It's a fact of life that any company, big or small, will eventually end up having to contend with business loans. For those new to it, the bewildering array of available choices and differing terms offered by different lenders are likely to create more than a little confusion. The descriptions of the various types below should help clear the confusion.
Term, Collateral & Source: Any and all financing can be divided into the following two main categories. The first thing to decide is whether the need is for the short-term or a long-term need. The second thing to consider is whether it has to be unsecured or can be secured.
Making these basic decisions will help with the other choices. So a short term and unsecured loan required for working capital could possibly be arranged for from family/friends. The company could also apply for a line of credit, or a loan based on credit card sales advance or accounts receivable.
A long term secured loan, on the other hand, is used for heavy capital investments and for starting up a company. This includes things like real estate, equipment finance and acquisition of the assets of another company. This kind of business loans can be availed of from banks or other large lenders.
Equipment Financing: Equipment purchases or leasing is quite easy since the equipment itself is collateral. This calls for a long term loan with monthly repayments. If the borrower is unable to make the payments, only the equipment in question is in danger of being seized by the lender. This ensures that the company and its owner won't lose anything else.
Lines of Credit: For short-term requirements, a lender can make specific amounts available to businesses that can use it as and when required. Interest gets charged only on amounts that are in use, instead of on the total value of the LoC. The funds can be used for temporary needs such as working capital, inventory, etc.
Credit Card Advances: This is not about a company paying suppliers or bills using credit cards, although that's possible too. The credit card advance being considered here is a loan offered by a lender against expected future card sales. Approval and amounts lent will be based on the past record of the same.
Factoring: An enhanced version of the above card advance is known as factoring. This is where yet to be paid invoices are sold to a lender at a discount. This ensures that the business gets paid immediately, even if customers take some time to clear their bills.
Obviously, this isn't all of it even if it does cover the broad types of business loans. There are many more variations and possibilities, such as cash advances, government backed financing for small businesses, and so on. Sometimes, it's even possible to get grants.
None of this changes the basic elements of financing terms and requirements. An unsecured, short-term loan will always have a higher interest charge associated with it, as compared to a long-term, secured loan. Also, go over the figures once again to make sure the company won't be harmed by an increase in the debt level.
Term, Collateral & Source: Any and all financing can be divided into the following two main categories. The first thing to decide is whether the need is for the short-term or a long-term need. The second thing to consider is whether it has to be unsecured or can be secured.
Making these basic decisions will help with the other choices. So a short term and unsecured loan required for working capital could possibly be arranged for from family/friends. The company could also apply for a line of credit, or a loan based on credit card sales advance or accounts receivable.
A long term secured loan, on the other hand, is used for heavy capital investments and for starting up a company. This includes things like real estate, equipment finance and acquisition of the assets of another company. This kind of business loans can be availed of from banks or other large lenders.
Equipment Financing: Equipment purchases or leasing is quite easy since the equipment itself is collateral. This calls for a long term loan with monthly repayments. If the borrower is unable to make the payments, only the equipment in question is in danger of being seized by the lender. This ensures that the company and its owner won't lose anything else.
Lines of Credit: For short-term requirements, a lender can make specific amounts available to businesses that can use it as and when required. Interest gets charged only on amounts that are in use, instead of on the total value of the LoC. The funds can be used for temporary needs such as working capital, inventory, etc.
Credit Card Advances: This is not about a company paying suppliers or bills using credit cards, although that's possible too. The credit card advance being considered here is a loan offered by a lender against expected future card sales. Approval and amounts lent will be based on the past record of the same.
Factoring: An enhanced version of the above card advance is known as factoring. This is where yet to be paid invoices are sold to a lender at a discount. This ensures that the business gets paid immediately, even if customers take some time to clear their bills.
Obviously, this isn't all of it even if it does cover the broad types of business loans. There are many more variations and possibilities, such as cash advances, government backed financing for small businesses, and so on. Sometimes, it's even possible to get grants.
None of this changes the basic elements of financing terms and requirements. An unsecured, short-term loan will always have a higher interest charge associated with it, as compared to a long-term, secured loan. Also, go over the figures once again to make sure the company won't be harmed by an increase in the debt level.
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