When starting a business, you have three options: you can use your own money, use investors’ money, or you can get a loan. Getting a loan is your best option in many scenarios because it is more efficient and easier to manage for many people for several reasons. If you use your own money, you are taking a big risk that it will pay off soon. If you don’t become profitable rather quickly, you could have a difficult time covering all of your other expenses. If you use investors’ money, you have to offer them some kind of return on investment. That means that you’ll need to be profitable above the amount of money that you put into the business, so it will take you even longer to become profitable. Finally, if you get a loan, you’ll be able to repay it on the agreed-upon schedule, and you could possibly get a line of credit.
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Line of Credit
Being able to start your business is only one of the benefits of a business loan. If you open the loan with a company that also offers credit, you’ll have enhanced flexibility. For example, you might think that you need a certain amount of money to start a business selling trainers. If you lose your distributor at the last minute and have to choose a new distributor, you might find the new one is more expensive. That means you’ll suddenly need more money than you borrowed initially. Instead of getting an entirely new loan, you could open a line of credit. That will allow you the flexibility to borrow more money.
What About a Credit Check?
Many lenders will check your credit to decide if you are a good candidate for a loan. Your credit is how you will be able to assure the lender that you’ll pay back the loan. Someone with good credit is presumed to be someone who pays their loans on time and in full. If you have bad credit for any reason, you might be rejected from some lenders. A good business lender will not reject someone with bad credit.
You will likely have a different interest rate. The interest rate serves two functions for the lender; it helps them to make a profit, and it also helps them make back their money before the loan is fully paid off. Therefore, if you have poor credit, you might have a higher interest rate to ensure that they will get their money back more quickly.
How you are going to repay your loan is important. When you get the loan, you will sign up for a repayment plan. However, many people find that they are actually having better months than they anticipated. If that’s the case, you can pay it back quicker than you planned. If you are not making money as quickly as you’d anticipated, you might need to refinance the loan and adjust the payment plan.
All of this adds up to increased flexibility and responsiveness for a business that needs money to help it become profitable.
Infographic provided by Startup Loans USA, a business startup loans company