Types and Purposes of Business Development Loan

Types and Purposes of Business Development Loan

Almost any entrepreneur sooner or later comes to the conclusion that for the organization to reach a more serious level, borrowed funds are needed. To date, each Bank provides loans for business, but the owner of the organization should be soberly aware of his chances of obtaining a loan for the development of his business.

The main conditions for the loan by the Bank

First of all, it is recommended to get acquainted with the requirements of the Bank in which the loan is planned, if you fully comply with them, the funds can be obtained easily and at a not very high-interest rate. One of the most important conditions is the long existence of the company being credited.

Young entrepreneurs, owners of firms that have been on the market for less than two years, will find it more difficult to obtain a cash loan at interest than firms that have already shown themselves since most banks issue loans only to enterprises that operate for more than three years. And if the company is still quite “young”, the business owner must make a very good business plan to convince the Bank of the success of the case.

Purpose of the loan and its size

The loan for the development of own business is targeted, which means that the money received from the Bank can be spent only on increasing the volume of working capital, the purchase of raw materials and equipment, the production of new goods and additional services, but not for personal needs.

The size of the loan will depend on the working capital of the organization for a certain period of time.

Type of lending

The purpose of its receipt is the purchase of equipment or real estate, as well as replenishment of funds. The loan can be issued for a short or medium term secured by the property of the borrower. But the borrower is at great risk, as banks estimate the value of the collateral several times lower than the market value.

Investment credit

It is provided to the borrower only for the implementation of a specific project, business expansion, increasing the turnover of production capacity. To obtain a loan, it is necessary to develop a business plan and submit financial statements of the enterprise. The collateral will be current assets. Funds are issued for up to 10 years only for long-term projects. There are no high requirements for enterprises, but there is a considerable risk on the loan.

Commercial mortgage

Issued to the borrower for the purchase of non-residential premises; office, production area, cafe, warehouse. Lending is secured by the same premises that are bought. The peculiarities of such a mortgage are very high-interest rates and short maturity of the loan.

Leasing

The leasing company acquires any property (equipment, transport) at its own expense, and then leases it to the borrower. Until the end of the contract, the company retains the rights to this property, and then it becomes the property of the borrower. If the lessee violates the contract, the company may seize the property. Leasing is most beneficial for companies with available financial assets.

Factoring

The Bank pays the debt of the creditors on the fact, thereby eliminated the gap between selling the product and paid by the buyer. Such a loan is short-term and avoids large costs in the calculations.

Credit

The debt of the company is extinguished by the Bank to suppliers of products when suppliers provide documents on the transaction. This method is popular in foreign economic activity.

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