When running a business, times may occur when you have enormous expenses to make and your financial strength isn’t capable of carrying it. A bank loan for your business can be what will be needed to scale up.
You may want to drop that business transaction but due to the fact that you must always deliver to your customers, you definitely will want to find means of the money.
What most people do is getting loans from banks among others. Some other ways have been discussed in the previous post.
In this post, we will be focusing on loans.
As a business owner, you definitely are aware of some of the risks involved in obtaining bank loans such as properties being forfeited if not able to pay up in due time.
One other reason why most people don’t go for bank loans is because at times the payment amounts isn’t always fixed due to the instability of market.
Most people see loans as a risky endeavor to do due to the consequences in the event of not meeting up to its demand but some actually still go through with it. Here are some reasons why.
2. PROFIT RETAINMENT
3. COST EFFECTIVE
4. TAX BENEFITS
Most people choose to get their loans from banks due to it’s flexibility.
It is flexible in the sense that you can pay installmentally which is the opposite for taking drafts where you must pay all at once when the bank demands it.
Another reason why taking loans can be flexible is because the banks do not want to know what you are using the money for so far they have the assurance that you will pay them back when due.
Unlike the equity approach where you give a portion of your business and its profit to your shareholders, when dealing wuth loans, ypu only need to give back the amount borrowed and the interest after which the remaining earnings belongs to you.
As regards interest rates, bank loans are by far the cheapest when compared to other channels like credit cards and overdraft.
The lower interest rates of banks will definitely safe you more money as you need not paying too much as interest by the time you are refunding the money you borrowed.
Using a bank loan for business reasons ensures that the interest you pay on the loan is a tax -deductible expense. This means that if you are paying a 5 percent interest rate on a $30000 loan,then your yearly interest is deductible on your 1040 schedule C tax form.
TYPES OF LOAN
According to Wikipedia, there are 5 types of bank loans for your business although each of them contains some sub types of loans. We will be discussing them briefly in this post. To get a full grasp of them, check out newer posts.
- Secured loan.
- Unsecured loan.
- Demand loan.
- Subsidized loan.
- Concessional loan.
1. SECURED LOAN
In a nut shell, a secured loan is a type of loan in which his asset and a collateral for example his car.
One of a very good type of secured loan is a mortgage loan, here the borrower uses the loan to purchase a residential property.
In the event that the borrower cannot pay back the lender which is usually a financial institution has the legal right to seize and claim the property.
There is also another sub type of secured loan, its called auto loan which can be divided into 2 types namely : direct and indirect auto loan.
DIRECT AUTO LOAN :
This type of auto loan is used when the loan transaction is between the individual and the bank or financial institution.
INDIRECT AUTO LOAN :
From the word indirect, you can easily tell that the transaction is between the individual and the financial institution although has an intermediary between them.
The intermediary could be a car dealer company, that’s if the loan is to get a car.
2. UNSECURED LOAN
These are loans that in monetary terms they are not secured against the borrower’s asset.
3. DEMAND LOAN
These are loans that are short term. They do not have fixed dates for refunds instead they carry a floating interest rate with changes according to some of the contract terms.
Another tip ; demand loans can either be secured or unsecured .
4. SUBSIDIZED LOAN
A subsidized loan is a loan in which the loan interest is reduced by subsidy. The subsidy could be hidden or explicit.
For example, as regards taking of loans in colleges in the US, as long as the student is still enrolled in the school, no interest will be added to whatever amount of loan collected.
5. CONCESSIONAL LOAN
Concessional loans are often regarded as soft loans.
These loans are granted on terms considerably more generous than market loans either through below-market interest rates, by grace period or a combination of both.
BASIC THINGS THAT BANKS REQUIRE BEFORE GIVING OUT LOANS
To obtain a bank loan for your business, there are some requirements that must be met .
Below are the requirements for getting loans in banks
- Business Plan
- Business Financial details
- Financial statements
- Personal financial details
- Insurance information
- Copies of past returns
- Agreement on future ratio