The Different Types of Loans Available to Businesses
One of the prerequisites of business is that one requires to make a financial investment for it to thrive. There are times when business run short of money and they need assistance to get additional cash for the business to continue operation smoothly or so that the business can be able to take advantage of an opportunity that could bring in a lot of returns. A loan is a facility where one is given a specified amount of money and they are required to repay it after a certain duration of time at an interest. To be able to qualify for the loans, the business has to meet certain conditions and they also need to explain the reasons for taking the facility.
The most popular type of business loan is one where the loan is given upon the business giving security of an asset like land that can be taken away from them in the event that they are unable to repay the loan. Unsecured, like the name goes, are extended with no security although these ones come with higher interest rates. Bank overdrafts, like the name suggests, allows the business to overdraft their account, meaning that they have the ability to withdraw more money than is in their accounts although this means that their interest rates are very high.
Other loan facilities include one where one is allowed to take purchases from their creditors on credit and thereafter pay them. Most times these purchases are sold at a slightly higher price to cater for the fact that the money will come in at a later date. Business can access the debt their debtors owe them by liaising with factors who agree to avail an amount lesser than the amount of debt owed immediately and then collecting the full of the debt from these accounts receivables. The rationale behind this loan facility is the fact that the business does not wait for the credit period to expire before accessing the money, although the downside is that they do not receive the whole amount of debt owing to them.
All loan facilities will require the business to be legally registered and then has a previous good credit rating showing that they were able to honor credit extended to them in the past. They also need to have a solid plan of how the plan will utilize the money they obtain from the loan. Depending on the risk involved, the extending entity determines the interest rates to attach to the loan. Financial authorities have been put into place to ensure the business and loan facilities are not exploiting each other by regulating the loan terms,to as well as helping the startups access the loans because most do not have a previous credit rating or assets to give as security.