Month: January 2019

Types of business loans

You may need business financing to either set up a business or to expand the existing business. Lenders will provide financing for your business based on your creditworthiness. There are many types of loans available in the market and knowing the right one for your business is important.

We will explore the different options available in the market.

  1. Term loans

Term loans are the most common types of business loans. You get a lump sum and pay interest on the principal amount. These types of loans have the advantage that you get your money upfront and can borrow high amounts. You also get the money faster if you use online lenders.

You may require collateral or a personal guarantee. Interest rates may vary with online lenders being slightly costlier than normal banks.

  • Equipment loans

If you need to equip your business then this is the right type of loan for you. The equipment serves as collateral and the lender can repossess it if you are unable to meet the terms of the loan.  The value of the equipment determines the rates you will pay.  Depending on the strength of your business you can get competitive rates. You may, however, need down-payment and the equipment can become obsolete before the term of your loan expires. You may, therefore, be paying for a machine you are no longer using.

  • Invoice  financing

This type of loan is good for people who want fast cash. You use your invoice as collateral to get cash advance. Invoice financing is, however, costlier than normal loans and you will still need to follow up on the invoices for payment. 

  • Personal loans

You can take a personal loan to finance your business. This works for start-ups who may not qualify for a business loan as most require that you should have been in business for a period of time.  You need a good credit score to qualify for a loan but can access fast funding.  The borrowing costs are higher and the amounts you can borrow are not high. If you fail to pay, it will reflect in your credit ratings and may hurt your chances of getting a loan in future.

  • Microloans

Non-governmental organizations offer microloans to support small businesses. The amounts given are not large but they come at a low cost and are a good option for start-ups. The lending organizations normally have stringent qualification checks before you qualify for a loan.

  • Business lines of credit

Business lines of credit provide funds up to your credit limit. You only pay Interest on the money drawn.  It is a good option for short financing and emergencies. You will not need collateral thus much flexibility in borrowing. There may be some additional fees like maintenance and withdrawal fees. You will also need to have good revenue and credit.

To build a successful business, you need funding. There are very many options available in the market. Only borrow what you can comfortably pay because defaults will cause a stain on your credit rating.

Secured versus unsecured business loans, what is the best option?

You have opted to take a business loan and are in the process of looking for a good lender. Your credit scores are good and you know the business can sustain a loan, but you are not sure about the type you want to take, secure or unsecured.

What is the difference between a secured vs. unsecured loan?

An asset protects secured loans while unsecured does not have asset protection. Interest rates for secured loans are lower and make the lender feel protected due to higher interest charged on the loans.

To take a secured loan you need collateral. The collateral makes it easier for the lender to give you higher amounts due to lower risk. Most asset-based financing will require collateral for instance car loans, housing loans amongst others.

Understanding unsecured loans.

In-as-much as you require no collateral to take an unsecured loan, you will still need to meet the lenders minimum requirements like credit ratings and income levels. The loans are easier to obtain because you do not need an asset to secure them. The lender cannot take your property in case you are unable to pay the loan. However, in some cases, the court can attach your property.

If you do not have a good credit history, the lender may not approve your application. The lender can also obtain a judgment against you when you file for bankruptcy to stop the court from discharging your loan.

A major disadvantage of unsecured loans is that the amount you can borrow is not much. Secured loans actually give you more leeway in how much you can borrow because an asset protects the loan. Unsecured loans are also good for short-term loans because they would otherwise be too costly because of high-interest rates.

Understanding secured loans

Selling an asset does not reassure the lender that he will get his full amount back, as he will be selling second-hand goods. The borrower will also have some kind of psychological pressure to pay back the debt as he fears losing his assets or getting poor credit ratings which will impact on his ability to get loans in the future.

People with poor credit can access secured loans because they can use the assets to protect themselves. Until you finish paying the loan, you do not actually own the property and cannot use it as you wish including altering or sell the property until you finish paying for it. You will usually not get 100% financing as the lender will normally require a down payment.

Final thoughts.

The decision to take a loan will depend on how much you want to take and what security you have to offer in the case of a secured loan. Both options explored above have some good benefits and the not so good aspects to them.

 Consult a specialist to make sure that you get the best out of whichever option you go for, also make sure that your business will be able to sustain the loan once have taken it so that you avoid getting poor credit ratings that could affect your ability to get loans in the future. > ���K2&

Pros and cons of business loans

Business loans are important for financing a business and there are many types of loans and lenders with very attractive packages available in the market.

You may, however, need to know the pros and cons of taking business loans, weigh them carefully and make the decision of whether to get one or not.  

Pros of business loans

·         Unless you make them silent partners, the lender does not become a part of your business and will not have a say in how your business runs. As long as you repay your loan, the profits are yours to keep.

·         You may get good interest rates depending on the lender you approach. Business loan interest rates are normally lower than the interest charged on personal loans.

·         Interest payments are sometimes tax deductible. Find out if your business qualifies for this.

·         Many types of loans available. You can decide on the interest options for instance variable vs. fixed loans. You also have the option of unsecured loans although these charge higher interest rates than secured loans.

·          The loans are normally easy to get and you can access large amounts of money at relatively short notice.

Cons of business loan

·         Your business may not qualify for the loans. There are conditions that need to be met for your loan application approval. You need to have a proper business plan in place together with a profit prediction for your business. Make sure you are fully conversant with their requirements before you start the application process. Even with the approval of your loan, the lenders may not grant you the full amount you requested.

