USDA Lender Watch Out for Debt Trap

SBA Business Loan

The minute you are employed and start earning a steady income, you will no doubt be bombarded with lots of calls, emails and post offering you credit cards and loans.It is quite possible that you will be tempted to avail all types of loans and subscribe to credit cards. People often end up falling prey to uncontrolled spending and get into a debt trap even before they realize.

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Let's examine some valuable tips.

It is important for you to give sufficient thought to your financial planning and avoid getting into such debt traps. You should get into the healthy habit of spending only on necessities and not fuel your wants which are unlimited. Remember the money is ultimately going from your savings and earnings. The credit card companies and banks which give you the loans gain in the bargain because they charge very high rate of interest. It is your weakness or willingness that is used by the banks to give you instant money and to charge you huge interest on the loans.

It is also a fact that in the economic situation today one cannot be without availing one or the other loans. However you should exercise caution while approaching loans. You are a lot safer by practicing planned expenditure based on your needs and avoid spending on unplanned and unnecessary expenses. It is always safer to limit your borrowings to a home loan and a vehicle loan.

While on the personal front it is better to limit your liability and exposure to loans, the same stance is not valid in your professional front. If you are starting a small business, then it would be foolish to invest all the money on your own without borrowing funds from the bank. All business firms depending upon its strategy and business models, borrow money to fund its business ventures through commercial loans from banks. It is quite impossible or rather impractical for promoters to keep funding their business ventures through their personal assets and sources. Commercial borrowing from banks and financial institutions is a must.

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Banks give loans to the business firms to invest into acquiring plant and machinery required for their operations. Such borrowing of capital investment comes under the category of Term loans against hypothecation of assets to the bank. The assets will continue to be hypothecated to the bank until such time that the loan is paid off and assets released by the bank.

To run day to day operations like buying raw material, paying salaries to staff, selling expenses etc the business requires continues cash flow in the form of working capital. Working Capital loans are given by the banks to the business firms to meet their cash flow requirements. Such borrowing is called Cash Credit Account or Over Draft account in banking terminology. Depending upon the inventory holding including work in progress as well as the estimated sales forecast, the bank arrives at a limit up to which the business firm can borrow funds from the loan account.

Every business be it a small scale enterprise or a home based business run by an individual, a loan from the bank is a necessity. Knowledge of financial management and borrowing is a must for every one who is aspiring to start ones own business.

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