For new players in the industry, the business financing world can seem overwhelming, complicated, and daunting.
Thankfully, armed with the essentials, navigating the seemingly complex realm of start up business loan can become a lot easier.
For those who are considering applying for a start up business loan, the following are the available options alongside the basics about them borrowers need to know.
Hire Purchase Loans
Purchasing goods through installment payments made over a fixed time period is the essence of hire purchase loans.
In hire purchase loans, the purchase of commercial vehicles, equipment, and machinery will be financed by the bank.
Under the arrangement, it will be agreed that the bank will have legal title to the financed asset until such time that it is fully paid for.
Hire purchase loans interest are usually offered on a flat rate basis.
The financing period of hire purchase loans will often range between 4 to 8 years.
However, whether the machinery or equipment purchased is new or otherwise will also be taken into account.
Hire purchase loan amount can range from 80 to 90 percent of the asset’s purchase price or market value, whichever is lower.
Working Capital Loans
In essence, short-term loans that are often used to finance the day to day operations of the company are called working capital loans.
Simply put, working capital loans help ensure the business stays afloat until such time when the revenues come in.
Working capital loans can be unsecured (sans collateral) or secured (with collateral).
The former often comes with a higher interest rate.
The latter on the other hand is typically only granted to borrowers that are considered low-risk.
Working capital loans are often recommended for short-term financing needs only.
They can take the form of any of the following:
Instant credit extensions that are provided by banks are called overdrafts.
For those who are granted this type of loan, they can overdraw their current account up to the maximum amount the bank would agree with.
Interest will be paid only for the amount overdrawn.
Typically, the charge is at least 1 to 2 percent of the primary rate of the bank.
The credit amount granted will be based on the limit the bank will set.
One thing about overdrafts that many borrowers appreciate is the instant access to cash especially for activities like stock turnovers and payments to creditors.
In a nutshell, factoring loan refers to money extended on the basis of trade debt.
Essentially, the business will sell the account receivables to the factoring agent (i.e. banks).
The lender will then provide a loan based on the company’s account receivables.
In majority of the cases, banks will grant as much as 90 percent of the account receivables or the billed invoices.
One advantage of factoring loans is the immediate access to cash as soon as the invoiced has been issued.
That will also mean there is no need to follow up with customers for the payment of the account receivables as they will be settling it with the banks themselves.
Given that one is able to demonstrate their ability to repay their start up loan accordingly, banks and other lending institutions are likely to offer ones with very good terms.
To get the best deals available, it would be best to first shop around for potential lenders and thoroughly prepare all the necessary documents so the chances of rejection will be significantly reduced.