Obey The Rules Of Business Borrowing

Know the types of business loans available, and the ‘laws’ that govern each of them


There are several types of business loans available, and it is helpful to not only know what these types are, but also understand them.

First, there is the term loan, a common type of business loan. These loans are called term because they are for a specific period of time, and can be for working capital, expansion, refinancing and acquisitions. This type of loan is repaid via monthly installments and is common when the borrower is seeking a large amount of money.

Short-term loans are just what they seem – they are loans made for much shorter periods of time and for smaller amounts. This type of loan is often repaid in a lump sum at the end of the term, rather than in monthly installments, although monthly installments are also an option.

Another type of unsecured business loan is equipment financing. This is usually easier to get than a line of credit, because you use your equipment as collateral. However, it can be risky. If you can’t repay the loan, you wind up losing your equipment. But this type of loan may be just the ticket if you need a large amount of cash, and you know you’ll be able to repay the loan according to term.

You can apply for a line of credit, which many business owners use as a sort of “floating” cash source. Whenever you need money, you have it in reserve. A line of credit is a lump sum loaned out that you use in intervals, paying it back monthly or all at once. But this type of loan has no term – it remains open until you close it. Be aware, however, that this type of loan is seen as a short-term fix when you need cash – it should be repaid as quickly as possible.

Many business owners turn toward their credit cards when they are strapped for cash. This might be a legitimate resource if you need a smaller amount of money, and you can’t pay it all back at once. You can also borrow what’s called a credit card advance, which is based on your expected future business success and how well you’ve managed things thus far. This type of loan usually comes with a fairly good interest rate.

Last of all, some businesses turn toward receivables financing, which simply means they sell their invoices to a third party, then use the money for whatever the need is. You will pay a fee in this instance, but it is a quick way to get money for your business.

Whatever you choose, make sure you weigh your options carefully. Don’t borrow more than you can comfortably repay.

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