Running a business is no child’s play, especially in the initial years of the business. According to reports, running out of capital is one of the most common reason that businesses fail to make a mark on the market and many even have to shut shop within the first few years for this very reason.
Steady cash flow is required to run business operations smoothly. When short on cash, businesses need financing sources such as loans.
There are various kinds of business loans available, however not all loans may be right for your business. You must know the right kind of loan and then apply for it so that you do not end up in financial trouble.
Applying for a loan is not as hard as many make it out to be. You only need to know the amount you need the loan for, look for the right financial institution and speak to them about the requirements once you are sure of the type of loan you wish to apply for. Also, the business must have a good credit score to get a loan approved.
To help you understand it better, let’s have a look at three types of business loans to know about:
- Installment Loans
Installment loans are the most common business finance solution. One can get them approved from a lender or the bank, agreeing to pay monthly installments along with principal and interest.
The interest rate is decided by the lender and full amount is handed to the borrower once the loan is signed. This type of loan can cover up for business different needs. Iti is very easy to pay back since these loans run for years if a hefty amount is taken.
The time associated with paying back this loan may go up to 21 years, based on the purpose of the loan. Mostly, such loans are taken in order to make a major purchase, such as to expand an office and buy real estate.
- Balloon Loans
Balloon loans are similar to installment loans but with one difference. One doesn’t need to pay both the principal and interest on a monthly basis.
When you take a balloon loan, you only need to pay the interest rate each month and the full principal amount is paid on the final due date. The interest rate on this loan is typically low, which makes it easy to pay these loans.
While these loans are for short term (5 to 7 years), the borrower has the feasibility to pay the loan back in 30 years of time.
This loan is suitable to take when a business is expecting to receive money on a specific date, let’s say from a client in the future.
To keep operations running, a balloon loan can be taken and the due date to pay the final amount can be set as the same date when the money is to be received by the business, so that the loan can be paid back with that money.
- Line Of Credit Loan
One of the most preferable loans by businesses is the line of credit loan. This is because it’s a short term loan that helps businesses replenish the inventory or increase working capital to have their operations run smoothly. Note that this loan isn’t intended for major dealings, such as to buy real estate or machinery.
The interest rate on this one is low and most of the banks give borrower’s the advantage of paying the principal as they see fit. Meaning, it’s up to the business if they want to pay principal every month or as they find it easy. However, interest is paid monthly.
The Verdict
If your business is declining because of financial issues then talk to your bank about how to get a business loan so that things don’t halt and your business keeps running.
