Business Loans: what you need to know
A business loan is a loan expressly intended to finance your business. The business loan can be the initial loan to pay startup costs or the loan can be on an existing business and used to fund expenses, new equipment, expansion, or as a debt consolidation loan. These are just a few things the loan can be used for.
Secured Business Loan
One type of business loan can be secured by the existing business. It can be secured by accounts receivable or real-property owned by the business. Real-property might be the building used to house the business, or facilities like a carwash, owned storage facility or other collateral property. Other secured loans are often taken out on equipment like automobiles, heavy machinery or inventory.
Unsecured Business Loan
An unsecured loan might be issued based on past business performance, business credit worthiness or is a signature loan based on the owners credit worthiness. These types of loans normally have a cap of a few thousand dollars and the interest rate is higher than a secured loan. The payback period may be shorter as well.
Business Loan With Personal Guarantee
A third type of business loan can be issued with a personal guarantee or secured with personal assets. Often the personal asset used to secure a small business loan includes the owner’s personal residence.
Terms Vary
The rate and term of a business loan is based on whether or not the loan is secured or not, the businesses credit worthiness, and of course…the ability to make payments. For smaller businesses, the owner’s credit report might also be included in the decision. The maximum time for payback on a business loan traditionally runs at about fifteen years.
Business loan funding comes from financial institutions, individuals, or organizations. The variables on a loan include the amount, payback term, rate of interest, business or individual qualifications, and the number of lenders needed to satisfy the desired loan amount.
Qualification Process
The requirements for getting a business loan also vary. But everything starts with paperwork. You’ll need neat, data rich documentation that will sway the lender to issue the loan and asses a specific loan repayment plan. A creditor will want you to present how much money you need and what it will be used for. They’ll want to see a detailed business plan and be apprised of the planned contingency options if things don’t go as you’ve projected. They will look at the business’ credit report and/or your personal credit report. As with any loan, the better your FICA scores and the more thought out, confident and concise you are in the required paperwork and in person—the better chance you’ll have of securing the loan.
First Mistake
On the other hand, if you meet with the loan officer without the right documents, missing information and with disorganized paperwork, you will delay the loan processing. Ultimately your poor groundwork may cause you to be turned down for the loan just for your lack of preparation.
In the current economy especially, money lending for small businesses is at an all time low. If all things are equal across several loan applications, lenders are going to focus on the ones who are better prepared and organized.
Assume The Lenders Don’t Know Your Business
When you are putting together your business plan and data sheets on the business, don’t assume the loan officer or lender knows what you are talking about. Be very careful to stay away from using terms that may be well-know to business insiders, but aren’t recognizable by the general public. Acronyms are big pitfalls. Spell out the terms, make sure you include definitions or make the plans and data understandable by anyone.
It might be advantageous to have someone who isn’t involved in the business, read the plans and information. They can point out any confusing issues and this will give you the opportunity to make clarifications before you present the loan documentation.
Conclusion
There are several types of business loans, including secured and unsecured loans. Getting a business loan can be a time intensive process. The loan process can be affected by the amount of time and effort you put into preparing the documents.
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