Whether you are starting or expanding your business, you may need to look for sources of financing to help carry out your business goals.
One option is through debt financing, where you receive a loan repayable over an agreed period of time. You then pay interest over the loan amount, the rate of which depends on the source of the loan, length of time for which you borrow the money, and the general economic conditions at the time you borrow the money.
It is however important to remember that not all business financing is the same. The kind of loan you will get will depend on your business needs and the loan terms (loan amounts, interest rates and repayment terms). Before you go to the bank or even the Small Business Administration (SBA), you need to be clear why you want the loan so you can match them with the appropriate credit request and ensure that you will get the most cost-effective loan. Loans to support your working capital needs are different from financing a real estate investment.
Types of Credit Available
There are three primary types of loans based on repayment terms offered by most financial institutions such as banks are:
Short-term loans, are for short-term uses such as meeting working capital needs. These kinds of loans are usually highly adaptable to your financial needs, and are typically paid back within 6-to-18 months. You can use these loans to take advantage of purchasing discounts or some seasonal requirements. Business revolving credit lines are another example of this kind of loan.
Medium-term loans, are usually paid back within one to five years. These loans are often used to expand your business line, redesign your work environment or purchase major equipment like a new computer system.
Long-term loans, are usually paid from the cash flow of the business and can have maturity dates from five to ten years. Some of the uses of these kinds of loans include the purchase or refinancing of commercial property.
There are also other types of credits. If you are in the business of international trade, you will utilize Letters of Credit, which is a mechanism that allows importers to offer secure terms to exporters. Trade credit, on the other hand, allows you to get goods from your suppliers on credit for 30, 60 or 90 days. Business credit cards can provide short-term financing while keeping your business and personal expense records separate.
If you are based in the United States and have been turned down for traditional bank loans, you may try applying for SBA loans. Note that SBA itself does not lend out the loans, but only guarantees loans you will get from their participating institutions. SBA has a number of loan programs, ranging from short term to long-term loans.
Knowing what your credit needs will show the banker or lender that you possess a strong understanding of your business, the impact of credit on your bottom line, as well as your short and long-term goals.
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- How to Get an SBA Loan
- How Banks Review Your Bank Loan Application
- Using Supplier Credit to Finance Your Start-up