·         Loan approvals require your credit rating to be good, poor credit history can lead to rejection of your loan application.

·         If you decide to take a secured loan, you need collateral to get the funds. You can use the business assets as security. If you are unable to pay the loans, the bank can seize the assets and sell them, normally at a lower price, to recover their money

·         If you take a variable interest rate business loan, you will be open to the unpredictability of the financial markets. If interest rates rise, the business will have to pay the adjusted rates meaning that the impact on a small business, especially a startup, can be hard to adjust to. Businesses that may have not started making profits may not afford the payments leading to defaults.

·         The loan appears as a liability on your balance sheet and can affect your business valuation.

Be careful when borrowing money for your business. Though a great solution for your business, they do add to your debt burden. Ensure that you pay back the money in the stipulated period so that you do not affect your credit rating or lose the assets you used as collateral.

Always engage the services of an expert to walk you through the loan application process.

How can a business quaify for a business loan?

A business loan can elevate your business to the next level. What was previously unattainable can now be realised for instance an equipment loan will allow you buy equipment for improved efficiency in your operations. A lona for a startup will allow thte binsess owner pay salaries and rent without having to dip into his saving or borrow from friends.

So how do you qualify for a business loan?

We will explore 5 things you need to address to get a business loan. The most important thing is preparation. This will require a level of research on you part, make sure you understand the the lenders requirement so that you do not wast time applying or a loan that the lender will not approve.

  1. Build credit scores

Credit scores deternine an individuals creditworthiness. It determines whether you would be a risk to advance credit to.

Different agencies have different ways they use to assis an individuals creditworthiness.  Generally the higher your score, the more likely you are to get a loan. Credit scores look at current and past financial behaviour of an individual or business. Small business owners may need to show their personal credit ratings because it shows their ability to handle debt or finances.

2.  Lenders requirements

Each lender has a minimm reqirement before they can give your business a loan. You need to fully understand what these requirements are and exceed them.

Some of hte minimum requirements include a good credit score, annual income, size of business, lack of other loans among other considerations.  Some types of businesses will also not be considered for the loans, the lender should be able to advice on minimum requirements before you apply for the loan.

Online lenders are more flexible in their requirements. If your credit score is weak you can consider getting a bad credit loan although these are typically very expensive because of the high interest rates.

3.  Gather relevant documents

You will need relevant  legal documents including income tax returns, income statement, balance sheets, bank statements, articles of incorporation, business plans or financial projections amongst others. Each lender will have their requirements and will be able to advice you appropriately.

4.  let your business plan sell you

Your business plan will highlight how you intend to use the money and how it will contribute to your bottom line. It will also show how you planto make the payments. Ideally a business plan will show your operatonala plans and how you plan to take advantage of the market opportunities while overcoming any threats to your business.

5. do you need collateral

If you are taking a secured loan you will need collateral. This means that if you are not able to make the payment then the bank will sell the asset to recover their money.  You may also need to provide a personal guarantee for the loan especially when dealing with online lenders. 

Taking an unsecured loan may be a better idea if you do not want to loose your assets. However be advised, they are generally more expensive than normal loans.

Business loans explained.

Thinking of starting or expanding your business and need capital or funds?  You can decide to raise the funds from your savings or by asking your family members or close friends to loan you the money, but you may not raise the required amount. You can, therefore, opt for a business loan.

A business loan is borrowing for a business purpose. You will be undertaking a debt from a lending institution and pay it back with interest at an agreed point in time.  The loan will cater for the expenses that will arise which the business cannot cater for, this could include rent, salaries, and renovations, amongst others. The lender may need to know what you are borrowing the money for, so having a well thought out business plan will help you secure the loan faster.

Good credit scores will help a lender form the decision whether to give you the business a loan or not. Lenders use Credit scores to determine whether an individual or a business is capable of servicing a loan. It takes into consideration the financial habits of an individual or businesslike, timely credit card payments, bankruptcies, defaults, overspending, the age of the company and size of the company amongst other considerations. The lender will require a credit report to allow them to see how good you are with money. Individuals or business with a low credit score are high risk and are generally avoided by banks.

Lenders make their money by charging interest on the principal amount. Ask your lender whether they are offering fixed or variable interest. As the name suggests, fixed interest means the applicable rate remains constant for the duration of the loan repayment. Variable interest, on the other hand, fluctuates due to market conditions. You may need to consult on which is a better option for you because, for example, fixed interest will be good when the market interest rates go up, on the other hand, if the rates go down, you will lose out on this benefit.  You are better off keeping the loan repayment to the shortest time possible to avoid interest accruing.

In conclusion

Before you apply for the business loan, you need to decide on the amount.  Do not borrow more than you need, only borrow enough to cover your expenses. Consider the duration you want to pay back the loan to avoid high-interest rates and the type of loan you want to take whether fixed or variable interest or secured, which might allow you to pay lower interest, or unsecured.

You may need to personally guarantee the loan in case the business is unable to pay it back. Some lenders have a charge that allows them to seize your assets to repay the loan if you are unable to meet the terms of the agreement.

Finally, read the loan agreement documents carefully and engage a lawyer or financial specialist to walk you through the documents and explain terms you may not understand before you sign on the dotted line.