Drawbacks or Shortcomings of Traditional Financing

Posted: June 24, 2012 by

Traditional financing can be difficult to get if you are just starting out in a small business. These types of loan are based upon credit scores and overall credit history of a business. If a company has only been around 6 months to a year, they may not have established the needed amount of credit to qualify for a conventional loan. Most lenders who offer traditional loans will not just hand a company money without some type of collateral or security measures in place to make sure they get their money back.

Short term loans may be an option that better fits the needs of a fledgling company. While traditional lenders may require proof of income or a contract giving the bank the rights to the property the company purchases with the money that is loaned to them. A short term loan may have a higher interest rate than that of a traditional loan, but their payments can be taken right out of company’s sales. A percentage of each sales transaction can be deducted and used as a means to repay the loan. A traditional loan has a lower interest rate, but each payment is the same amount and must be paid by a certain day of the month. Short term loans may be open ended, depending on the amount that is taken out per transaction. A traditional loan is for a specific amount of months with no grace periods or extensions.

A short term loan may be extended and additional monies loaned out while the loan is in place, as long as all payments are being made on time and obligations are being met. A traditional loan normally does not offer this option. With that being said, traditional loans are much more rigid form of financing than short term business loans. Depending on the what the money is going to be used for could be a key factor in which type of loan is considered.

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