Business loan types defined:
Cash flow might be low in your business where it leads you to go hunting for a business loan.
The term loan is the most common general purpose loan. It is usually used for working capital, expansion, refinancing, and acquisitions. It is repaid monthly over a term based on the expected life span of the assets you are purchasing. This is a most convenient loan one can take for bigger amounts.
A short-term loan is always set up for terms of one year or less and can be repaid in a lump sum instead of monthly. It is usually for smaller amounts and is best for seasonal inventory build-up or small investments with quick returns.
Equipment financing was specifically created to assist in buying equipment. It is the easiest to obtain because the equipment one buys serves as direct collateral for the loan. It is also less risky in a sense that if you are unable to make your payments, you do not have a lien against your entire business or your personal real estate.
All you lose is the equipment you bought. The amount of financing differs from business to business as it is determined by the size of your business.
The line of credit is a business loan that is usually set up for insurance against cash flow problems. Instead of getting a cheque for the full amount of the loan, the financial institution will allow you to borrow up to a certain amount per year. You then take out the money in small amounts as you need it.
This loan's flexibility comes at a cost though. For example, if you do not repay the loan balance as expected, it can quickly become more expensive than other types of loans. Avoid using a line of credit for significant business improvements since it is meant for temporary cash shortfalls.
Credit card advances - in lending. This does not mean taking out cash through your business credit card, although many businesses do that. Instead, it is a loan based on your track record. It is a good choice if your business has at least a three-year history of accepting credit cards. Because credit card sales are such a good estimation of your future earnings, you will be able to get a fairly good rate on a loan against your expected income.
While the National Credit Act has put stringent guidelines as to how banks and financial institutions must conduct business, the terms and conditions may vary from one lender to the other. One must be sure he or she knows exactly what conditions apply to a loan one is taking.
Factoring is another option for many small businesses. Factoring refers to the selling of one's invoices to a third party instead of waiting for customers to pay. The third party pays the invoices to you but takes a certain percentage of the full amount. Typically, you will receive 80percent of the invoice value upfront and the remaining value once the client pays.