Debt financing continues to be an important financing model for all kinds of businesses – right from startups and small businesses to franchisees and multi-store retail chains. You can turn to banks, private lenders, and even credit cards to finance your needs. Also, most lenders are willing to offer some basic consultation to help you choose the right kind of loan. You can even choose an online financing service aggregator platform to conveniently search for all kinds of business loans. However, with better knowledge of the different types of loans you can avail as a business owner, you’ll be in a better position to finance your business’ operations and expansion efforts. Here’s a guide to help you out.
Line of Credit
This is a loan arrangement that every business owner must get into, because it acts as a cover of protection against financial emergencies and cash flow problems. These loans are granted to help businesses finance working capital and cash needs for business cycle management. You can’t really use this money to purchase real estate or buy new equipment. This short term loan extends the cash available in your business checking account to the higher limit mentioned in the loan agreement. You can issue checks and the bank will transfer the equivalent amount of money to your checking account, so that the checks are covered. Banks differ in the way they finance the cash requirements, but all of them charge interest on the advanced amount, from the day of advance to the date it’s paid back.
Installment Loans
These are the more traditional loans that you need to pay back in the form of fixed monthly installments (covering principal repayment and interest payment). This option can be availed to finance any kind of business requirements. Most banks offer installment loans with no pre-payment penalties. Once the contract is signed, you get the full amount; interest calculations are done from that day to the final payment date. The duration of a loan, of course, will depend on the quantum of the loan, and the purpose of the loan. Business cycle financing loans are generally under 6 months, and those needed for real estate and renovation could go up to 21 years. You might want to ask around for installment loans with quarterly payment options (instead of monthly).
Secured and Unsecured Loans
The name says it all – secured loans are the ones wherein the lender believes that the money being lent is secured against default, because of your business’ strong credentials. It’s common enough for lenders to issue secured loans without any collateral. The interest rates tend to be lower and the terms tend to be more flexible for secured loans than others. Startups, mismanaged businesses, and businesses operating in risky markets, however, find it hard to get secured loans.
Letter of Credit
This is an alternative to line of credit loans, used by businesses to issue a payment guarantee to suppliers in foreign countries. The letter of credit offers coverage for a pre-negotiated set amount, and for a specific duration.
Balloon Loans
For businesses with long term focus, balloon loans emerge as a useful financing option. In these loans, the lender issues the full amount, and the business only needs to make the interest payment every month. When the duration of the loan expires, the business has to make the complete principal repayment in one shot. When you need to wait for a long duration before your enterprise clients clear their payment, balloon loans become a useful option.
Concluding Remarks
Your business journey will throw all kind of situations where you’ll need the right kind of financing. Understand these loans, and you’ll be able to make smart debt financing decisions.
