Types of bank loans
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Working capital lines of credit
for the ongoing cash needs of the business
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Credit cards: higher-interest,
unsecured revolving credit
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Short-term commercial loans
for one to three years
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Longer-term commercial loans:
generally secured by real estate or other major assets
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Equipment leasing for assets
you don't want to buy outright
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Letters of credit for businesses
engaged in international trade
Direct and indirect costs
The final cost of borrowing money
often involves much more than just the interest rate. A variety of other monetary
and nonmonetary costs should be considered in determining the real cost of borrowing.
Consider: 1) direct financial costs,
such as interest rates, points, penalties, and required account balances, 2) indirect
costs and loan conditions, such as periodic financial reporting,
maintenance of certain financial covenants, and 3) subordination agreements personal
guarantees needed to obtain the loan.
What banks look for
1)credit history of the borrower
2)cash flow history and projections for the business
3)collateral that is available to secure the loan
4)character of the borrower
5)loan documentation that includes business and personal financial statements,
income tax returns, and frequently a business plan.
Asset-based financing
To generate working capital or to meet specific short-term cash needs,
small businesses may use certain short-term assets as collateral for commercial
loans. Common types of asset-based financing are:
1) Accounts receivable financing
uses the receivables as collateral. As the business collects the receivables,
the proceeds are used to repay the loan or line of credit.
2) Inventory financing is a similar
type of loan, using inventory as collateral.
3) Factoring is a process whereby
accounts receivable are actually sold to a third party (the factor) for a discount
price, after which the factor takes on the job of collections.
Leasing
Leasing assets, rather than purchasing them, is a form of financing because it
avoids the large downpayment frequently required for asset purchases and it frees
up funds for other business expenditures. However, you should be aware that leasing
from conventional lenders may be difficult for startup businesses because traditional
lenders require an operating history from prospective lessees.
Trade credit
Suppliers can often provide an easily available way to supplement conventional
borrowing. Startup businesses may benefit from shopping for prospective suppliers
as soon as the entrepreneur has a business location picked out
Life insurance companies
Your existing policy can be a source for low-interest policy loans.
