Business Loans: Making A New Beginning

What is a business loan?

A business loan is a type of financing that is specifically aimed at meeting the needs of a growing business. Business needs are varied and so are the options available for raising private debt funding. The mechanics of a business loan is not too complicated. A business loan comes under the aegis of debt financing. Lenders offer business loans for a fixed amount of time and at a pre-determined rate of interest, which is usually a percentage of the principal loan amount. The loans are repaid in a staggered manner over the loan period. There are different types of business loans, depending on the nature and requirements of the business.

Types of Business Loans

Working Capital 

Working capital loans are aimed at tiding over short-term financial shortages. Such loans are taken when the cash reserves are insufficient to take care of a business’ day-to-day operational needs. Working capital loans are a tremendous solace in times of seasonal cash shortfalls, irregular cash flows and sudden spurt in business.

Term Loans

A term loan is a business loan meant for capital expenses of a business, such as acquisition of fixed assets in the form of machinery, building and land. The quantum of loan is generally higher in case of term loans, and the rate of interest can be lower depending on the credit profile of the business. Terms loans are long-term, ranging from 5-20 years, and carry fixed or floating interest rates. 

Cash Flow Financing 

Cash flow financing or invoice financing is a powerful tool to raise capital, especially for small businesses. There usually exists a time lag between raising an invoice and getting paid for the products or services. Banks and financial institutions provide loans against the invoice, to the extent of 80% of the invoiced amount.

Asset-based Financing

Asset-based lending means borrowing money by mortgaging a company’s assets, with the lender focusing on the quality of the collateral rather than the credit rating and prospects of the company. A business may borrow against premises, plants, stocks and receivables. Asset-based lending is an attractive proposition for businesses that lack track record and credit rating to qualify for other loans. 

Loan against Property

A loan against property is raised by pledging a property as collateral security to the lender. Property assets such as residential, commercial and vacant land property can be used for raising loan against property. This loan can be used for any business purposes, including advertising and working capital requirements. 

Bank Lines of Credit

A bank business line of credit is a well-known loans category. A bank lends a specific amount of money that a business can draw at any time, depending on its needs. Lines of credit can either be fixed or revolving. In the case of revolving credit, the bank resets the credit line after receiving the entire dues owed by the business concerned.

There are loans aplenty. A business has to take a call on the appropriate loan, based on its needs, financial situation, operations and goals.