In today’s world, so many businesses thrive on one funding system or the other. For some, it is their personal savings (life savings) being injected into a new business venture. Others use means such as credit cards, angel investors, loans, line of credit, factoring, purchase order funding, crowdfunding, SBA loans, microloans, and so on. You cannot rule out family and friends that can be of financial help one way or the other.
Finding capital for your business can be a very challenging mission. It requires determination and patience, or you may end up getting frustrated and giving up too soon. You need to learn about the various ways you can get funding for whatever purpose. Your research should lead you through a learning process about debt instruments.
Debt Instruments
When we talk about debt instruments, we are referring to tools that can be used to raise money (or capital for business). An individual or organization can use such tools to gain access to funds for various purposes. In using these instruments, there would be need for documentation and the statement of binding obligations which the recipient of the money would have to perform.
Debt instruments require the recipients of the loans to adhere to terms of repayment, where the investor/lender gets the money back after a stipulated period. This will be according to the contract’s terms.
The contract document would have a clause stating that the borrower has to lay down a collateral in order to gain access to the funds requested. It would also include the interest rates, schedules for payments, and other clauses.
Collateral is described as an asset (such as a real estate property, motor vehicles, and so on) which is offered by the borrower to the lender in order to qualify for a loan. The lender would have to approve the collateral as a good security for lending in case the borrower defaults in repayment. If the recipient of the money is found to be defaulting in the process of repayment, the collateral can be permanently acquired/seized and sold to recover losses (partially or fully).
The type of collateral you can offer depends on the type of loan being applied for. What really matters is that the collateral has to be worth the value of the loan. Note that your lender’s claim to the collateral you offered is referred to as a lien. Read more about that here.
Even a government entity can also utilize a debt instrument in order to obtain funds. This is with a promise to pay back after a period of time. Primarily, debt instruments focus on debt capital raised by individuals and organizations (private and public). Bonds and mortgages are good examples.
Mortgages
They are also referred to as “claims on property” or “liens against property”. These are debt instruments that are applied for with the involvement of collateral such as land, buildings, and so on (real estate). Businesses or individuals can use this to purchase real estate properties which can be paid for in full at a later date.
The repayment process can go on for several years with interest included. Once the mortgage has been settled completely, the property is considered “fully owned” by the borrower.
Foreclosure takes place when the borrower ceases to pay the mortgage or cannot handle the full repayment as at when due. It is a way for the bank to recover losses incurred from lending by putting the property up for sale, where the eviction of the property’s inhabitants takes place.
Below are two major forms of mortgages:
- Adjustable-rate mortgages (ARMs)
- Fixed-rate (traditional) mortgages
- Adjustable-rate mortgages (ARMs)
This category involves paying a fixed interest rate for a short timeframe before it can be subject to market influences. The first set of payments would feature interest rates that are lower than what is obtainable in the market. This makes the process of repayment easier for the borrower initially.
It will be of advantage to the borrowers if the interest rates decrease later, and it is the opposite when there is an appreciation. This kind of unpredictability can be scary to borrowers and may push them to opt for other options.
- Fixed-rate (Traditional) Mortgages
As the name implies, it involves the payment of a fixed interest rate until the last schedule of payment. The interest rates and principal are not subject to change, but remain the same till the last payment, regardless of whether there is an appreciation in the market or not. However, if there is a depreciation, borrowers may be at liberty to pay the reduced rate. You can qualify for this by making another loan on fresh terms (refinance).
Patronizing a Mortgage Broker Company in Vancouver
If you are thinking about applying for a mortgage, you should consider patronizing a broker that provides the kind of services that Geoff Lee Mortgage Broker Group offers to their clients. Primarily, what brokers do is to aid borrowers in reaching an agreement with lenders (banks). They may also render other services like financing, insurance, and more.
Your search for a broker should not be done in a hurry. You have to learn as much as you can before becoming a borrower. Try making use of a mortgage calculator. These specialized calculators are very useful in estimating how much you will be paying monthly, and the interest total for the entire duration of repayment. You can find these tools online.
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