What is a Business Loan?
Every small and medium-sized business requires access to working capital. The business loans not only help you meet your working capital requirements but also helps fulfill your desire of expanding your business. A large number of loan types, terms, and lenders willing to provide financing that often creates confusion about the right kind to apply for. Here’s an introduction to the variety of Business Loans financing options that might help make it easier.
- Term, Collateral & Source: The financial requirement for a business loan should be categorized on the basis of the need for the loan, is it a short term need or a long term need. Another categorization should be whether it can be secured or has to be unsecured. For instance, a short-term, Unsecured Loan can be an amount borrowed from friends and/or family for working capital. It could also be a line of credit, credit card-based loan, or one based on accounts receivable.
- Equipment Financing: Equipment financing is a type of Business Loans which is usually a long term loan in which the equipment serves as collateral. This is usually a long-term loan, and monthly payments are the norm. If the borrower defaults on payments, the lender will only seize the specific equipment that was financed, so the rest of the company and the borrower’s personal wealth are not at stake.
- Lines of Credit: It is a type of short term financing in which a specific amount is available for interim needs like inventory and working capital. This amount can not be used for capital investments. Interest is charged only for the amount actually used up by the borrower, and not the amount approved.
- Credit Card Advances: This is not about a company paying suppliers or bills using credit cards, although that’s possible too. The Credit Card advance being considered here is a loan offered by a lender against expected future card sales. Approval and amounts of lent will be based on the past record of the same.
- Factoring: An enhanced version of the above card advance is known as factoring. This is where yet to be paid invoices are sold to a lender at a discount. This ensures that the business gets paid immediately, even if customers take some time to clear their bills.
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