A loan is purchasing the right to use someone else’s money right now, intending to pay them back over a certain number of years, plus interest. The loan contract outlines the length of time you have to repay them and other conditions. If you own a business, this is a standard method you will use to finance various purchases.
These loans can be short or long-term. You can have co-signers for them or secure them with collateral. The interest rate you receive will directly reflect the risk the lender is taking by providing you with the funds. Here is more about the various qualities of loans that you need to know.
1. Time To Maturity
The time to maturity is the length of time you have to repay the loan. This decides whether the loan is classified as short, intermediate, or long-term. Research a BHG review before deciding on your time to maturity.
However, things like revolving credit have no set time to maturity. An example of revolving credit is when a bank extends a credit line. Likewise, the margin credit provided by a brokerage firm is similar. You only turn over the credit line when you pay something down, and you can reborrow funds as needed. Perpetual loans, where you only make interest payments, also do not have a time to maturity.
2. Repayment Schedule
You will typically make payments on either a monthly or another regularly established schedule. When you make payments, you cover interest and some of the money you took out. Over time, you will repay the total loan amount. As the loan balance decreases, so does the interest you pay. Whether you opt for a private or government loan, the repayment schedule is designed to pay off all the money you owe within your timeline.
This is the price you pay for borrowing money. Lenders use these to cover operating fees and administrative costs. Interest rates can remain the same for the duration of a loan or change periodically to reflect the current market. Interest rates can be adjusted daily, annually, or every 3, 5, or 10 years. These can provide you with higher or lower rates, depending on how the market is.
Collateral is the assets you pledge as security. When you commit something as collateral, the loan is secured. A lot of times, collateral is the asset you purchased. Other times, you can put cash or other items aside for your collateral. If you use the funds to buy a building or land, you probably will use this to secure your loan. Unsecured loans are also possible, especially if your business is high earning.
Short-term loans are often ones that mature in under a year. These can cover cash shortages that impact operations, such as when you need to buy inventory unexpectedly. Short-term loans come in a variety of types, including trade credit. This is when a vendor offers you three months to pay your bills. However, you might not get the discount of paying cash upfront when you use this to purchase inventory.
You can also opt for a seasonal credit line for inventory or operations. Selling this inventory allows you to pay back this loan. Doing this over several years turns it into a permanent loan. That is because you can roll over any remaining balance to a new loan if you expect that sales in the future will pay off your debt.
6. Intermediate Terms
Intermediate terms allow purchasing furniture, office fixtures, vehicles, and equipment. For example, making repairs or remodeling may prompt you to take out a loan with this term for your business. These typically range from one to five years in length.
Lenders like to see longer operating histories, stable management, market share growth, and strong cash flows when loaning to small businesses. To get started, you must prepare your loan proposal and application. You will also need to provide a business plan and details of your financial information. The lender then evaluates your application based on many factors. Before detailing the above qualities, they will consider your credit report and repayment ability.