Business Loans – Information for Business Owners
Most small business owners are well aware that there is no such thing as free money. Loans for businesses aren’t given away without thought, action or work on the part of the business owner. Loan applicants must convince lenders to make them a loan offer rather than take their money elsewhere.
To get loans for your business, you need to understand what lenders are looking for in an applicant and how they go about making decisions about who qualifies.
There are several types of loans available to new and existing businesses:
Business Acquisition Loans – The lender makes funds available to acquire another business or franchise. Short-term Capitalization Loans – Cover shortfalls between cash flow and expenses, which can include payrolls, accounts payable and other essentials. Asset-Based Loans – The lender is primarily interested in the value of your equipment, real estate or inventory. Asset-Based Lenders may also look at factors like management experience and the business’s reputation. Cash Flow Loans – These loans are designed to fund operating deficits. They usually offer lower interest rates than other types, since they’re available for short terms (6 months or less) and carry higher risk for lenders.
Business Loan Terms and Risks
Interest rates, repayment schedules and the type of collateral required vary depending on the type of loan you obtain. Loans can be secured or unsecured; secured loans typically carry lower interest rates and more favorable terms than unsecured loans. Securing a loan requires that you offer some type of guarantee either by using an asset as collateral (for example putting up your business equipment to secure a small business loan) or using your creditworthiness (if you have good credit). A guarantor might also be required if you are seeking a signature loan, or one where no assets are used as security. In these cases the guarantor is usually someone with excellent credit who agrees to repay the debt in case of default by the business owner.
Most loans for businesses have a repayment term of five years or less, although some can run up to 10 or 15 years. Interest charges vary with the type of loan and your creditworthiness. If you have good credit, you’re likely to pay a lower interest rate than if your credit history is spotty. Loans for new businesses usually carry a higher rate than loans for existing businesses with solid track records that are seeking refinancing.
Small Business Administration Loans – These government-backed loans are specifically reserved for small businesses that cannot qualify for conventional financing under SBA loan guidelines.
Vendors’ Accounts Receivable Financing – This kind of finance is an agreement with a third party to sell your clients’ accounts receivable invoices in exchange for immediate payment so you can purchase what you need now to keep your business operating.
Business loans aren’t just for established businesses that have been around a while or have a long list of satisfied customers and lenders might also look at the applicant’s credit rating, financial history, collateral offered, and the overall health of the industry in which the enterprise operates. But there are things business owners can do to make their offer more attractive to potential lenders:
Get Your House In Order – Clean up your personal debt situation by repaying outstanding loans or bills from suppliers.
Start A Positive Cash Flow – Make sure your business is generating a positive cash flow, but don’t fall into too much expense before getting a loan – otherwise, you’ll be digging yourself into a hole that will be difficult to recover from.
Choose A Reliable Bank – Look for a lender you feel comfortable with, one whose loans are known to be profitable and trustworthy.
If all else fails, consider turning to your bank for help. Banks are more likely to provide credit if they have some sort of relationship with you or your enterprise already.
As long as you’re up-front about what you want the money for and how much it will cost, you should have no problem getting financing when cash flow is tight. And remember that lenders are business owners too – so don’t try to sell them on your brilliance or remind them that closing the deal will get their cash back quickly since most loan officers understand these things already! Be prepared with information and documentation and you should be able to get the loan you need.
Business loans can help your company grow and mature – but they’re not always easy to obtain successfully. Make sure you understand all the requirements of the lender before signing on any dotted lines.