Raising Money for Your Business 3
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What kinds of bank loans are available to businesses?
The two general types of loans are short-term loans and long-term loans. A short-term loan is one that has a term (the time from when you get the loan until it has to be paid back) that is usually 1 to 6 months but can be up to one year. Usually short-term loans are made to cover temporary or seasonal financial needs.
Long-term loans are usually made for terms longer than one year. Generally these loans are for major purchases, business expansion, or purchase of equipment or real estate. You will usually have to pledge some kind of collateral to get a long-term loan.
What is a secured loan?
A secured loan is a loan for which you have pledged assets as collateral (or security). If you can't pay, the bank takes over whatever assets you have pledged to pay off the loan.
What is a revolving line of credit?
A revolving line of credit works something like bank credit cards. You are granted a certain amount of credit, you may use it up to that amount, pay it off, use it up again, etc.
What is a personal guarantee?
A personal guarantee is a legal document that makes you liable for the debts of your business. You may be asked to sign a personal guarantee for small loans for which you don't pledge collateral, for business leases, and in some other circumstances. If the business defaults on the loan and you have signed a personal guarantee for the loan, the tender can force you to sell personal assets to make good on the loan if you don't have the cash to repay it.
Can I get a loan without going through my local bank?
Yes, there are many sources for loans other than banks, and you can find many of them by searching the web for the term "business loans." The search results for that term will list lenders and websites that help you find lenders.
What about credit cards? How can I use them? Do I have to take out a cash advance?
Some credit cards offer small businesses a line of credit with their cards. If your credit rating is good, you can get $25,000 to $30,000 or more this way, without the hassle of applying for a bank loan. Although you have to fill out an application, generally the applications form is much shorter than application forms for business loans from the bank.
Usually there is no restriction on how the money is used. You can either use your credit card for purchases or request that the money be put in your bank account and use it for working capital. As with any loan or credit card purchases you need to use the credit wisely since you will be personally responsible for paying it back even if the business doesn't do as well as you had hoped.
Some credit card lines of credit have an annual fee. And sometimes interest rates for credit card lines of credit may be higher than interest rates from you bank on a line of credit. So, before going the credit card route, compare the credit card interest rates with the interest rate on a bank ine of credit.
If you have good credit, check around for special introductory offers, too. Interest rates and annual fees vary depending on the economic conditions in general and how badly credit card companies want your business.
What is receivables financing?
Receivables financing (also called accounts receivable financing) is short-term financing used to provide companies with a source of cash between the time they sell a product and when they get paid for it. The business pledges the accounts receivable (outstanding bills) as collateral for the loan. If the business doesn't pay back the loan, the lender makes arrangements to have customers of the business pay their bills to the bank instead of to the business.
What is factoring?
Factoring is the outright purchase of accounts receivable (as opposed to lending against them). The business sells the receivables at a discount, getting, say $70 for every $100 in receivables it is owed. The factor may take over the collection function. The factor used to bear all the risk. Nowadays, however, the factor may have recourse back to the company that originated the sale.
What is inventory financing?
Inventory financing is a loan used to bridge the gap between the time a company has to make an outlay for raw materials or inventory and the time the raw materials can be turned into products and sold. Although inventory financing may be used in conjunction with receivables financing (to gear up for seasonal sales, for instance) it is more individualized than receivables financing.
Some lenders will advance only on raw materials and finished product but not on work in process and some lend only on raw materials. Most lenders want to make sure that any advances against finished product are only against newly created inventory—they don't want to be stuck with merchandise that is old and has no commercial value."
How do I get vendors to extend credit to me?
Often all you have to do is ask the vendor to bill you, or ask if they take purchase orders. You may be asked to fill out a credit application form and supply business credit references.
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