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The Basics of Borrowing
Money |
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by: Jose
Valdez |
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.
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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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You are free to reprint this only if the article text
link is included:
If You are Starting a Business visit
www.AGuideToStartingABusiness.com
Jose Valdez is the
owner/operator of www.AGuideToStartingABusiness.com and
www.AllHomeBasedBusinessIdeas.com
About the
author:
Jose Valdez is the owner/operator of www.AGuideToStartingABusiness.comand www.AllHomeBasedBusinessIdeas.com
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