How to Choose the Bank Loan You Need?
A bank loan is the most common way to fund a business. There are other ways as well, like using your personal funds and other financial tools beside loans. However, with loans you have the most flexibility and the most time needed to repay it. The interest rates are therefore somewhat higher.
There are also other fees and expenses that you need to consider when choosing a bank and that’s why taking the time to compare a few different offers means you get to weight those against each other.
Term loans
Term loans are how the so called long term loans are called in the world of finance. That’s the best option for those who need a lot of initial funds but also have plans to operate the company for a long period of time and have a sustainable business model.
It takes a long time to obtain this loan and you can’t use it for a temporary or a quick fix. You should also take this time into account when it comes to your plan since the business won’t be operational until you’re able to secure the funds.
Short-term loans
Short term loans are the opposite options. They are used to get small amounts of cash that you need to fix up a particular problem or make an individual purchase. These are also faster to get and you could plan on spending them while you’re still in the process of handling the paperwork.
The loans also come with a higher interest and therefore shouldn’t be the solution that you come back to, that often, since it will cost you more than long-term financial planning overall. Instead, they should be for emergencies and onetime expenses.
Secured loans
Secured loans the best way to go if your goal is to pay the smallest interest since these loans are made for the bank to be secure in case something happens to your finance and you’re unable to pay. Therefore, the bank is able to afford providing you smaller interest rates.
For the most part you’ll use some sort of asset as the security that you’ll repay the loan. It can be a business asset such as your office, equipment or intellectual property or it can be a personal asset such as your home or personal savings.
Equipment loans
Equipment loans are also a type of secured loans but they are unique because of the way it can be used and what’s used as a security. Those are the loans that are used to purchase the equipment needed to run your business. That’s the first big expense that your company has so this loan may be essential.
The equipment itself is used as a security for such a loan meaning that if you can’t pay it back you simply lose the equipment and possibly pay some difference that accounts for the wear and tear of using it for a while.
Invoice financing
Invoice financing is technically a short term loan even though it’s often not seen as such. Since most businesses rally on those with whom they work with to pay their dues on time, businesses are often waiting for the next cash injection. This can be a real problem for a small company.
When you use invoice financing it’s the bank that makes the payments you’re waiting on. That’s done for a small fee, but it means you get a steady stream of income while the bank collects what you’re owed over time. It’s a way to pay for the sense of security.
Credit lines
Similar to this, but somewhat different is the option of taking out a credit line instead of an ordinary loan. This means that you reserve the funds from your bank but you only use and therefore pay back only the amounts you have actually used and spent.
This is a good option for those businesses that are just getting started and can’t really predict their upcoming costs that well, but also can’t dip into the savings from which to pay the costs if they do come up. It’s a bit more expensive than borrowing all the money at once.
Conclusion
A bank loan is the best way to start your business. It proves that your business plans are thought out and that you’re able to make a profit in the years to come. At the same time, it’s essential to choose the type of loan you’re using carefully since there are many different loans out there and you need to choose the right one.
The loan should be chosen based on how much money you need, what kind of interest rates you’re able to pay and how long do you plan to repay the loan.
