If we talk about IP, then businessmen often take an ordinary consumer loan for an individual and use it for entrepreneurial purposes. In this case, the advantages are obvious: you can quickly and without collateral receive money, you will not need to collect an impressive package of documents from the bank and wait until the bank experts analyze them and then make a decision on granting a loan.
For newcomers to the business who have not worked for 3 months, this method of obtaining money for the development of the company may be the only one. Banks, unfortunately, refuse to lend to startups. Fastcapital360.com tells you everything you need to know about small business loans.
Credit in a microfinance organization
You must have heard of such companies that offer loans quickly. Some of them provide services to small and medium-sized businesses, so a small amount and for a short period can be borrowed from them.
In addition to private microfinance organizations, there are state-owned ones that provide loans for businesses from the state budget. These are various funds to support and develop small businesses, like small business lending funds, microfinance centers.
You can get no more than $25000 from a microfinance organization and, as a rule, a loan is issued for a period of not more than a year. The interest rate is different and an individual approach is applied to each. The most attractive interest rate for state-owned MFIs: is much lower than for private ones, but you will have to make more efforts to get a loan. Commercial microfinance organizations request a minimum of information, but the loan overpayment is substantial. The package of documents required to obtain a loan should be clarified in a specific MFI.
Before choosing an organization from which you will take a loan, make sure that it is included in the state register and has the right to carry out microfinance activities.
It is convenient to use the services of microfinance organizations if you urgently need money for a short time and there is no time to wait until the bank approves the loan. But when a business needs a larger amount for the implementation of a project, the purchase of expensive equipment or its own office, then lending programs for small and medium-sized businesses in banks should be considered.
Credit for business development in a bank
Now almost all large banks offer small and medium-sized business loans on favorable terms. The loan amount can be from several thousand to millions, and the main advantage is a low-interest rate from 14 to 27% depending on the bank. But to get a loan to develop a business is not so simple.
Firstly, large amounts are provided only to companies that have worked in the market for at least six months and deal with profit. In addition, banks are actively studying credit history, so it should be perfect.
Secondly, to obtain a loan for the development of a business, you will definitely need a property on bail or a guarantor, and sometimes banks require the fulfillment of these two conditions simultaneously. Various properties may be used as collateral depending on the purpose of the loan: real estate, automobile, goods, equipment, personal property of the entrepreneur. The business owners act as guarantors, and for the individual entrepreneur, a guarantee of the spouse or a third party is required. If your collateral is not enough to secure a loan, then a guarantee fund may also be a guarantor. More on this later.
Thirdly, be prepared to provide the bank with all the necessary documents. A specific list needs to be clarified in each bank, approximately it looks like this:
- Constituent documents
- Tax return
- Accounting reports
- Clearly developed business plan
Then you will need to wait a while until the bank analyzes your documents and decides on a loan. The term for consideration of the application may take from 3 to 14 days.
Getting a loan through guarantee funds
If the bank refuses to receive a loan due to insufficient collateral under a loan agreement, that is, your property is not enough for collateral, then the guarantee fund can be a guarantor. Guarantee funds may also be funds supporting small and medium-sized enterprises and centers for the development of entrepreneurship in the regions.
Of course, funds provide a guarantee for remuneration. On average, the remuneration of the fund is up to 2.5% per annum of the amount of the guarantee. You will have to pay this amount to the fund immediately upon the conclusion of the contract.
What type of loan to choose?
A bank loan is a money that a bank gives out for a certain period of time according to pre-agreed conditions. Depending on the conditions and goals, loans are of several types.
By loan purpose
The Bank gives out money for the implementation of the purpose provided for in the loan agreement, for example, for the purchase of housing, a car, education, treatment, and leisure. Often the bank does not issue this loan in cash but immediately transfers it to the party acting as the seller in order to guarantee the targeted use of funds. Typically, such a loan can be taken at a low-interest rate and for a long period.
The borrower has the right to spend the money received at its discretion. He will not have to report to the bank, and the bank does not verify the purpose of using such loans. The rate on such loans is usually higher, and the maximum term is less.
By type of collateral
Secured by a pledge.
The Bank provides loans secured by property (car, real estate), securities or precious metals to guarantee loan repayment. If the borrower stops paying, the bank sells the collateral object and thus repays the loan debt. Depending on the terms of the contract, the collateral is in use by the borrower or the bank disposes of it until all loan obligations are fulfilled.
Secured by a guarantee.
The repayment of the loan is guaranteed not only by the borrower but also by its guarantor. For the bank, this is an additional guarantee that the loan will be repaid because if the borrower stops paying the loan, the obligation to repay it passes to the guarantor.
The Bank grants a loan and does not require any guarantees in the form of a pledge or surety on the part of the borrower. Since the bank takes risks by issuing unsecured loans, the amount and term of such loans are less than that of secured ones, and the rate is higher.
By repayment method
In such loans, the borrower closes the loan in a single payment at the end of the contract. If the borrower closes the loan ahead of schedule, he pays the bank a commission or all interest, depending on the terms of the contract.
With differentiated payments.
The borrower pays a monthly portion of the principal debt and interest to the bank, but in uneven payments. This is due to the fact that the amount of the main debt is distributed evenly over the entire payment period, and interest is accrued on the balance decreasing with each payment. Differentiated payments are gradually reduced by the end of the loan term.
With annuity payments.
The borrower repays the loan monthly in equal installments, the amount of payment is always fixed. Payment consists of repayments of principal and interest on the use of credit. At the beginning of the term, interest makes up a large part of such a payment, so the main debt is reduced slowly. In the end, the opposite: interest makes up a small part of the payment, and the main debt – a significant.
To obtain a loan, you can either apply directly to the guarantee fund or get a loan through a bank that cooperates with the fund under a guarantee program. The application review procedure and the package of required documents are similar, only the loan agreement will be tripartite: with you, the bank and the guarantee fund.