Financial injections may come as a necessity anytime during business ownership, and there is a wide range of methods for the borrowers to choose from. When it comes to selecting a funding option, it is essential to step back and review all the aspects before making any decisions.
You have to understand at the first point that all lenders or investors have some specific objectives and needs for the applicants to meet. You may have a high possibility of becoming successful by availing finances from those sources for which you meet the requirements at best. The standard elements of financers include.
- Personal credit requirements
- Meeting specific financial ratio measures
- Personal capital injections
- Repayment capacity
- Collateral needs
To make a choice, you can consider the below aspects too.
- Interest rates
- Repayment terms
- Ultimate cost involved
- Specific requirements of the lenders.
Table of Contents
Major options
Debt financing is an option, which is primarily borrowing money by making an obligation for repayment.
Investment financing or equity is the option which may or may not need cash repayment, but includes surrendering a certain percentage of the business equity to the investor.
Considering the length of the financial arrangements, the considerations to make are:
- Long-term loans will cause piling up of interest.
- Short terms loans will require bigger periodic payments.
- You also need to check how the principal amount and interest is allocated during the term of repayment.
Associated cost
You may add up all involved costs with different financing methods. One should do this before making any decision to make sure that you are okay with the final figure. As you know, the major cost of a loan is the interest rate, broker’s fee, and closing rates.
Prepay obligations
Sometimes, you may have the ability to pay your loan before the term itself. It is common that the debt financing loans also allow pre-closure of loans, but you have to know that there are some penalties too.
Another common lending terms entrepreneur should know
If you are in search of financing for your business, you may probably come across many other unfamiliar terms too. Let’s break some other common terms used by lenders.
Term loan
It means lump sum cash you have to pay back plus its interest over time. Traditional bank loans usually offer longer payment terms and lower monthly installments compared to short terms loans. You have to possess a high degree of creditworthiness to secure a term loan. If your business is new and you have poor credit, then getting a term loan may be a nightmare.
SBA loan
SBA means Small Business Administration loans which only costs lower and also spread over a longer term for repayment. These loans are specifically focusing on entrepreneurs, so accessible for aspiring young businessmen too. This is the most affordable financing options for small business owners to grow their business.
Line of credit
It is another popular form of Money lending. This type of finances provides the borrowers a revolving credit, which allows you to borrow money and pay back that amount over a period while staying within the optimum limit. Unlike a term loan, lines of credit by agencies like Liberty Lending offers you the needed capital, and you have to just pay for what you avail.
Annual percentage
APR or annual percentage rate is the actual annual cost of the loan you avail. APR is usually quoted in percentage like the interest rate, but it offers a better understanding of what you owe to the lender. In addition to the interest, the APR will also include an origination fee, closure fee, processing fee, etc.
APR of various lenders may vary based on the financial products they offer and also based on the borrower’s history. If you are aiming at a loan, then make sure that you learn to compare the APR of various loans before making a decision. Even though the other elements like interest rates and the term may vary, APR will act a different measure to compare multiple loan products better.
Income statement
The income statement is the document which details your net income, expenses, and revenue over the specified period, usually quarterly or annually. You may come across this when you fill a loan application. This is one of the essential considerations for the lenders to assess your creditworthiness. You may also find it stated as a profit and loss statement at some places.
This is the documentation of your business’ financial health. You can prepare this statement easily by yourself or can take the assistance of a skilled accountant to do it for you. There are specific jargons on income statements too, which needed to be used during its preparation. So, you have to familiarize with that vocabulary first to prepare it on your own.
Collateral
This is the asset you own if you want to pledge something to the lender to back up a loan. It may be anything like the business equipment, real estate, your accounts receivable, processed inventory, etc. It should be something which a lender could liquidate on you defaulting the payment. Collateral helps the lenders to minimize or cover up their risks. If you are looking for a secured loan, you may expect to pledge some collateral to get it processed. Unsecured loans usually don’t require collaterals but have higher interest rates.
Personal guarantee
If not collateral, you may look for personal guarantee also to cover up the risk of the lender. In which, you or another person commit to be personally responsible for the debt you owe. So, the lender gets the authority to seize yours or the guarantor’s personal assets on defaulting. Such personal assets include your property, vehicle, retirement fund, etc.
What given above is not an exhaustive list, but to help the beginners to break the ice while applying for a loan product. However, once you get into it, you may have a better understanding of the requirements and will learn to cope up with the needs if you have a baseline knowledge of financial terminologies.
