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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article source:
A Guide to Starting a Business at www.aguidetostartingabusiness.com
About the Author
source: A Guide To Starting A Business at www.aguidetostartingabusiness.com
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