Raising Finance - Types of Loans

Among the many factors that determine the success or failure of an enterprise, finance plays a major role on how the venture will work out. Essentially, there are principal methods of obtaining a capital namely, shareholders' equity, reserves, and borrowed funds. When a decision to raise funds by borrowing has been reached by the entrepreneur, the next step in financing a business is considering where and what kind of financing will be ideal to the needs of the businessman.

There are several possible sources of funds that an entrepreneur can look into when in needof funds for the business. Credit unions, banks, financing companies, and financial brokers are all viable channels to borrow funds. However, each of them have their own respective features and benefits, which may include borrowing criteria, resettlement alternatives, rate of interest, incentive, and site and service.

Types of Loans

Short term loans - Working capital
Determining the amount of loan to borrow depends on the specifications of the borrower. This should be indicated on the business plan since it will play a vital role when getting a loan. In addition, the need of the borrower will show his ability to settle the loan, while considering the accompanying risks like reduced sales forecast or increase in the rate of interest.

The need of the borrower will have an impact on the kind of loan that they can avail of. The first kind of loan is the short term mortgage or loan. Also known as "working capital," this kind of loan is needed to finance the daily operations of the enterprise. It should be noted, however, that a short-term loan is not ideal for extended undertakings since it will be more costly compared to money repaid through a more stretched period.

Medium term loans
Another kind of financing method is the medium-term loan. It is ideal for funds that stretches for three to ten years and is used in purchasing equipments, expanding the business, or in developing new products. Some examples of a medium-term loan are term loans, personal loans, and leasing.

Term loan loans
With a long term-loan, on the other hand, the borrower can finance the assets they bought like the enterprise itself, infrastructures, and equipments to be a part of the profit the company will inherit in several years.

Loan Application

A loan application entails many pertinent information that may influence the amount that can be borrowed. The borrower needs to supply a brief summary of the venture such as its background, products and services, manpower, machines, and other important assets. Similarly, the borrower needs to supply their own background and qualifications.

Another vital information in a loan application is the price and reason for the loan. It should be as detailed as possible, including the computation of such amount. In addition, the repayment method should be clearly stated.
The loan applicant should supply the lender with the necessary documents, such as balance sheets and financial statements, to help the financing institution assess the proper loan amount. Usually, these institutions require some kind of guarantee from borrowers.

As a whole, it will all boils down to how thorough and well-researched the business plan of the borrower is.