If you have ever taken out a personal loan or used a credit card, you know how convenient – and dangerous – borrowing from the bank can be. As an entrepreneur, funding your app may not be as easy as launching a successful crowdfunding campaign, or relying on funding from your friends and family.
In some cases, a bank loan can be just the tool you need to get your project off the ground. In order to determine whether a particular loan is right for you, you ought to consider three important variables:
- The term of the loan
- The monthly payment of the loan (monthly rate + interest rate)
- The security required to obtain the loan.
The term refers to the length of time that you are granted to pay the loan off completely.
The monthly payment consists of two monetary quantities: the monthly sum agreed upon in the loan terms, and the interest rate. The former is calculated in such a way that the full loan amount will be paid off by the end of the term.
The interest rate is an additional percentage, on top of the monthly payment, that must be paid to the bank. Strictly speaking, the interest rate is an incentive for banks to give you a loan in the first place.
The security required to obtain the loan is a form of collateral. It is typically required to be valued higher than the loan amount, in order to ensure that the bank will not lose money on the deal. If you default on your loan, the bank can can legally seize whatever assets you put up as collateral.
Pro-tip: debts resulting from unsecured loans are typically wiped out by bankruptcy.
Your first consideration when choosing a loan ought to be the term length. In general, there are two types of loan terms available for your business: short-term, and long-term. In order to determine an appropriate term length for your business needs, you ought to consider a few key factors.
|What are you going to use the money for?
||Raise money for cyclical inventory needs, accounts payable, and working capital
||Purchase, improve or expand fixed assets such as your facility, or long-term equipment
|What is the useful life of the asset that you are acquiring with the loan?
||Ideal for assets with shorter useful shelf-lives
||Ideal for assets with longer useful shelf-lives
|How much collateral are you willing to put up?
||Typically requires lesser collateral
||Typically requires larger collateral
Your choice of term-length can have a significant impact on the security requirements and efficiency of the loan. In order to ensure that your loan is efficient, you ought to match the term of the loan with the useful life of the asset acquired. In doing so, you ensure that you are not paying off something that you are no longer anymore.
How do banks review loan proposals?
When applying for a business loan for your app, banks will look at a number of factors before determining if you are the right fit for them. This is generally due to the high level of risk associated with lending money, particularly when the sum is large.
When you apply for a loan, banks consider the following factors:
- Your Character
- Your personal credit history, and the credit history of your company
- The cash flow history and projections for the business
- The amount of collateral that your business is able to put up for the loan
- Available loan documentation, such as business and personal financial statements, income tax returns, and business plan
What kind of financing do banks offer?
Banks offer a wide-range of financing options to fit the needs of different clientele. These options include:
- Working capital lines of credit, typically used for the daily needs of small businesses
- Credit cards, typically used when unsecured, higher interest capital is more convenient
- Short-term commercial loans, typically anywhere from 1-3 years
- Long-term commercial loans, typically used when substantial security can be provided by the company seeking the loan
- Letters of credit for businesses engaged in international trade