Business loans are there to help business owners to leverage the power of money and cash flow to invest in their business. While ideally, it is best to create the working capital through the daily activities and sales of your business, there are times that the money is just not there.
In these cases, you only have two choices: give up on your dream or find other sources of capital to bankroll your idea. No one wants to give up on their dream. So a business loan often fills in the gaps when the money is needed to move forward with your business goals.
Business Loan: A Definition
The financial world can be confusing. Sometimes it helps to first define things before deciding if you want to move forward with it. A business loan is a loan that is granted to a business owner for the purpose of building or expanding a business. (Wikipedia) Another option is to acquire a business line of credit, which allows for business owners and businesses to borrow up to a specific amount (say $100,000) and pay interest on the line of credit, for only the amount that was borrowed. As such, a line of credit can be borrowed and paid against as long as it never goes beyond the initial amount it was approved for.
If you have the financial resources to launch your business on your own, you will have no need to take out a business loan or line of credit — however many companies need help to obtain working capital, and this is a good way to get started when you need the money.
Types of Business Loans
Business loans can be obtained from a variety of sources. But it is important first to determine what type of loan you want to get. There are a variety of types of business loans. Some of them are listed below with a short description of each.
- Secured loans– Secured loans offer some sort of collateral from the borrower so that the lender will feel secure in getting their money back. These are sometimes referred to as “guaranteed loans.”
- Unsecured loans– Unsecured loans are loans granted without collateral or a co-signer. They can vary in the amount, but they are harder to get since the bank or lender has no guarantee that they will get their money back.
- Lines of credit– Lines of credit are loans that offer a line of credit for starting business owners. They can use the credit to purchase things for their business that they cannot afford otherwise.
- Bridge loans– Bridge loans are loans that literally “bridge the gap” while you are waiting for other more permanent financing. It might surprise you to know that you can borrow up to $725,000 for independent business owners.
- Installment loans– Installment loans are loans that are paid off in installments over a certain period of time, usually around one year or more.
Amounts of Business Loans
The amounts of business loans can vary from $500 to $500,000, and there are many different options out there. You should do your homework and look into each type of loan and also visit a variety of lender sites to make sure you understand what each type of loan entails.
Business News Daily has an article that takes you through the steps of deciding which type of business loan is best for your business. Some of the questions they remind you to ask yourself include the following:
- How much money do you need?
- How long have you been in business?
- When will you pay it back?
- Do you have collateral you can use to secure the loan?
Answering these questions is important before you apply for any business loan since they address the various aspects of obtaining a loan. It’s a good idea to assess your financial situation and ask yourself how much money you need before trying to get a loan.
Your ability to pay back the loan is paramount when considering a business loan. If you borrow money that you cannot pay back, it will cost your business much more in the long run. In this case, it is better not to borrow money to fund your business.
Lenders agree with this philosophy, as well. Credible lenders will always tell you that they prefer to work with lenders with an ability to pay back the loan over installments or per the terms that the contract states at the time of the loan.
If they are forced to get their money by legal means, they will lose some money in the end because they rarely can obtain all of the delinquent funds. This is why you often read about “short sales” in the real estate industry. They are homeowners who got in too deep with a financial deal and were unable to pay back what they owed.
Fiduciary responsibility is one of the most important characteristics of entrepreneurs, and some accountability and caution should be observed in all cases. It’s a good idea to seek advice from a financial expert when taking out a loan of any kind.
What Type of Loan is Best for Your Business
At the end of the day, you know your business best. To find out what financial path or structure is best for you and your business moving forward, it’s highly recommended to seek the advice of a financial expert. This doesn’t have to be your accountant or lawyer, it can also be from other business associated, friends or even employees at the bank in which you might be looking to open a new account or line of credit. Don’t forget to research all options and any online financing options either.