Business loans are generally taken out for various reasons. Most commonly the purpose of taking out business loans are:
Business loans are generally taken out for various reasons. Most commonly the purpose of taking out business loans are:
Expanding operations by purchasing additional real estate- If you want to purchase real estate as part of your business expansion plans. Lenders generally look at if your business is turning profits, trend of cash flow (rising) and overall positive business outlook. Such loans for real estate are usually in the form of a mortgage. In most cases a collateral is required for securing a loan and repayments can be monthly or quarterly
Stocking up on inventory to avoid lead times esp. for businesses seasonal in nature- Some businesses are seasonal in nature e.g. retail, hospitality, agricultural businesses etc. If a company makes most of its sales during the holiday season, they can take out a short-term loan to purchase most of their inventory in advance. Many businesses do this to beat lead times on inventory supply chain and ease of cash flow. Loans to purchase inventory are generally short-term in nature; companies strategize around repaying them once then season is over, using proceeds from their seasonal revenue
Access to additional working capital-Working capital is the money used to manage day-to-day business operations. Businesses may take out a loan to satisfy operational costs until their earnings reach a certain revenue level or volume. Working capital loans generally have a higher interest rate than real estate loans because of higher risk.
Upgrading or purchasing equipment- If your business is looking at either upgrading or buying new equipment or leasing them, business loan can help. A cost-benefit analysis needs to be performed to understand if it’s better to buy or to lease . This type of loans generally have a term of less than three years.
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A commercial hire purchase is a commercial finance loan where you hire vehicle or equipment for your business purposes. This means that you will benefit from such arrangement when you don’t need to purchase the asset outright or own the asset immediately but can still generate income from its use. There are many tax incentives for such loans and terms of the loan can vary.
A finance lease is a form of finance (generally meant for car or equipment), that allows business owners to purchase / lease a vehicle (commercial vehicle) for the use of your business i.e. day to day running of business.
A chattel mortgage is a business loan product that’s commonly used for equipment financing. With a chattel mortgage, a lender provides your business with cash in the form of a loan to purchase the equipment, and this equipment is then used as collateral for the life of the loan.
Business loans are generally either secured or unsecured. Business loans function similar to other loan products. If approved, the lender will provide finance to assist with your business’s working capital or the purchasing of an asset, and you’ll be charged either a fixed or variable interest rate over the loan term.
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A business line of credit / overdraft facility, is a type of loan that allows you to draw against an agreed amount of funds when you need to. The agreed amount is your approved credit limit. Once your business has a line of credit facility in place, you can access these funds when you choose, without having to get approval or apply again.
With an unsecured loan, you’re able to secure financing for your business without using an asset as collateral. Because you’re not borrowing against an asset, the lender will typically assess your business’ cash flows, trading history, and creditworthiness as part of your application.
Secured business loans are generally provided for a fixed period of time and require a physical asset to be served as collateral for the loan. Examples of a secured asset include residential and commercial property, vehicles, and equipment.
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