If you are just starting out in the business world or you are thinking of expanding your current business, then you may be thinking about taking out a business loan. Getting a loan is not always the cheapest way of financing, but it is often necessary and does give you more flexibility than most other options. If you do your research and follow some simple steps, then you will find the best loan for your business needs.
Types of loans
As with any type of loan, business loans come in various types and with various terms. Here are some of the options you should think about when getting a business loan:
Fixed vs. variable rate
As with most personal loans, business loans come in both fixed and variable rates. Fixed rate loans are better for those companies that have definite incomes each month, and so want to pay a fixed amount. Variable rates can save you money, but you remember to budget in case interest rates increase.
Whatever type of loan you get, the most important factor is the way you will pay back the loan. The most common repayment scheme is to make equal repayments back each month until you pay off the loan in full and the interest amount. The interest level and the agreed loan term length determine the amount you pay each month.
Another popular method is to pay lower equal payments each month and then pay a larger balloon payment at the end. This works if you know that in the future you will have more money, but right now you need to keep your outgoings to a minimum. However, you should remember that you will have to pay the large payment at the end; so budgeting for this is crucial.
If you want even lower payments then you can just pay the interest each month and then pay the remainder of the loan at the end of the term. This is good if you want really low monthly payments to begin with, but you need to remember that the loan term will last a long time if you only pay interest, and that the final payment will be very large.
Advantages of business loans
∑ There are many advantages to business loans, including:
∑ Retaining business ownership
∑ Financial flexibility and improved cash flow
∑ Easier budgeting
∑ Increased financial leverage
Even if you can afford to pay for things with cash right now, getting a loan may mean you have more financial flexibility, and will leave your cash free when times are tougher. Of course, there are disadvantages as well, including the costs involved and the risks of default and repossession. However, if you need to expand your business or free up cash to get your business started, then a business loan could be right for you.