Having access to working capital for business is an essential part of starting or growing any company. Obtaining a business loan will mean most likely mean having collateral or an operational business with a minimum amount of revenue or years in operation.
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Access to capital is essential for any business. And operating and expanding a business can be difficult without some form of financing. Depending on the need, there are different types of financing available. Businesses can utilize either revolving credit lines or instalment loans to address working capital needs, equipment loans, accounts receivables financing and more.
Factors to consider when seeking business financing
Type of Loan
What do you need the loan for? A loan needed for working capital will have different requirements than a loan to buy commercial real estate. The reason for the loan will dictate whether you get revolving credit or an instalment loan and what the terms of the loan will be.
Expect to be quoted a higher interest rate than for a personal loan. And there may be a huge variance in interest rates. You may be quoted a rate in the low single digits or as high as 40% or more. Adding assets such as a home as collateral can help lower the cost of the loan.
Term of the Business Loan
The terms of the loan will vary depending on the type of loan. Revolving credit allows you to borrow up to a set limit and either pay off the balance each month or carry the balance over, much like a credit card. Instalment loans allow you to borrow a set amount and require you pay it back in fixed monthly payments. Instalment loans can be short-term (3-12 months) or long-term with durations up to 5 years or more.
Calculate the monthly payments, which may include fees. This will clarify the monthly carrying cost of the loan and help you budget accordingly.
Size of Loan
Know how much money you need. Lenders want to know that you have carefully thought through why you need the loan and what the loan is for. Calculate the total expected cost of the loan by adding up the monthly payments over the term of the loan. This will also allow you to compare the cost of the loan with the estimated revenue the loan will help generate. If the expected revenue is high enough to justify the cost of the loan, proceed with the loan.
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