When starting a new business or running an existing business, you may need to borrow money for various purposes. The area of business finance is similar to other types of loans, but businesses have various options to consider. If you’re a business owner or an aspiring entrepreneur, it is important for you to understand the various types of loans that are available.
Traditional Business Loan
One of the the cornerstones of business finance is the traditional commercial loan. These types of loans are issued by banks and other commercial lenders. While these loans are commonly issued by lenders, they can be tough to get. In order to qualify for a business loan, you either have to have a good business credit score or a solid personal credit score and a legitimate business plan. If you are starting a business, you may have to guarantee the loan with your personal assets before you can qualify.
The lender will scrutinize the business plan to make sure that you have looked over every possible contingency. The business must be unlike other businesses and have a legitimate method of bringing in income. If the loan officer is satisfied with the business plan, then the loan application will move on to underwriting. If the underwriter is satisfied with your credit history, the business plan and the collateral, you can get approved for a loan.
Lines of Credit
Another area of business finance involves lines of credit. Many businesses use lines of credit to generate cash flow that they need to run a business. In many cases, lines of credit can be extended by suppliers of the business. This gives businesses some time to get cash to pay their bills after placing an order. Some lines of credit are issued by banks and credit unions as well. When getting a line of credit for your business, check to make sure that the interest rate and the repayment terms are acceptable.
Merchant Cash Advance
When businesses do not have good credit histories or are having trouble qualify for a traditional loan, another option to consider is a merchant advance. With a merchant cash advance, the company works with a merchant lender and gets a cash advance on future sales. Then the merchant cash advance company sets up the company’s credit card terminal. At that point, every time a transaction is initiated on the credit card machine, a percentage of the sale will go towards paying back the cash advance. This makes it possible to pay the advance back over time instead of by making monthly loan payments.
Considerations
Regardless of which method you choose to get the money need for business, make sure that you understand the terms that you are agreeing to. Otherwise, you may find yourself paying much more in interest or paying fees that you did not initially expect. By getting everything in writing and asking plenty of questions, you can often avoid these problems and stay on top of your business finance issues.
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