The
most common way for business to acquire loan capital is with a bank loan.
Financing for bank loans is usually medium or long-term. The interest rate, the
cyclical amounts of repayments and the fixed period over which the loan has to
be repaid (usually. 3 to 30 years), is all set by the bank.
The
bank will more often than not ask that the business be able to provide security
in the form of collateral for the loan, start-ups however have to come with
personal guarantees provided by the entrepreneur as collateral.
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Every
business that seeks a bank loan, does so for numerous reasons. However, a bank
isn’t the only place where one can get a loan. There are a number of government
offices and funding institutions that make loans to businesses. accounts
receivable and inventory can be used as collateral when making a loan. When
loaning money, you have to consider the expense of doing this, as well as the
high risk you are exposing yourself to. To Add to that. You have to also keep
in mind the risk of whatever business you might have established, taking out a
loan introduces you to a different type of risk. Never the less, when raising
capital for a business, debt is a way of financing the operations of said
corporation.
Companies will often take out a loan to acquire real
estate to expand its operations. There is a high likely hood that banks will
finance an already existing establishment that is need of buying a property in
order to grow its offices. In a case such as this the bank will more than
likely approve you and your business for a loan. Real estate Banks loans are
usually conveyed until the completion of the loan period. Long-term loans, such
as real estate loans usually run for a period of 25 to 30 years. In this type
of loan, the property is used as collateral in case of forfeiture.
A
business needs to purchase equipment and there are some options available to Businesses
with regard to the purchasing of new equipment. A business may opt to buy or lease
equipment. If you want to buy your equipment, you might have ample reason to buy
it by approaching a financier to borrow the money. Businesses have been known
to get tax cuts for their paraphernalia while depreciating the rest over its
lifespan. An enterprise may opt to sell its equipment for salvage value once it
has reached the end of its economic life span. when a business applies for a
loan in order to buy equipment, there bank will usually approve an intermediate
loan period for this. The Intermediate loan term is generally 10 to 15 years
long.
Companies
need inventory and banks will give businesses loans to purchase inventory,
however it should be noted that, this type of loan will be allowed sometimes.
Some companies operate in industries that are by their nature seasonal and
similarly the profit, this is especially true for retail businesses. Let us say
your company receives the majority of its sales annually when the holiday
season is in full effect, this means that you would want to ensure that your
sales floor stays full during this period, and you will therefore increase all
of you back up and sales floor inventory prior to the start of the holiday
season. The need for a bank loan before the season to be merry commences so
that you are able to buy inventory stock in bulk and set yourself up to profit
during this time. Banks will give some businesses credit for buying inventory
stock, these are mostly short-term loans and have to be paid off with a portion
of the profit made during the periodic sales cycle.
The
working or operating capital of a business, is the monies used for the daily operations
of a business. In order for any business to survive, it requires working
capital, so, businesses will sometimes find themselves in a situation where
they need a loan to get working capital until their income producing assets are
able to meet all of the business working capital requirements. Banks have intermediate
to short-term loan facilities available to businesses, so that they need not
worry about operational finances and can focus getting things started and growth.
With the growth of the businesses assets, the company will earn money to repay
the borrowed operating capital to the bank. These types of loans, do however,
have a higher interest rate attached to them when compared to others such as a
loan to purchase real estate, this is due to banks seeing working capital loans
as high risk.
Every
business…Let me self-correct and say, in exception of the smallest one, has the
opportunity to use debt and equity financing when raising capital. The most
common method to get a business loan is through a commercial bank. As a
Businesses you have many different types of needs all of which can be filled by
either a short-term, intermediate or long-term loan.
Coming
back to the long term loan and why it is essential for the enterprise. We
especially like long-term business loans to be used by businesses. Loans are
used for various different reasons in business, and therefore have different
periods of maturation as well.
A
Long-Term Loan secured by the business via a Bank more than often has a fixed
maturity period and rate of interest along with a monthly or quarterly
repayment cycle. Long-term loans mature in 5 to 15 years, but depending on what
the loan will be used for, they can be stretched to as far as 30 years.
In
order for a company to be able to secure a bank loan for the Long-term, it must
be able to support it with collateral, this collateral will usually be the assets
of a company.
How
easy it is to acquire a business loan is dependent on many factors some of which
include loan policies of the bank you are transacting with, how strong is your
company financially and how healthy is the economic environment.
A
business plan along with financial statements dating back some years have to be
produced in order for a company to secure a long-term business loan. The also
needs to be able to show that it can repay the borrowed amount by way of
forecasted financial statements.
Before
applying for a loan, you should compare what are the pros and on leasing versus
taking a loan for the asset that you would like to finance. This is because the
rate of interest to be paid on a long-term loan will often be few points below
that of a short-term loan.
This
article is about Bank Loans and how they work. the Business Own Corporation MIND Repository provides view to other banking related documents and other related documents that you need to be aware of.
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Banks
generally charge at a lower interest rate for loans compared to bank overdrafts
for instance. Therefore, loans are a good investment when it comes to financing
fixed assets such as machinery for a plant, real estate and other like
investments.
Startup businesses recording a poor cash flow and
profitability are likely not to get business loans. Banks see these businesses
as being high-risk, especially since the credit crunch, banks and lending
institutions are more cautious about the kind of lending they do.
