Most owners of small or medium-sized companies expect them to be able to grow and sustain their expenses. However, they soon understand that this is not always the case.
It is a common practice that these companies, called SMEs, are in need of applying for credits for various reasons; it can be to expand the installed capacity, acquire a new place of operations, deal with a large order, increase their daily cash flow due to long-term payment contracts or in the worst case, settle debts.
The commercial loans granted by top loan companies serve as financial aid tools, making it possible to obtain capital to achieve the growth of the SME with a view to strengthening your business.
The Financial Health of Your Company
The fact that you need a commercial loan to expand or meet delivery dates is not an indicator of poor financial condition. Between 80% and 90% of small or medium companies recur to quick cash loans in order to achieve their objectives.
In most cases, the income obtained by the financial activity serves to maintain up-to-date productivity, salary payments, and other expenses.
Another determining factor when assessing the value of your company is the size of your wealth. If you decide to sell it and the coffers are empty, you will not get too much. It is also beneficial to manage some expenses through loans, in this way the banking institutions will feel confident in lending their capital to a company with healthy funds.
Choose Between Short or Long-Term Loans
Not all companies have the same needs, as with a personal loan, your duty is to analyze if you need the borrowed capital to be replenished over a short or long period of time. But first, you must understand how short and long-term loans work.
- Short term: these are paid for periods of less than one year, in some cases, they are paid after two months or even weeks.
- Long-term: these imply periods of payment superior to two years, the maximum time will depend on the capacity of payment and amount obtained.
Decide one when you need the other can have negative repercussions in your company, so you must identify the loan model you need and inform yourself of the available loan models.
A piece of advice… Your annual debt should never be more than 30% of your annual income.
Identify Your Needs to Avoid Bad Credit Loans
An advantage in this situation is that the best loan companies are always willing to lend their money to SMEs because they know that the chances of recovering it within the term are high. To avoid falling into the temptation of choosing a loan that does not suit your needs to consider this:
Short-term loans are ideal for:
- Renewing inventory
- Meeting unexpected demand
- Meeting obligations because of a late payment that already has an arrival date.
Long-term loans are preferable for:
- The purchase of machinery
- The establishment of new facilities
- All kinds of expenses and investments involving a long period of time.
The problem arises when choosing wrong, if your company needs a long-term loan and acquires a short-term one, you will have to face very high fees or unsustainable one-time payments. In addition, the project will not be triggered and your cash flow will suffer greatly, making possible bankruptcy.
When a long-term loan is chosen in need of a short one, the ability to achieve the goal set is high, but the payments will affect your overall performance.
For example, if your company only needed to fulfill an order and this took two months, you will have to face payments that last for two years, hindering your capital flow.
Types of Short-Term Loans
If after analyzing the situation of your company, you have determined that a short-term loan is fit, you should know your options.
In general, short-term loans are acquired by alternative financing banks, which is even possible to acquire through an online loan application.
- With guarantee: the lender will request that you identify a good as a guarantee that you will pay, you will be entitled to take it for the duration of the credit agreement.
- Without the guarantee: obtaining capital without risking fixed assets of the company is difficult to find.
- Commercial credit: your company lends money based on payments to receive, which is a risky option.
- Bank credit: some banks offer short-term financing.
- Promissory notes: it is a written document addressed to a person, where the company is committed to canceling the debt within the time indicated.
- The line of credit: it is a banking product that makes it possible to borrow money from the bank at the time you need it, with a refund stipulated by them.
- Commercial papers: ask for money with a guarantee of pension funds or other companies.
- Financing by inventories: commit the productive inputs as collateral, the borrower can seize them until the debt is paid.
Types of Long-Term Loans
In this case, banks are the first options to borrow the capital your company needs but some of the best online loan sites may have options for you as well. You will usually have the following alternatives:
- Loan: the bank deposits in the coffers of the company the amount requested, charging interest on the total, it will be paid at par with the interest through quotas.
- Credit policy: the bank makes available a specific amount of money, charging interest on what is actually used, instead of the total.
- Leasing: formula to finance the acquisition of equipment, preferable if you are going to use a computer for at least 6 years.
- Renting: formula to enjoy the equipment without purchasing process, ideal to use rented equipment for a short period so that the installed capacity does not exceed what is really needed.
Advantages and Disadvantages of Short-Term Loans
Deciding on this type of loan implies benefits and inconveniences as listed below:
- They are easier to obtain, sometimes through the loan companies online
- It is possible to obtain lower rates.
- The debt can be amortized.
- They help to offset the deficit due to delayed accounts.
Advantages and Disadvantages of Long-Term Loans
In this case, the entrepreneur will need good planning. The advantages and disadvantages can be:
- It can be renegotiated throughout the period.
- It allows programming a sustainable cash flow.
- In general, the banks approve them.
- Improve cash flow.
- Reduces the interference of investors in operations.
- Improve credit history.
- It decreases the possibility of obtaining investors.
- Generally, debt is not amortized.
- The interest rates are high.
- They last a long time.
At the beginning of the fiscal year, the management of your company must be clear about the objectives that are to be achieved during that period. For this, goals must be established, which are the priority ones and/or those of the second level.
Maybe you are considering entering a new market, launching a new product line, expanding or renovating the facilities -which involves the hiring of direct and indirect personnel, as well as other expenses- and even acquire companies that allow the expansion of yours.
Based on this, you must determine if during that time it will be necessary for your company to acquire debt.
About this, it is not only important to identify the type of debt you intend to acquire so that your company does not suffer, not only, to avoid acquiring a debt unnecessarily -although this will increase your cash flow, it will mean the loss of the money product of the interest that the lenders obtain-.
Besides, it is not prudent to request money from shareholders and/or investors to return it in the short term, in which case it is preferable to go to superior loan companies such as banking institutions or accredited lenders to meet short-term commitments.
To Sum Up
Making the right decision will help your SME to reduce the expenses of shareholder money, the fund in a healthy way a planned expansion and reach the proposed goals without impacting the financial health of your dependents or yours.
Remember that unlike personal loans, in a transaction of this type not only the borrower and lender are involved, but also the family stability of employees and creditors.
Take the time to plan a debt of this type, get several offers and determine which is more convenient; if you tell your potential lenders that you are looking for the best offer and considering many options, you may get to negotiate more attractive rates.