There are many ways to gather funds for your business. Typically these fall into two categories; venture capital, and business loans. Venture capital can come in many varieties; informal varieties such as borrowing money from friends and family, or formal by borrowing from investment firms. If you are funding your company through investment you are also giving up a portion of the business. Some people are not comfortable with doing this and prefer to get loans instead. Loans come in three basic varieties and we will be discussing these varieties in today’s discussion.
The first of our category of business loans is installment loans. These are your basic monthly payment loans just like the ones that you would get for your personal use. They can be either secured, being backed by an asset, or unsecured. Typically payments are arranged on a monthly basis and a regular interest payment is due. This is the most common way to borrow money for your company.
Second on our list are loans that are tied to some metric besides monthly payments or interest rate. One example of this is a merchant account loan. Merchant account loans do not have regular monthly payments or interest rate. Instead loans of this type have what is referred to as a discount rate deducted from the loan disbursement. So for example if you have a 5% discount rate and you borrow $10,000 you will be disbursed $9500. You will still have to repay the $10,000, but you will not pay in monthly payments. So how was repayment arranged if not monthly payments. For all loans of this type that are tied to a separate metrics repayment will be handled through that channel. In the case of merchant account loans a small amount of the loan will be repaid with each credit card transaction. This makes loans of this type appropriate for companies with a retail space and a great number of card transactions each day.
Finally the third type of loan is a business line of credit. Lines of credit function much more like credit cards then loans in that upon approval you will not be immediately disbursed funds but instead will have a set amount available to you in the future. Also unlike most loans you will be able to use this credit over and over again assuming that you are making payments and you still have available credit.