Getting your business off the ground is far more viable when you have a good chunk of money to work with. Financing your venture with a loan is still one of the most common solutions, but it’s easier said than done. If you’re considering this option, it’s worth looking into what types of loans are available and how you can apply for one.
Types of Loans
Line of Credit: A pool of funds with flexible repayment options, where interest is only charged on what you take out.
Credit cards, overdrafts and revolving facilities are classified as a line of credit. If you don’t use the money, you don’t make a repayment, bar the fee you pay for the facility itself. These can be secured or unsecured, with higher interest rates and less cash for unsecured loans.
A business credit card is a popular line of credit. They have the benefit of being useful for ad hoc purchases and keeping your spending separate from personal expenses. However, interest rates and fees tend to be higher.
Term Loan: A lump sum attached to a regular payment schedule.
These come in many forms, including startup loans, business mortgages and asset loans. Interest rates, security requirements and terms of repayment is where they typically vary. With a fixed interest rate, forecasting is easier as you know how much you’re paying back each month.
With a floating or variable interest rate, your repayments fluctuate, which means you can pay the loan off faster if the rate goes down. Loans can also be secured or unsecured. With the latter, you promise nothing as security in exchange for a higher interest rate. With a secured loan, you’ll provide a valuable asset or some type of personal guarantee.
Term loans are usually better for long-term investments. The longer you’ve been in business, the more likely you are to be accepted, as lenders prefer to see a successful track record. However, some lenders can provide a poor credit loan, which can help you obtain funding with a score as low as 500.
Applying for a Business Loan
Lenders need a guarantee that you’ll repay them. This can come in numerous forms. You’ll typically need to provide a business plan showing the scope of the opportunity and how you’ll utilize it.
Providing a financial report with your budget is also useful. Having security and being creditworthy will be to your advantage. You don’t need to provide a wow factor to be eligible; you just need to prove that you can return a steady and predictable repayment.
There are mainly three types of lenders: traditional banks, peer-to-peer lenders and online alternatives. Banks tend to be the most difficult for less creditworthy borrowers, while online business lenders usually offer specialized loans with more suitable interest rates. The same applies to peer-to-peer lenders, which you’re also more likely to be approved by.
Remember to explore your options and avoid going for the first lender you see. Take the time to study their interest rates, lending limits and friendliness towards small businesses.