One of the common ways of financing a business is using loans. These loans are mostly provided by financial institutions such as banks. The most significant advantage of a taking a bank loan is that the banks will help you structure the financing. There are various ways to get loans for business. Some of these ways are:
The loan agreement that is signed by the bank and business owner will specify the monthly installment to be paid. The monthly installment will be broken down into interest and principal amounts.
Interest is normally charged starting from the date the loan is disbursed and is due at the end of a specified period which could be fortnightly, monthly, quarterly or yearly. Any default in repayment normally attracts penalties. These penalties are meant to act as a deterrent to defaulters.
The term of these loans is directly linked to the purpose they are being taken for. The term varies from one month to 7 years. The shorter the repayment period, the higher the interest charged since the bank will try to provide for risk if there is a default.
Unsecured and secured loans
The bank will do an appraisal of the business, and if it is sound, an unsecured loan will be extended to the business. In this case, no collateral will be pledged as collateral. The loan is provided because the bank considers you as low risk. New businesses are highly unlikely to be considered for these unsecured loans because they do not have a history of success and profitability.
Secured loans require some form of collateral. Subsequently, the interest rate charged is lower compared to unsecured loans. The collateral demanded will vary depending on the loan purpose and the amount to be advanced.
Line of credit loans
This is intended to aid the business in meeting their working capital requirements and their business cycle shortfalls. Ideally, a line of credit loans is not good for purchasing pieces of equipment. This mode of financing carries interest at a very low interest. Repayments of interest are done monthly, but the principal sum is done as a one-off.
Before banks offer a line of credit loans, they do an appraisal of the business regarding the financial statements, projected cash flow statements and the tax returns.
In conclusion, regardless of the loan taken, it is important that the purpose and amount of the loan are considered. These factors will, a way, determine the interest to be charged and the repayment amount and the period to be taken.…