Somewhere in our life, we all have thought of starting our own business. But due to the lack of funds, we were unable to execute our dream. Though there are several types of loans are provided by many financial organizations, having insufficient knowledge about all these things is the main hurdle we need to cross.
Here we are going to discuss the A-Z of business loans.
Types of Loans
There are two basic forms of business loans: The Term Loan and Line of Credit.
- Term loan: This type of loan is given in the form of a lump sum at a time. You will be given a period of time to pay back the loan. There are several types of term loans, such as personal loan, startup loans, business term loans, business mortgages, asset loans, commercial property loans. For different term loans the repayment terms, the interest rate charged and security required vary. It also depends solely on the financial organisation.
Repayments and Interest rates:
● Fixed: In this category, the interest rate will remain the same for the entire period or the term of the loan. If you pay back the amount before the period ends, an early repayment fee will be charged.
● Variable or Floating: In this category, the interest rate can fluctuate, and you need to pay back with the current rate of the time. When the interest rate goes down, you can reduce the repayments or keep it the same as before so that the loan can be paid off faster.
Security
● Secure: It will be beneficial to give a personal guarantee or some type of asset. It will be easier to get a large amount in this case. But somehow you fail to make the repayments on time; the lenders will take the security as their own. In some of the cases, the lender can offer partially secured loans, where the security is worth less than the full value of the loan.
● Unsecured: No security is needed in this case. But when there is no security, the rate of interest and fees get higher, and the lending amount will also be lower. It is also hard to avail this with a poor credit history. Lenders prefer a successful track record. The older your business is, the easier it is to get this loan. This kind of loan is perfect for a long term investment or for buying a large asset or business.
- Line of credit: This is a kind of a revolving account. You can lend an amount of money with flexible repayments. The amount which you take interest will be changed only on that amount. After paying back the whole amount, you can borrow again.
Repayments and Interest rates
● You need to pay interest only on the amount you use. If you are not using any amount, then there is no repay. You might have to pay a charge to avail this facility. But in case you are unable to repay on time, the interest rate will change drastically, or a late fee may be levied.
Security
● It can be secured or unsecured. In case of unsecured LC,there will be less amount but a higher rate of interest.
This type of loan is perfect for short term finance like a seasonal drop in business or coverage of unexpected cost.
How to Apply For a Loan
- Explain your business plan with all the opportunities, your benefits, and how you plan to use the loan. The key risks also need to be identified with their management plan.
- Present a budget and a repayment plan. If it is an ongoing business, then the profit and loss report of the last two years will be required.
- Show your business or personal credit score
- Provide any form of security or personal guarantee. It is not needed in every case.
There are three types of lenders:
- Traditional banks
- Online and alternative business lenders
- Peer-to-peer lenders
This is an abrupt ending. He needs to either elaborate on the lenders and place them somewhere above or skip them completely.
So, do not worry much, now you know almost everything about how to get a loan. So don’t lose hope and start planning- Give a stronger end.
Author: BizFunds is a brand of Auriolus Finvest Private Limited, a Power2SME group company. Auriolus Finvest Private Limited is a NBFC which focuses on the financial loan requirements of the credit constrained SME sector.
BizFunds provides Working Capital Loans to Indian Businesses at attractive credit periods to finance their purchase, acquisitions, expansions and temporary cash deficits.
