There are a number of ways to secure a commercial loan, whether your business needs money to startup or to expand. These ways include bank financing, terms loans, lines of credit, revolving lines of credit, securities, and venture capital.
Bank financing is a traditional loan. The bank gives the business an amount of money, and the business promises to pay that money back over time. Usually, the business must offer some type of collateral to secure the loan, such as:
- Real Estate
- Accounts Payable
A bank may also ask private business owners to personally guarantee repayment of the loan by signing promissory notes.
Term loans are loans that are repaid in equal periodic installments, such as every month or annually. These installments include both part of the principal and the interest accrued.
Some term loans do not have installments at all. Instead, the full amount, consisting of all of the principal and all of the interest accrued, is paid at the end of a specified period of time (i.e. five years).
A line of credit is a non-binding commitment by a bank to occasionally loan money to a company as it needs the money. Normally, that money must be repaid within a specified period of time. Since this commitment is non-binding, the bank can cut off the line of credit whenever it wishes.
A revolving line of credit is very similar to a line of credit.
The two main differences between a revolving line of credit and a standard line of credit are:
- The loan agreement for a revolving line of credit is formally written down, and
- The bank is obligated to extend credit to the business under the revolving line of credit; it cannot cut off the line of credit unless the loan agreement allows it.
Most revolving lines of credits have a maximum loan amount, also known as a credit limit. Revolving lines of credits are very similar to credit cards.
A company can sell securities as a way to raise funds. A security is an interest in the company that is bought and paid for by an individual or another company. When a company sells securities, it is either selling a percentage of the ownership of the company or the right to a percentage of the company’s profits. The company can then use the money raised from selling securities however it wishes.
Some forms of securities are:
- Investment Contracts
Venture capitalists are firms that invest money in companies that they hope will be profitable in the future. A venture capital firm will give money to a business in exchange for ownership of a substantial part of the company.
Seeking venture capital is similar to a making a securities offering in that the company is trading some of its equity for money. However, the two differ in that venture capitalists work more directly with the company and have some control over the operations of the company, while those that purchase securities tend to not be active within the company.
Even when you have selected a form of financing for your company, actually getting the money can be complex and frustrating. A financial lawyer can help you decide which method of financing is best for your business. Additionally, a lawyer can oversee all the paperwork necessary to get the money your firm needs, and resolve any disputes that may arise.