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When shopping for a business credit line, or business credit loan, you will usually be presented with a fixed or variable business loans. Most young entrepreneurs do think that business credit is like personal loans except that they are only extended along the business line. This is not accurate, and the reason is that the structure of typical business term loans is different from a personal loan. For instance, most businesses will still require some financial assistance even if they are profitable enough to expand, pay their vendors and fill their orders. For this reason, a business must put in place a permanent cash management or cash flow for business credit needs in order to meet up with long-term business financing.
When you try to finance business, through business personal credit, you must simply separate personal from business assets. It is okay to use your personal asset for a start-up loan and when the business starts to show to show some signs of becoming profitable, then you can replace the personal assets with business assets especially when you are taking secured credit loans. Keep in mind that it is safer to use your business assets, only when a collateral is required.
There is a wide range of reasons you may need a business loan, and in some ways, both the fixed and variable credit loans can be beneficial and choosing between the two can be a difficult task especially for young entrepreneurs, but here are some factors you may want to consider about the features of each type.
When you have a fixed business loan, you will have to pay the same interest rates through the entire span of the loan. This means you will make the same repayment from the beginning to the end of the loan (both interest and capital). You can say that a fixed financing loan is much easier to pay from month to month because you can plan your repayment budget efficiently especially when you have a fixed income too. When you take a fixed business loan, you are not subjected to the interest rates applicable or prevalent in the marketplace, hence you don’t have to worry about market interest rates that can increase steadily from time to time. Your capital and interest rates will remain fixed and it will never change, regardless of what happens. Beginner entrepreneurs who are taking their initial business loans may want to consider the fixed interest rate loan because of its convenience, It is also a suitable type of loan for those struggling with capital investment.
With variable business or personal loans, your payable interest rates may change periodically, all through the duration of the loan. In most cases, the interest rates are tied to an Index that fluctuates based on market trends, hence your interest rates will go up when the market is going up or down when the market trends are going down.
Most entrepreneurs are lured into variable business loans when interest rates are lower initially, despite the fact that they know a fixed interest rate loan is much safer. As a young entrepreneur, you must be aware of the risks associated with variable interest rates, and this is why it is only recommended to professional entrepreneurs who have established a solid financial foundation for their businesses. One of the issues with variable finance loans is that your loan repayment may double from the point it was when you took the loan, hence you may find yourself in deep financial trouble when you are not prepared for this type of loan.
One of the main benefits of a variable cash loan is that it can save you a great deal of money if you are able to project market trends and time the loan when market trends are down. If you can get a variable cash loan when the interest rates are low, and you have a shorter repayment plan, then you may save yourself some money significantly.
You need to learn to cope with the unexpected when you decide to choose a variable business loan, and one of those things to keep in mind is the fact that your monthly repayment will fluctuate from one month to another.
If you are confused about the type of business loan you can go for, there is another type of finance loans known as the “Blended rate” loan, which is used by most lenders to retain existing customers. In this situation, the lender will offer a cap on the highest rates a customer can pay on an existing loan, whether it is fixed on a variable. This means that the borrower will not pay interest rates close to the current market rates. This is one of the smartest ways of getting low-interest business loans.