Anyone in business knows it “takes money to make money,” and it’s needed throughout a business’s entire lifecycle. It’s needed to start up, to operate and to grow so where do businesses get the money from? Established businesses may just use the equity in the company, but it’s not always the referred option and for a start-up business with little to no revenue there is no equity to draw on. Businesses therefore need to borrow money for various third parties and there a lots of different products from mortgages to personal loans to business loans so what type of loans are popular with business owners and which type of business loan can help you?
Maybe business owners prefer the straightforward nature and convenience of using their credit cards to fund their business needs. On the upside, credit cards are easy to obtain (you probably already have several) and they can be used to pay for a wide variety of things, from paying bills to buying product. However, for all its convenience and versatility, the use of credit cards does have some serious drawbacks. First, most of us having a spending limit on our credit cards, which may not be enough to cover the cost of whatever it is you need the funds for, particularly if it’s for something costly like real estate. The second downside of using your personal credit cards for business purchases is that it blurs the line between your person and business cash flow. This can become problematic, for example, should you need to use your credit card for an important personal matter (emergency travel, health matters, an overdue bill, etc.) Finally, one of the biggest drawbacks for using one’s credit cards as a kind of business loan is that they typically carry heavy interest rates, almost always higher than other types of business loans.
Line of credit
A line of credit can be seen as something of a middle ground between a credit card and more typical business loan. Much like a credit card, a credit card works by giving the borrower a certain limit, and he or she can borrow money up to that limit. Interest is not charged until money is actually borrowed against the line of credit, and interest is charged only on the amount actually used. Lines of credit are often unsecured, which means you do not have to put up any kind of collateral against the loan. The primary difference between a line of credit and a credit card is that the line of credit has a lower interest rate, often very close to that of a standard loan. Drawbacks of lines of credit include the fact that interest rates on a line of credit can be variable, and can up and down over the life of the loan, making payments unpredictable. In addition, a line of credit typically must be repaid within a certain time period, and although the payments may be low in the beginning, as the deadline looms the payment could be higher to ensure that the balance is paid off in time. If you have the means and discipline to make more than the minimum payment month, a line of credit can be a good option. And if your cash flow is lower in certain months than others, you can rest assured that if you do make only the minimum payment a couple of times, your loan will still stand in good
Standard or Typical Business Loans
There are several types of loans that fall under the umbrella of business loan. A working capital loans, for example, are probably the most common type of business loan. Within the category are two further distinctions, secured loans and unsecured loans. Most of the time, you’ll need to be an established business owner with top-notch credit to qualify for an unsecured working capital loan. Most lenders won’t give this type of loan to a start-up, as the risk is too high. In those cases, a secured loan may be a more likely option. Whether secured or unsecured, a working capital loan are good options for businesses because they allow business owners to always have available cash on hand to pay for the day-to-day operations of the business.
An accounts receivable loan, on the other hand, is a little different. These loans are most often used when a business owner has accounts receivable payments coming to them soon, but they need money today. A loan is taken out and the accounts receivable effectively secure the loan. These (typically short-term) loans generally carry high interests rates as compared to more standard types of loans. Moreover, it’s easy to get caught up in a cycle of using your receivables before you actually receive them, which will eventually leave you short on cash before your next payment period. This should generally be a last-resort loan or saved for legitimate emergencies such as being able to pay your employees on time.
Business-only loans are loans in which the assets of the company are used to apply for the long, irrespective of the personal credit history of the applicant. Because the business itself is the determining factor in being granted the loan, applicants will be required be show evidence of a reliable source of income, strong business credit scores, and the likelihood of continued operation well into the future.
Additionally, there may be times when a business owner needs a loan that may not be strictly for business, such as the purchase of a piece of real estate. In those cases, there are other types of loans available to meet those specific needs.