One of the major stumbling blocks to establishing a business is inadequate capital and lack of funding. This is why there are provisions for bank loans and whatnot. While some strict terms and conditions may apply, business owners can easily get commercial loans and borrowed capital to boost their business and increase profit-making.
A notable con of taking out business loans includes the expensive fees and interest rates attached to them. Nonetheless, a business owner should get a loan only after ample time considering the pros and cons and ensuring they can repay both the principal amount and the accumulated interests when due.
Before you apply for a business loan, here is what a business loan is and the varying types of business loans.
What is a business loan?
Business loans are capital offered to a borrowing business by a lending entity. The latter could be the government, an organization, a bank, or any other financial institution. Repayment of these loans is usually in the payment of the principal and interests at a scheduled time agreed between the parties, which may vary with the time of the loan.
Types of business loan
- Small business administration (SBA) loans
These are some of the major business loans for SMEs and entrepreneurs. They are government-backed and usually come with lower interest fees and rates. In addition, they include long application processes and thus ideal funding sources for non-urgent loans.
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Secured and unsecured loans
Secured loans are charged against collateral or security. Thus, the lending entity, usually the bank, can fall back on when a company defaults in paying up the loan. The securities typically include insurance, shares, gold, buildings, and land properties. On the other hand, unsecured loans do not come with collateral or security promised, thus attracting higher interest fees.
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Term loans
These are loans for a fixed-term period and can be repaid in the same time frame – usually monthly. Therefore, they are ideal for everyday operational costs and expenses.
Other loans include real estate loans, franchise loans, microloans, business line of credits, and many more – the list is inexhaustive.
Three reasons you should take out a business loan
- Capital
For startups and small businesses without adequate capital for the establishment, taking out business capital loans is a significant profit booster and one way to seek out helpful resources for your brand. In addition, it can help alleviate the financial burden of the business establishment of a company.
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Expansion
Going concerns seeking to expand can also take out loans to do so. The loan-worthy expansion includes opening additional business locations, adding more products and services to your brand objectives, investing in marketing and advertisement, employing more workforce, and acquiring new properties.
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Equipment and Inventory
Business owners can take out short-term loans to purchase inventory and equipment, attracting tax write-offs in some jurisdictions. Faulty equipment equates to inefficient business operations, which may affect business profits and ROI. In the long run, business owners can sell off machinery purchased which may be a source of capital input.
While loans are good sources of business funding, no business should take out loans without proper planning on investing in the loan and how to repay it. Also, refrain from taking loans higher than what is needed. This can make you run into unnecessary debts averse to your business growth.