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2007
SBC Team

Loans That Fit

Posted by SBC Team Oct 19, 2007
Make sure you know all the options before you decide which loan is right for your business.
by Chris Freeburn

All businesses find themselves facing a variety of different circumstances under which they need more money than they have on hand. There are a variety of financing options available to small business owners to address these situations, ranging from credit cards to term loans and lines of credit, business home equity lines of credit, and traditional business loans. So, which option is right for your business?

CREDIT CARDS
Many small business owners use business credit cards to pay for everyday purchases, office supplies, and small equipment. In addition to their obvious convenience, many cards offer rebates, discounts, and extended warranties on specific purchases, which can result in significant savings for your business. There are also cards that offer cash back or rewards points on all your purchases which could result in your business receiving cash at the end or the year or points to use to purchase additional items.

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BUSINESS LINES OF CREDIT
If your business experiences seasonal fluctuations or at times you need an occasional influx of capital, a business line of credit may be the right highly flexible product for you. Funds can typically be made available in cash or on a credit card. Also, with a line of credit, you only pay interest on what you use, so for instance if your company receives a $50,000 line of credit and you utilize $25,000, interest is only charged on the $25,000 used. You have the ability to borrow up to your maximum line of credit limit and continue to borrow more as you pay back the loan amount.

TERM LOANS
Banks will provide term loans, often presented as "working capital loans" or "accounts receivable loans," to small businesses to cover new vehicle purchases, new equipment purchases, and office expansion. Term loans are also a good debt consolidation tool should your business find the need to consolidate higher rate loans from other sources. Term loans can extend anywhere from three months to five years and, depending on your bank, your loan rate will likely be fixed. In order to obtain a term loan your bank will want to know the reason for the loan and will want to see reasonable financial projections to demonstrate that you will be able to repay it. "Your own credit history may be taken into consideration along with that of your business," says Skip Honigstein, chairman of the Orlando chapter of the Service Corps of Retired Executives (SCORE). Honigstein says that term loans are best suited for capital equipment purchases that will generate increased revenue within a relatively short period of time. Many term loans offer the option of extending the loan if a certain percentage of principal is repaid at the end of the loan. For example, a payment of $2,000 on a $10,000 loan might allow you to extend the loan for three or four months.

THE TRADITIONAL BUSINESS LOAN
For a large expense that you expect to pay off over a number of years, such as the purchase of commercial real estate or a new business, traditional business loans make the most sense. Traditional business loans usually require some form of collateral - a personal or business asset - to secure the debt. Business loans feature a variable or fixed interest rate and have terms ranging from several years to a decade or more. Many banks are placing increased emphasis on serving small businesses and are willing to work with small business owners to grant traditional business loans to even very small companies. Additionally, the Small Business Administration (SBA) offers a loan program which guarantees loans from participating third party lenders. The SBA prefers business owners who have an equity interest in their company, as well as sufficient collateral to secure the loan.

BUSINESS HOME EQUITY LINES OF CREDIT
Many business owners and those who are starting new businesses find that tapping into the frequently skyrocketing equity of real estate they own is a convenient way to get the funding they need to grow or start a business. What's extremely attractive to many new small businesses or businesses with little to no business credit history is that your payment record is applied to your business credit rating, allowing your company to establish a credit history that will be beneficial when applying for additional business credit in the future. However it is important to note that funds for a business home equity line of credit must be used for your business.

Chis Freeburn is an associate writer for Business 24/7 magazine.
SBC Team

The Money Chase

Posted by SBC Team Oct 17, 2007
Finding the money to start your small business, or grow it, can prove an intimidating challenge for aspiring small business owners.
by Reed Richardson

The money you need for your business doesn't grow on trees; it belongs to other people, and deciding whose money to ask for, under what terms, and persuading them to trust you with it is a huge task for any entrepreneur.

Most small business owners start with their local bank, hoping to get a business loan to fund their company. The Small Business Administration (SBA) notes that 80 percent of credit line lending and 50 percent of mortgage, vehicle, and equipment loans are provided by traditional business bank loans. Given that interest rates remain relatively low, by historical standards, such loans are still an attractive option for many small business owners. Obtaining a traditional business loan requires you to demonstrate in detail your business's ability to repay it, or to convince the banker that your startup's business plan is solid enough to survive the rough and tumble of the market. But if your business is still too young, or if you need a larger infusion of capital to get your business off the ground, you may find that a traditional business loan is either not available to you, or not large enough to meet your needs. Fortunately, there are a host of alternatives for you to consider.

