Whether you’re a new or established business, you may need financing to help your company grow. There are several options available, including traditional business loans.
However, not all types of financing are created equal. Some can be more expensive than others, so it’s important to understand your choices and their potential drawbacks before you choose a loan.
Term Loans
Term loans are a financing option that small and medium businesses can use to fund their expansion plans or meet short-term cash flow needs. They are also used to cover inventory costs and refinance existing debt.
Typically, term loans offer a fixed interest rate and a set repayment schedule. They are often harder to qualify for than other financing options, so be sure to compare lenders and find the best one for your business.
For businesses that need capital for equipment or real estate, a term loan can be an excellent way to make the purchase. In addition to being tax deductible, making payments on time can boost your business credit score and help you get future financing at lower rates.
Term loans are available as secured and unsecured forms, depending on your business’s eligibility. They can be arranged on a monthly or quarterly basis, and can also be paid off early without penalty. Term loans can be long-term (three to 25 years) or short-term (one to two years). Generally, the longer you have to pay off a term loan, the higher your annual percentage rate, or APR, will be.
ARMs
ARMs, or adjustable-rate mortgages, are a financing option for people who don’t want to lock in a fixed rate and want some flexibility in the interest rates they pay. They start with an initial period of a few years (usually 5 or 7), and then adjust every year after that.
These loans may have an index that tracks the performance of an index (e.g., the federal funds rate), a margin and an interest rate cap structure. The margin is the percentage of the index that your lender agrees to add to your interest rate, and it’s based on factors such as your credit score.
The caps limit how much your interest rate can change from one adjustment period to the next. They also usually have a lifetime cap that sets a maximum rate for the life of your loan. This gives borrowers some predictability, but it can also come with risks if your rate is reset higher than your original rate.
Special Programs for First-Time Buyers
Buying your first home is a big commitment, so it’s a good idea to have several financing options ready. Here are some special programs that can be helpful in your search for a home:
Grants
If you qualify, you may receive cash toward closing fees or down payments from your local government, nonprofit or community organization. These grants are usually lump-sum payments you don’t have to pay back immediately.
Loans
If your budget allows, you can apply for a low-interest deferred payment loan or a forgiven mortgage to help you cover the down payment. These loans are typically structured as a second mortgage, but some programs allow for forgiveness after a set number of years – provided you stay in the house and don’t violate the terms of your forgiven loan.
These loans often have income and profession limits as well as neighborhood restrictions, so it’s a good idea check with your lender for details. Also, don’t forget that you can always ask your employer to provide access to lower-cost lenders and real estate agents in your area.
100% Financing
If you have a good credit score and have a stable income, 100 percent financing can be a great option. However, it can also be risky if you deplete your savings to cover the down payment.
One way to prevent this is by investing extra cash into securities or a larger down payment. This can help you avoid paying PMI and save on interest costs over the life of the loan.
Traditionally, home buyers put down 20% of the purchase price on a mortgage. Today, that amount is unaffordable for many people.
Lenders have come to trust borrowers who are capable of paying their mortgages, based on their credit scores and debt-to-income ratios. They want to be sure that the borrower has the money available if they experience an illness, job loss or other financial setback.