Business is unpredictable and you may suddenly need to boost your financial resources at one time or the other. There are various means that you can turn to for debt financing depending on your requirements in terms of money, time span and the interest you are willing to pay. Before you approach a bank or a private lender for a loan, you should explore all the loan options that you can avail for business purpose so that you can shortlist the one that is right for you. Let us check them out for you.
1. Line-of-credit loans
Line-of-credit loan he most common type of loan for small-sized businesses. This is permanent loan arrangement that a majority of business owners have with their banks to brace themselves for stalled cash flow and other emergencies. These loans are a short-term option meant for buying inventory, incurring operational expenses and fulfilling the business cycle needs. They are not suitable for capital expenses such as buying equipment or real estate. The basic concept of line-of-credit loan is that the bank or lender extends the available cash in the checking account of the business to a certain upper limit as mentioned in the loan contract. The business need to pay interest only on the actual amount advanced, for a period from it is availed to the time when it is repaid. Being a low-risk advance for the bank, it carries a low interest rate. these loans are usually written for a period and are to be renewed at the end of this period by paying an annual fee.
2. Installment Loans
Another loan option for businesses is installment loan. As the name suggests, this loan has to be repaid in the form of equal monthly installments (EMIs), which are calculated by adding the principal and interest and dividing it by the number of months in the loan period. It may be availed for diverse business needs. The full loan amount is disbursed to the borrower when the contract is signed. At the same time, he is told the payment he has to make in lieu of monthly installment after calculating the interest due and adding it up to the principal amount of the loan. The loan term depends on the purpose of its use. For instance, a business cycle loan is meant for a short period (1-7 years) and accrues a low interest rate. Conversely, long term loans such as real estate and renovation loans are for longer periods (more than 7 years) and are charged with comparatively higher interest rates. If you are planning to take installment loans in San Jose and elsewhere, there is a need to consider installment timing too. For example, if monthly payments are inappropriate for you, consider options like quarterly, half-yearly or annual installments.
3. Interim Loans
Business owners may require funds on interim basis. It is given to real estate contractors who are engaged in building new facilities for the period while it is under construction. This kind of loan is called interim loan as the mortgage on the building can later be used to repay the loan. While the lender provides this loan, he checks whether the loan is secure and given to a business with a reliable means for repayment.
4. Secured Loans
As the name implies, secured loans need some kind of collateral as a security. Since this reduces the risk for the lender, the interest rate on such loans is low. Lenders usually ask for a collateral security when the loan period spans more than a year, is used for investing in equipment or the business reputation is not as sound as a lender would want it to be. The collateral may be in the form of inventory or real estate and its value should be comparable with the loan amount.
5. Unsecured Loans
Unsecured loans are the loans that are extended without collateral as security. A business is generally able to get this loan if its reputation is sound and the lender is convinced that it will repay in time. The borrower has to pledge in written that the loan will be cleared on time. Since this type of loan carries some risk, the interest rate on it may go higher as compared to that on secured loans.
When you consider these loan options for your business, you need to understand how each of them works and whether you will qualify for them or not. Each of these options have their benefits and downsides which you must know well enough while you choose the one that is right for your business.