Business loans refer to the transfer of money from a lender, commonly a financial institution, to a borrower. In this case, the borrowers are the businesses, and the financial institutions are banks. The bankers determine the interest to be paid, and the schedule of the settlement and the borrower consents to those terms. Lenders may offer unsecured or secured loans. Secured loans require collateral, which is generally personal property, for example, the home of the borrower.
Nevertheless, when referring toenterprise or business loans, collateral is something possessed by the enterprisee.g. equipment, real-estate,
There are several reasons for businessesto get a loan. Some may need extra money for the growth of the company, oroffering additional services, while others would require funds for makingdifferent small or big purchases. Loan providers consider quite a few factorswhile improving these loans. First, they may check the creditworthiness of theenterprise. They would also evaluate how far the enterprise has been successfuland the chance of its being profitable. Procuring loans for a new company isindeed very challenging, and the credit history of the individual borrower isnearly the main criteria for taking the decision.
As the lender would like to ensure thatthe borrower can repay the borrowed money, the borrowers have to meet somerigorous expectations for availing the loans.
When the risks connected with the loan are quite higher, it is generally a great option to look for investors from within the family or the social circle that could loan money or purchases part of the business. Banking institutions are certainly not enthusiastic about offering loans taking a high risk. Small businesses needing smaller loans could check with government sources that lend money, or other organizations offering micro-loans, as their perquisites for extending loans are not so tough.
Enterprises that get loans during theirbeginning have the advantage of building their credit history as the businessexpands. As in the case of unsecured loans, businesses too need to ensure topay back the borrowed money within the stipulated time. Failure to makeappropriate payments harms the credit rating of the enterprise, making itchallenging to procure any enterprise loans in the future. Banking institutionswith other lending institutions not only consider the credit rating of thebusiness, as well as its revenue in the past along with the profit the businessis likely to make when being granted the loan.
How to Get a Business Loan
Finances make the business world goround. Getting a steady and flowing financial source is a significant factorwhether you are planning on a new enterprise or growing a current one. Severalnew business owners are daunted by the task of getting a loan and don’t evenknow where to start.
Here is a practical guide on how toprepare yourself and your business idea as you apply and effectively get a businessloan.
Understand the criteria that banks look for in making small loans.
Various banking institutions and lendingorganizations may have different criteria, but generally, if you are applyingfor a business loan, you should have been able to meet the followingrequirements so they can consider you:
- Yourloan is for a sound business purpose. For instance, the business enterprisemust be prepared depending on size, use of loan proceeds and the nature of theenterprise.
- Youand your partner are of good character, have experience and sound personal andbusiness credit history
- Youcan pay back the loan. This could be in the form of collateral or a privateequity investment in the business/skin in the game.
You have the necessary documents to submit. You will need the following documents. Different lenders may need more or less of these.
- Personal and business credit rating
- Personal and enterprise economic statements for current and start-up businesses and as well as an expected financial statements
- Strong, detailed business plan
- Cash flow projections for at least a year, and
- Personal guarantees from all principal owners of the business
Research on the banks and lending institutions
Before actually approaching the lenders,learn about business loans, such as the banks’ accounting systems, so you candiscuss intelligently with the lending officers when the time comes.
- Chooseyour bank and lending institution carefully; one that would suit your businesssector.
- Approachthe ones you have worked with or are a customer of
- Takea look at community banks and Credit Unions
- Bethorough, bring everything they ask. Many loan applications are denied or faceunnecessary hurdles because of incomplete applications.
Identify the size of the business loan that you want.
There is a typical size for smallbusiness loans.
Have a good business plan.
Getting a business loan for a newbusiness may be more difficult since many banks want to fund growth. Manystart-up businesses seek financing from family, friends and credit cards.However, you can get better chances of successfully getting a business loan ifyou have a healthy business plan and the credit for the loan is reasonable.
What Type of Financing Loan should you apply For Business?
This question often plagues businessowners. Funding is not hard to come by these days, but there are always stringsattached, especially to unsecured sources of funds. This type of financing isavailable with no need to furnish guarantee or collateral and may temptbusinesspeople who are faced with cash crunches now and then.
There are other options as well. One canapproach family and friends if the amount involved is not significant. However,this may not be the best business financing option. Loans that take days ormonths to process and require collateral are best given the go by.
Business owners need money immediatelyand that too without any guarantee. Before one applies for such loans, one mustknow how to apply business finance methods.
One must assess the business position. It is necessary to know about repayment capabilities and whether such repayments would impose a fresh burden or whether the deployment of finance would result in higher cash flow that would take care of repayment of installments. Smart businesspeople will find out the position of creditors and debtors, and if they have funds incoming, they know the loan will not impose a burden.
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