The basics of borrowing money
Are you thinking about
starting a business but have no money to do it with? Well, you're not
alone. This article will tell you the basics of borrowing money
A loan is money that is borrowed, and
has to be paid back along with interest. If the money is borrowed from
an institution such as a bank, this is called a commercial loan. Money
that is borrowed from a friend or a relative is called a personal
loan.
The borrower, or debtor, is the
business or individual that takes out the loan. The lender, or
creditor, is the source from which the money was borrowed. The term,
or period, is the time that is specified during which the borrower has
to use the money borrowed before he has to repay the loan. The
maturity of a loan is when a loan term reaches its end. The Principal
is the amount that is borrowed from the lender.
When you or your business borrows money, the lender wants to know when
they will get their money back. Keep this in mind when you are looking
for a lending source.
If the business is not able to repay
the loan, the lending source has a right to legally come after assets
to recoup it's money. The extent to which you are personally liable
depends on the business structure your business is operating under.
If you are approved for a loan, that
you will have to make scheduled payments (typically on monthly basis)
plus interest. A loan can sometimes be set up as a balloon loan. A
balloon loan will typically require smaller initial payments and one
lump sum of what was borrowed as the final payment at the end of the
term.
Borrowing from Institutions
Business loans generally fall into two main categories: short term and
long term loans. A short term loan is a loan that is to be payed back
within one year. Examples of short term loans include:
Working capital loans
Accounts receivable loans
Lines of credit
Long term loans are loans that are to be payed back typically from one
to seven years. Long term loans are typically used for:
an expansion of a business
the purchase of equipment
real estate
Most business loans that are used for starting a business are long
term loans.
When you approach an institution for
a business loan, it will be looking at you as the business owner as
closely as it will be looking at the business itself. One of the ways
lending institutions make money is by lending money and they want to
be as sure as possible that they get back their money with the
interest owed.
The time between applying for a loan
and learning that you have been approved (or disapproved) can vary. If
you are disapproved, you may be told almost instantly. If you are
approved, it may take a few days though it usually takes longer. It
may even take several months to learn whether you or your business has
being approved for the loan.
Borrowing from Family and Friends
If you don't want to, or can't get a commercial loan, you can consider
getting a private loan from family or friends. This is usually real
informal. However, you need to be careful because this can lead to
ruined relationships.
If you are getting a private loan, it
is in the best interest of the lender to have an agreement put in
writing. The written agreement should state the principal, the
interest charged and the terms of repayment. This puts the lender in
better position either write off the loan on his or her tax return or
to legally come after you.
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