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Personal Loans & Credit Cards
According to research conducted by William Bygrave at Babson College, 87 percent of small business entrepreneurs turn to family or friends for funds to launch their startups. But such financing can come with a heavy price. Failure to repay family members or friends can ruin those relationships, bringing an even higher emotional cost in the event your business runs into trouble. Worse may be the feeling of being "in their debt" every time you encounter them.

If you wish to avoid the emotional strings attached to loans from family or friends, borrowing against yourself may be an attractive option. Many small business people have funded their startups, or kept their businesses going, by using their personal credit cards to pay for needed supplies and other business expenses. Many credit cards have relatively high spending limits and there is no shortage of financial institutions willing to give out credit cards to individuals.

But there is a downside to financing your business using a personal credit card. Interest rates on credit cards are higher than for bank loans in general-and those rates become even higher in the event you are late with or miss a payment. "An awful lot of people open new businesses by running up their credit cards," says Skip Honigstein, chairman of the Orlando chapter of the Service Corps of Retired Professionals (SCORE). "Many people start there before they ever ask a family member or friend for money. But the interest rates come back to bite them later." The interest rates on credit cards can snowball the amount of debt you owe, sometimes making repayment difficult. If your business suffers a slowdown or other problems, high levels of credit card debt could hurt your credit report, making it hard for you to obtain credit at lower interest rates in the future. Honigstein suggests looking for less expensive sources of cash, especially when your business is just taking off and not generating sufficient revenues.

A better alternative to maxing out one's credit cards is the personal bank loan. Personal bank loans are typically unsecured, which means no property or asset is put up as collateral. While this makes it an attractive option for those lacking a home or other substantial property, it increases the bank's overall risk, resulting in higher interest rates than would be applicable on other types of loans. Better still, personal loans have a fixed term in which they must be repaid, compelling you to be disciplined and repay the loan on time. This avoids the credit card temptation to continue amassing debt without attempting to repay it.

Home Equity Loans and Lines of Credit
Homeowners who wish to start a business can tap into the equity value in their homes through a home equity loan or line of credit. A home equity loan is simply a loan secured by the value of the property that collateralizes it. The amount that can be borrowed through a home equity loan depends on the fair market value of the home, minus any outstanding debt against the property (a mortgage, for instance). Some states have placed restrictions on the amount of home equity that can be borrowed. Texas, for example, limits the borrower to 80 percent of the home's value. Interest rates for home equity loans tend to be lower than for other types of loans and are determined by the borrower's credit history and market rates.

A home equity line of credit functions as a revolving credit account secured by your home's value. You may borrow money up to the amount of your credit limit. Once repaid, the money becomes available for you to use again. Interest rates for home equity lines tend to be slightly higher than for traditional home equity loans, and are usually variable, but are still lower than conventional credit card or personal loan rates. Interest is paid only against the amount of funds actually used. Many banks offer home equity lines for business. Under a business home equity line, funds from the line of credit must be used for your business and are usually dispensed in the form of checks or electronic transfers. Your payment history is then applied to your business's credit rating, instead of your own. Provided that you maintain a good payment record, this can help establish a solid credit history for your business, boosting your chances of obtaining business lines of credit and business loans in the future.

Rising real estate prices over the last decade have made home equity loans and lines very popular. Moreover, because they are backed by tangible assets, home equity loans are generally easy to obtain from banks and lending institutions. Interest payments on both home equity loans and lines can be tax deductible.

Business Lines of Credit
If your business is already up and running and has produced a track record of solid finances, you may be able to obtain a business line of credit from your local bank. A business line of credit differs from a loan in that you may borrow as much money as you need, up to a certain limit, and borrow more as you pay back the amount without applying for a new loan each time. Depending on your company's finances, the bank may require that the line of credit be secured (collateralized by assets or a personal guarantee) or not. Most banks require an annual fee for business lines of credit. A line of credit gives you great flexibility, providing cash to cover emergency situations, seasonal revenue fluctuations, or purchases that are too expensive to charge on a credit card, but not costly enough to justify taking out a traditional loan.

Reed Richardson is an associate writer/editor for Business 24/7 magazine.

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