Line of Credit

A Line of credit, also called an operating line, working capital loans or overdraft lines are fluctuating loans that are used to pay the operating expenses of the business day to day. The lender usually determines the maximum amount of your credit line based upon your accounts receivable. Because this is used primarily in businesses that have large Accounts receivables, they are usually not available to businesses that operate heavily in ready cash, such as restaurants or retail shops. As a general rule lenders will also not allow inventory to back up this line of credit, but as always, exceptions are sometimes made.

Term Loans

A term loan, also called a passbook loan or a simple loan, is a loan for a set period of time (or term) and requires regular monthly payments, consisting of both principle and interest. These loans are generally used for the purchase of fixed goods or long-term assets, such as computers, vehicles or equipment and as a general rule, use these goods as collateral. Because they are used to purchase goods with a fixed life, they generally are limited to 5 years or less.

Leasing

While not a loan in the traditional sense of the word, equipment leasing is rapidly eclipsing term loans as the preferable way to finance equipment and other fixed assets. You will find that leasing firms generally have similar requirements to term loan lenders because they share the same risks. Generally speaking, equipment (such as computers) is leased for a period close to its expected life, generally with a $1 buyout at the end of the lease period. The end result is the same (you now own the equipment), but the tax laws in The United States are much more favorable to lease payments than they are to term loan payments. Always consult your tax adviser before signing a lease to make certain you are doing it in the most tax advantageous way for your situation.

Mortgage

A small business may carry a mortgage on a building it owns. Just how long the mortgage is for will vary widely depending upon the lender and their criteria, but terms from 10 to 30 years are not uncommon. Lenders are much stricter on the requirements for business mortgages than they are personal mortgages, with the borrower often having to pay all the costs for a full property appraisal, environmental audit and all of the legal fees, in addition to the standard closing costs. Because of this, business mortgages tend to be much more expensive and complicated than a similar personal mortgage.

Business Credit Cards

Often, a business will get a credit card in the name of the business for use by employees to pay business expenses. This can be useful if the employee is traveling or has to regularly purchase supplies or pay expenses for the company. However, since the credit line is secured by the assets of he company and the personal guarantee of the company officers, you should make sure that employees use the cards wisely and have good credit histories themselves. For the very small business, most lenders will require the personal guarantee of the owner, placing their personal assets as collateral on the account. Also, for small businesses the status of the credit card will most likely be reported on their personal credit file, sometimes harming their ability to gain more personal credit.

SBA Loans (in the United States)

If your business is located in the United States, one option is what is known as a small business loan, or an SBA Loan. There are various types, but they all are guaranteed either fully or partially by the Small Business Administration and thus, the US Government. A business applies for the loan via a lender in the typical fashion and then must be approved by the Small Business Administration prior to the borrower being approved. Because of this, SBA loans are generally a lengthy process, but the results can be worth it.

Some of the types of SBA loans available are listed below, but as always, consult your bank or accountant to make sure you have the latest information.

SBA 7(a)

The SBA’s 7(a) loan is generally used by existing small businesses to expand or grow. It is seldom used by start-up companies. An SBA 7(a) loan are for loan amounts up to 1 million dollars ($1,000,000) and are generally amortized over a period of 6 years or less. The SBA will guarantee up to 75% of the loan amount. These are generally used for working capital, new business acquisition and equipment or real estate.

SBA MicroLoan

These are used by very small businesses and are generally for amounts less than $25,000 and have to be paid back within 6 years. These are typically used by startups to buy equipment and materials needed to start a business. The loan interest rate is currently capped at the Prime Interest Rate plus 4%.

SBA Fastrak Loan

There are large national banks that are allowed by the SBA to approve SBA loans without the additional red tape of consulting the SBA. These loans are for amounts up to $100,000 and are generally guaranteed up to 50% of the loan amount by the SBA

As you can see, there are many options to borrow money for your business. The decision to borrow money is not one that should be rushed into: However, with proper planning it give you the much needed capital to take your business to the next level. 

Comments (1)

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written by Roz , March 19, 2008

Thanks for a very good article

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