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The Right Kind of Loan
At one point or another, your business would need
money; either to finance a new venture, make a new expansion and
even to sustain the business’ very survival. One way to get funds
for your business activities is to get a loan either from a
financial institution, a group of people or an individual.
Securing a business or commercial loan depends on the confidence that lenders and investors have in your character, capacity and capital. The Three C’s Character refers to your integrity as a borrower and the reputation you have built for meeting obligations and overcoming business adversities. Honesty, integrity and commitment are essential for a person to be credit worthy. Your ability to use financing wisely reflect on how well you manage your business through your earning record and standing in the community. The industry term is Capacity. This would gauge your capability to repay the loan you’ve taken. The Capital represents an objective evaluation of how much you own and the amount of money you are willing to risk on the venture. This is related to capacity. To evaluate whether or not they want to lend you money to finance your enterprise, lenders consider these three main things. There are many types of loan options available in the market today. Here are some that you might look into when securing a loan for your business. See which of these would suit your particular needs. Personal and Character Loan This type of loan is usually the result of an established personal relationship between the borrower and the lender. Trust secured by good faith and strong credit ratings makes this kind of arrangement work. With a personal and character loan, the lender places his own credibility on the line. Although generally these loans are un-collateralized, you may still be required to execute a personal guarantee. You may also be required to restructure your business’ debt load by refinancing or selling off assets. Most personal and character loans are found in rural communities where the lender works with tradition and family relationships. This kind of loan typically finances small family firms with long track records and solid physical resources. Occasionally, they’re also used to help start-up ventures or to buy commercial real estate for future development. The major drawbacks of a Personal and Character Loan are:
Installment loans are used as primary capital funding to back start-up businesses. Their main use is for purchasing vehicles, office machinery and other items needed for the day-to-day operation of the business. When cash reserves are low, installment loans become a logical way for a business to finance such purchases. Look beyond banking institutions when thinking of getting an installment loan. Many suppliers now offer monthly payment plans to their dealers at reasonable interest rates. However, you must proceed with caution. Not only does installment interest run higher than other commercial loans; your collateral won’t be released until the entire loan is paid off. Installment loans are also bad when it comes to building equity. They seldom generate net asset value for your balance sheets yet almost always produce liabilities that eat into your business’ net worth. Check first with your accountant before using installment financing for your business.
Home equity borrowing is also another way to tap into your personal net worth for business capital when you’re in a start-up situation, or when you need to make a personal investment on your business. A home equity loan or line of credit places a mortgage on your property. With this kind of loan, you won’t have any debt liability until you actually withdraw the money. A key drawback in this type of loan is that your home is your collateral. Until the loan is repaid, your property is at risk. In the event of a recession or a drop in value, the mortgage holders may require faster repayment schedules or extra collateral. It is important to check with a lawyer who specializes in real estate before you sign for a home equity loan. |
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Home Equity Loans
