Thinking Of A Start Up? Start With A Better Knowledge On Financial Credit And Loans

Financial Literacy: an overview

Financial literacy is basically the understanding of financial, credit and debt management along with the proper knowledge of market and finance for a responsible decision-making. A recent study found that around 40% of small business owners are financially illiterate whereas around 81% of them are running their finances on their own.

Some major areas requiring literacy:

• Taxes: For running business in any country a fair understanding of the country’s and state’s taxation and regulation system is important. A failure to which might end you up in jail.• Pricing: As for running any business you need to have a transparent, clear, definitive pricing index. • Anticipating cash flow: Your suppliers will always want their payments as quickly as possible. When you are starting the business on credit basis failure to anticipate the processes will destroy the entire cash flow cycle. Destruction of the cash flow cycle is where you might need to borrow loan or financial credits to keep your business afloat. Thus, a profound knowledge of loans is equally important.

Understanding financial credit and loans

A loan in simple terms is a money or property given to a person in exchange of future repayment of that money along with loan value amount, interest charges or other financial charges. Thus, a loan can be secured like mortgages or car loans or unsecured with higher interest rates. It can also be spent, repaid and utilized again within a term which has equal monthly installments over period of time etc.

Amongst these options, a special type for companies are working capital loans. In simple terms a working capital loan is taken for running the daily finances of a company. These loans are not for long term asset buying but for daily expenses, payroll, rent payment etc. These types of loans are necessary when the company doesn’t have even cash flow or assets liquidity for covering their daily expenses. These types of loans are mainly utilized by companies that have a particular cyclical sale season where they can make enough to repay the debt. Although as most companies do not have such hard and fast sale cycle this works fine for manufacturing companies or agencies dealing with goods or services dealing in a particular season.

The major pros for these types of loans is easy availability and the fact that it lets the the owners cover up all the business gaps effectively. Another big advantage of this loan is it’s a form of debt financing and thus it doesn’t require any transaction of equity. Thus, as an owner you can be in full charge. However, a big problem of these type of capitals are the working capital loan interest rates which generally range from 16-35% which is pretty high with respect to other loans.

Also, the working credits are tied to business owners' personal credits. Thus, any default or mis payment reduces the credibility of the owner and hence reducing the overall brand value as well.

Reema Sharma is a professional content writer specializing in blogging, press releases. I would like to share some knowledge by that Articles.