The most important factor in deciding how well your company will develop is your ability to access capital. The funds can be used to develop the firm’s infrastructure or to increase its inventory, however, they can also be useful if you need resources in order to keep basic operations going.
When it comes to accessing capital, there are two main options that you have to choose between:
- Bring in investors – Finding individuals and companies to invest in your company can be extremely difficult if it is still in its infancy and has not started generating a considerable amount of profit. Furthermore, investors usually demand that they have some degree of control over how you run the company;
- Take out a loan – Borrowing the money is usually the preferred method of accessing capital because it does not require you to sacrifice any amount of control over your company, and banks are only interested in hard facts. Basically, as long as you prove that you will be able to pay the money back, in some shape or form, you will receive the loan with no questions asked;
This having been said, when it comes to borrowing money in order to develop your company, it is important to understand what type of loans are available to you. Each has its own advantages and disadvantages that must be taken into consideration to ensure that it will not have a negative impact on your business.
Take out a long-term loan from a commercial lender
Long-term loans are the most common types of loans in the world. They are distributed by commercial companies and are great for business expansion, acquisition, refinancing, or if you need working capital. This type of loan has to be repaid on a monthly basis and often have much smaller interest rates than short-term loans because they span over a long period of time.
It is usually easier to obtain a long-term loan if your business is well-established and can convince the lender that it will be around for enough time to repay the money. Alternatively, companies that are just starting out may still be able to secure a long-term loan, however, they will have to prove that they have enough resources that can be liquidated in case they are unable to make the monthly payments.
Short-term loans are more feasible for smaller companies
At the opposite end of the spectrum are short-term loans. Unlike other types of loans, these span over a short period of time and do not have to be repaid on a monthly basis. These are usually more useful for small projects that can yield profit in a small amount of time.
Seasonal businesses such as small hotels, farms, or ranches are the regular companies that regularly submit requests for short-term loans. This having been said, it is important to note that with these you can only get up to $100,000.
The main disadvantage of short-term loans is the fact that they often have larger interest rates than long-term loans, and they have to be repaid at once, not over time.
Lines of credit offer more flexibility
When accessing a line of credit, you do not get a large amount of money at once. What you do get is access to a credit account that has a very high limit, allowing you to take out the money as you need it and return it in the same way. Interest is typically paid depending on how much money is “missing” from the account at the end of each month.
Furthermore, lines of credit are offered for a specific period of time, at the end of which you have to return all the money, in bulk. This makes these loans useful only to use for emergencies or as running capital if you are sure that you won’t lose money over time.
Alternative Financing Solutions
Depending on the type of business that you are running, there have a variety of non-bank lending services that you can access. These include cash advances, leasebacks, asset-based loans, p2p loans, and crowdfunding. Most of these lending products can be accessed and tracked online.
While these are all regulated by the government, they are free to define their own eligibility requirements and protocols when it comes to lending money. This means that they will offer a lot more variety in terms of monthly interests and credit limits, making it important to shop around and know how they work before borrowing money.
These are the 4 most important types of loans that you should be aware of as a business owner. They all offer a reliable way to get capital for your company, however, each is suited for a different type of business. Research each of them and decide which one is better for you.