Start A New Venture? Take A Small Business Loan |
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Before applying for small business loans you must ascertain the type of financing desired by you. You could either get debt financing (money you borrow to run your business) or equity financing (money acquired from investors and/or savings) as per your need. If you need debt financing, you could approach traditional financial institutions, such as banks and credit unions, to get the small business loans. Short-term small business loans, sometimes called demand loans, have to be repaid (with interest) within a fixed period such as 180 days. These loans can be called in by the lender (the bank) at any time. Small business financing can also be done with longer term small business loans. Term loans are usually used to finance particular assets, such as building renovations or capital equipment. Lines of credit can be used for small business loans in other types of business. Your business will have a fixed amount of credit that you can draw on as per your agreement with the financial institution. You can then make day-to-day expenses or meet cash flow crises. However, you will have to pay back the amount of money you have used and pay interest on the outstanding balance. Credit cards are now becoming a very popular and convenient mode of financing startup and operating expenses and specially designed credit cards have been introduced by many financial institutions for small businesses. Nearly 41% of small and medium-sized enterprises use personal credit cards as their main source of small business loans, as revealed by the findings of a 1998 study. However the high interest rates applicable to credit cards make them an expensive proposition and as such they should only be used for day-to-day expenses, if you pay off the balance in its entirety each month. Most small businesses cannot avail of traditional sources of small business loans financing as they find it difficult to meet bank requirements for debt financing. There are, however, different types of equity financing that a business might avail of. The most common form of small business loans financing originates from the pockets of the business owner, who invests his savings from his employment to start and run his new business. The advantage of this type of equity financing is that the small business owner retains all the equity in his company. However, starting a small business and developing it through various phases into a healthy company can prove quite expensive. This is probably the reason why many small business people start part-time ventures while still hanging on to their jobs and become fully active only when the business becomes self-sustaining. Even so, the business owner often has to find outside sources of small business loans financing for keeping the business in motion. For startup businesses, the most common form of equity financing is sourced from friends, relatives and angel investors. The price for this financing could be in the form of part-ownership of the business or an active role of some kind in running your business or both. However, to get the business off the ground you may have to agree to this type of trade-off. You can avail of many other sources of small business loans financing once your business starts operating profitably with a proven track record. You could get venture capital or you could sell shares of your company in stock exchanges by making your company go public. A healthy way of progressing in your business is to plough back your earnings into the company once your business is established. You must ensure that you invest at least some portion of your earnings back into the business making it the best source of small business loans financing. Most startup businesses get financed with home equity or savings. It is difficult to get outside small business loans financing without collateral and guarantees and venture capital deals are extremely rare. |
