Types of Finance, Types of Loans & Capital Options

Learn about Asset-Based Loans, Bank-Term Loans, Micro Loans, Federal Government Venture Capital, and Other Options.

Asset-Based Loans

These types of loans are available against account receivables and inventory. They are offered by many financial institutions to businesses that are growing rapidly or do not have adequate funds due to under-capitalization. Asset-based loans allow for easy access to funds and enable the proper use of the working capital that is locked up in the form of accounts receivable and inventory. However, you should opt for only those loans that are available at low interest rates. You can get funds up to $100,000 and above, based on the market value of your accounts receivable and inventory.

Bank-Term Loans

Bank-term loans are the most commonly used funding option and are characterized by fixed interest rates, monthly or quarterly repayment schedules and a specific maturity date. These can be broadly classified as short-term and long-term loans. Short-term loans are to be repaid within 2 or 3 years, whereas long-term loans are usually to be repaid within 10 or 20 years. Short-term loans are used for meeting immediate requirements such as working capital, whereas long- term loans are used for acquiring capital assets such as machinery, building or land.

Micro Loans

Micro loans are small loans that are usually made available through non-profit intermediaries. These types of loans have become very popular among small businesses and since the time they were first offered in 1992, more than 12,500 such loans have been approved, totaling nearly $112 million. You can get funds ranging from $100 to $35,000 by applying for the loans. The maximum repayment term for such loans is usually 6 years.

Federal Government Venture Capital

If you find it difficult to get loans from banks and other financial institutions, you can opt for loans offered by the Small Business Investment Companies or SBICs and Specialized Small Business Investment Companies or SSBICs. These loans are licensed by the Small Business Administration (SBA) and are readily available. There are more than 400 SBICs and SSBICs, managing around $21 billion of funds.

Going Public

If you are planning to expand your operations or invest in the latest technology and systems, you can opt for an initial public offering or IPO, by selling your business equity in the form of shares.

Other Options

If you want to curtail your risks, you can look for a Venture Capitalist (or VC) or an Angel Investor to fund your business initiatives. You may also want to consider investing your personal savings. In certain cases, however, this is not recommended since you could easily lose your hard-earned money if the business fails. In general, it is always better to use external sources of funding.

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