Businesses are in constant need of working capital, which is why business loans are a lucrative idea. Business loans are, as the name imply, loans granted for business purposes. There are both secured and unsecured business loans. However, you need to know more about business loans before you go for them.
Types of Business Loan
The most common type of business loan, term loans are simply the loans that you repay after a specific period of time along with the interest. They are simple loans with long repayment tenure, and you can easily get the exact details with a business loan calculator.
2. Short Term Loans
Short terms loans are mostly identical to term loans, except the shorter repayment tenure (generally 2-18 months). They might also have higher business loan interest rate.
3. SBA Loans
SBA loans are basically small business loans that are offered by most lenders and secured by the Small Business Administration. They are the best option for small businesses due to their low cost and high flexibility.
4. Equipment Financing
As the name suggests, equipment financing allows you to get the capital for buying new/used equipment for your business. Though it is a secured loan, the equipment act as the collateral.
5. Invoice Financing
A growing business loan option, invoice financing allows you to get funds in exchange of the outstanding (that it, still unpaid) invoices you have for your orders. Up to 85% of the invoice amount could be lent, and a small fee is charged on a weekly basis.
Factors affecting Business loans
Simply understanding the definition and types of business loans won’t get you the loan though. Certain factors play a critical role in deciding whether you receive the loan or not:
1. Credit Score
Even though a business loan is technically a loan taken by a company, personal credit scores still matter. For starters, your credit score establishes your reliability and informs the lender how you have been with past loans. For small business loans, credit score is all the more important. Hence, a good credit score must be maintained before you seek a business loan.
2. Business Age
The age of your business is another important factor that decides your business loan eligibility. Most lenders and banks require at least 3 years of income tax returns before they can grant you the loan. However, many business like startups are fairly young and do not have past income tax returns, so they must opt for business loan for new business. Thus, you need to check if you are eligible for regular loan or start up business loans.
It is fairly obvious that the lenders want to be assured that you are capable of repaying the loan. Your revenues and profitability decide that. Since profits can fluctuate and even many big companies operate at a loss, many lenders are willing to ignore that. However, your revenues are absolutely necessary for the bank to decide your eligibility.
In case you are going for secured business loan, you would need collateral and in some loans like invoice financing, your investment itself work as the collateral. In other cases, you might need to find something else like fixed property to act as the security. The collateral must generally match the location of the lender. So if you are applying for business loan in Delhi, you must have the collateral in Delhi too. Some loans like business loans for women might offer you concessions on the collateral.