Like most entrepreneurs, you are probably looking for viable ways to finance your business via debt. After all, you don’t mind the interest payments as long as your business concern generates adequate revenue.
Banks and other similar institutions are always willing to lend you the funds you need. However, you have got to fulfill the stringent requirements such organizations lay down for obtaining this money. Many of these lenders may even go to the extent of offering you business credit cards.
Prominent financial experts say it is always prudent on your part to determine what type of loan you need. This makes it easier for your financier to up with a lending scheme you are looking for.
What types of loans can you consider as an Entrepreneur?
Such professionals explain that you need to be aware of the type of loans you as an entrepreneur. They point out that such lending schemes fall under the following seven general categories:
1. Line-of-credit
If you are a business owner with limited resources, this loan should be useful to you. Actually, experts feel you should request your banker to make this facility available to you.
This lending scheme allows you to withdraw as much money as you need to overcome financial difficulties. This could be in the form of cash crunches or any emergency expenses you need to meet.
Generally, entrepreneurs open a line of credit with their bankers to meet their working capital needs.The facility is ideal for purchasing necessary inventory, clearing their suppliers’ dues, and paying their employees.
However, they cannot use it for buying the necessary machinery, real estate, equipment and other similar assets. This duration of this lending facility is generally one year. Fortunately, proprietors can easily renew it by paying an annual fee.
2. Instalment Loans
In this type of loans, you need to repay the interest and principal in monthly instalments. Experts say you can use this form of debt financing to meet any type of business needs.
On finalizing the contract with your banker, you get the total amount of money you need. This financier will also calculate the interest payable and determine the date on which you have to clear this loan.
If you are able to do this, you do not incur any penalties or additional interest charges. Its duration depends upon what purpose you intend to use this money. Generally, it ranges from 1 to 7 years. However, if you are going to use such funds to purchase real estate, the facility can extend to 21 years.
3. Letter of Credit
If your organization conducts its business activities in the overseas, you need this lending facility. It allows you to make secure payments to your suppliers in different countries.
You also do not face any problems in receiving payments from your international debtors. To obtain a letter of credit from your banker, you need to submit certain important documents.
These include the bill of lading identifying the merchandise, your commercial invoice, and the insurance policy. In some case, you may have to give a copy of the title documents of the goods you are dealing in.
4. Balloon Loans
Prominent professionals from reliable companies say that most people don’t know of such loans. You can receive the money you need under this lending scheme after signing the agreement with your banker.
You are liable to pay the interest charges on this loan over its entire term. However, you need not pay the principal amount until the date of maturity. Even then your financier will insist you make a lump sum or ‘balloon’ payment for this liability.
This makes this lending scheme different from most conventional loans available to business owners. Some banks even allow entrepreneurs to pay a such an amount for the principal and interest on the final day.
You could compare it to a mortgage people take to buy a home. It is useful for proprietors who are waiting for their clients to make large payments on a certain date.
5. Interim Loans
Business owners use this lending facility to help them manage their business operations for a short period. After this period, such proprietors generally enter into a long-term financial arrangement with their bankers.
For instance, people operating a startup company may need money to conduct their activities for a few months. However, after launching the initial public offer (IPO), they start repaying this loan.
Again, an entrepreneur may take an interim loan from his/her banker to pay the contractors he/she engages for a project. However, as soon as he/she get a mortgage for the facility, the proprietor will begin repaying the interim loan.
Generally, banks have very stringent eligibility requirements for securing this form of debt finance. This is because the officials of such organizations need to certain of commitment of person repaying it. They will evaluate his/her ability to pay off such a loan before sanctioning it.
6. Unsecured Loans
Most business owners are familiar with these loans. Bankers generally sanction them to such proprietors when they are certain of the financial viability of their establishment in the market.
They also scrutinize the ability of these borrowers to repay the sums they lend to them. Generally, these entrepreneurs can use such money for any business purpose. Moreover, they do not have to pledge an asset to obtain such modes of finance at a high rate of interest.
7. Secured Loans
These are similar to unsecured loans. However, entrepreneurs availing them need to mortgage one of their assets. This is why this lending scheme has a low rate of interest. In the case of a default on the part of such borrowers, the bankers can forfeit this asset.
Entrepreneurs can avail any of the above 7 seven loans to finance their business. However, such modes of debt financing are not cheap. They need to know what their requirements are and how much money they need.
Only then can they select the right one. However, when they have any doubts, they should not hesitate the consult their bankers. Such professionals can assist them in taking the right course of action.
Author Bio
Marina Thomas is a marketing and communication expert. She also serves as a content developer with many years of experience. She helps clients in long-term wealth plans. She has previously covered an extensive range of topics in her posts, including money saving, Budgeting, business debt consolidation, business and start-ups.
