If you are a new player in the industry, the world of business financing can seem daunting, complicated, and overwhelming.
Fortunately, arming yourself with the essentials can help make navigating the seemingly complex world of start up business loan a lot easier.
If you are considering getting a start up business loan, below are some of the options available at your disposal alongside all the basics about the options you need to know:
Working Capital Loans
In a nutshell, working capital loans are short-term loans typically used to finance the company’s everyday operations.
Primarily, working capital loans help businesses stay afloat until revenues come in.
Working capital loans can be secured (with collateral) or unsecured (without collateral).
The latter often comes with higher interest rate as opposed to the former which are only often granted to borrowers that are deemed low-risk.
Working capital loans are considered ideal for short-term financing needs alone. It can take the form of:
As the name indicates, short-term loans have a short maturity period (a year or less).
Short-term loans are often used to even out cash flow, pay the payroll or bills, and purchase inventory, etc.
Borrowers are often required to provide projected financial statements and exhibit their ability to repay before a short-term loan is granted.
Money lent on the basis of trade debt is called factoring loan.
Essentially, you will be selling your account receivables to the factoring agent (i.e. bank).
The bank will grant a loan based on the basis of the company’s account receivables.
In most cases, banks grant as much as 90 percent of the billed invoices or account receivables.
With factoring loans, you will have immediate access to cash as soon as you issue the invoice. You also won’t have to follow-up with customers for the payment of account receivables as they would be the ones to settle it with the bank.
Overdrafts are instant credit extensions provided by banks.
If you are going to sign up for this type of credit facility, you can overdraw your current account up to the maximum amount agreed with the bank.
Interest will only be paid on the overdrawn amount.
The typical charge is at least 1 to 2 percent more than the bank’s prime rate.
The amount of credit granted will be based on the limit set by the bank.
One advantage of overdrafts many borrowers appreciate is instantaneous access to cash especially for activities like payment to creditors or stock turnovers.
Hire Purchase Loans
The method of purchasing goods by making installment payments over a fixed time period are called hire purchase loans.
In hire purchase loans, the bank finances the purchase of the machinery, equipment, and commercial vehicles for business operations.
Under this arrangement, the bank will retain the legal title to the financed asset until fully paid.
Interest rate of hire purchase loans are typically offered on a flat rate basis.
The financing period usually ranges between 4 to 8 years and will depend whether the equipment or machinery purchased is new or not.
Amount of hire purchase loan can be as much as 80 to 90 percent of the market value or purchase price, whichever is lower.
Given that you are able to demonstrate your ability to repay your start up business loan in a timely manner, banks and other finance institutions are likely to offer loans with very good terms.
When possible, prudently shop around for prospective creditors and thoroughly prepare your loan application so you can significantly reduce your chances of rejection.