It is common practice for business owners to take loans. However, a lot of them go into a loan without necessarily knowing what it entails and whether it’s the right time to take it.
This article provides certain exposition into some of the most popular loan types and when it will be perfect to apply for each.
Line-of Credit Loans
A line-of-credit loan is a short-term loan that provides more cash to the checking account of your business to the upper limit of the contract of the loan. Although funding methods vary from ban to bank. The essential principle is that money is transferred to the business’ checking account in order to cover checks. The business in turn pays interests on the advanced amount from the period it is advanced to when it is paid back.
Majority of line-of-credit loans are written for about a year but they can be renewed almost automatically, as long as an annual fee is paid. In order to negotiate a credit line, you will most probably have to present your financial statements, your latest tax returns, and a projected cash flow statement. Basically, this type of loan can be applied for anytime, but you need to ensure that you’re able to pay it back
An installment loan is paid back with equal monthly payments and it covers both the principal and interest. Installment loans can be written to meet various business needs and they’re also awesome small business loans for women. As soon as you sign the contract you receive the cash and the interest is calculated from that day to the last day of the loan validity. Also, if you are able to pay an installment loan before the final loan date, the interest will also be adjusted, so you can even get returns.
It is mostly advised to get an installment loan at the beginning of a financial (or business) period. That way, you can factor payments into your fiscal calculations and know how to manage it efficiently.
These loans are usually written under a separate name, but you can easily recognize them by the fact that although the full amount is received as soon as you sign the contract, only the interest is paid during the life of the loan. A ‘balloon’ payment is made for the principal on the final day.
It is common for a lender to offer a loan in which a single ‘balloon’ payment covers both the principal and the interest.
If you’re looking to get a balloon loan, it is advised that you wait until a specific date when you have to receive payment from a client for providing certain products or services.
Regarding interim loans, bankers are more concerned with the entity that will be pang the loan off and whether they can rely on this financial commitment.
It is advised that you take an interim loan when your business has expanded to a fair degree and you need to make payments to contractors on a periodic basis for building new facilities.