If you are a business owner, you will most likely have a moment when you consider a business loan. There are many reasons why you may consider a business loan. You may be just starting your business and need some money as your disposal. Perhaps you have a long standing business, but you are growing quickly and you need to expand. Just like there may be many reasons why you need a loan, there are many details to consider. This may be the first time you have considered taking out a loan for your business. Just like with a personal loan, you should carefully consider your options. You should not enter into a loan agreement without making sure it is the right solution for you. In this article, I share all the details you need to know about a business loan, including all the documentation you need.
What Is A Business Loan?
I always like to start with basic information. It is a mistake to think everyone knows about the business loan process. Really, unless you are some heavy duty business person, chances are, you are not up on the details of business loans. In the most basic definition, a business loan is when a lender allows you to borrow money to help you run your business. The lender charges a fee, also known as interest, for giving you the money. You promise to repay the money by making monthly payments for the length of the repayment period.
Business loans can be secured or unsecured. They may also be a line of credit. Similar to a personal loan, an unsecured loan has no collateral or anything backing it. These loans are riskier for lenders. As a result, they have higher interest rates. A secured loan has collateral attached to it. That means you have offered something of value, such as your business or pieces of it, to ensure you repay the money. If you default, or do not pay, on the loan, the lender can take your collateral. A line of credit works similarly to a credit card. You can borrow any amount up to the line of credit. You do not have to use the full amount of the line of credit.
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How Do I Get A Business Loan?
The first thing you must do is understand why you want or need a business loan. You must have a purpose for the money. Thinking about this can help you decide if you really need the money, or if you are putting your business at risk. After you decide that, yes, a business loan is right for your business at this time, be realistic in how much money you need. Most importantly, determine if you can repay the loan. A loan is not a gift. It must be repaid every month.
Now that you are sure you want to pursue a loan and you know the amount you need. You are also sure you can repay the loan, it is time to find a lender. There are many lenders out there and it is important to find the one that fits your needs best. Lenders offer different types of loans with varying interest rates. That interest rate impacts your monthly payment amount. Lenders may have different loan terms, also. It is important to find a lender that matches those requirements for you. You may have to do some research. Do not pick the first lender upon which you stumble. Look around and do some research to find the right one for you.
Once you have taken all of those steps and found the perfect lender for you, it is time to fill out an application. You are almost finished with the process at this point. Depending on the lender you choose, you may have to go into the bank and fill out a paper form. If you choose an online lender, you can fill it out on your computer. It is important that the information you provide is accurate. If anything is off it could impact the decision. It make take a couple of weeks before you receive a response from the lender.
What Documents Do I Need?
One thing I did not mention above is the documentation you need when applying for a business loan. As with any type of loan, you must provide documentation when applying for a business loan. I am sure it makes sense to you that potential lenders like to see that your business is profitable. Lenders want to make sure you are investing wisely into your business. Usually a lender will not just take your word for it. They would like to see documentation to prove it.
Some information a lender may ask to see is your business license and resume. They may want your financial statements and the financial statements for the business and any principals that you have. They want to gather the credit history for you and all your partners, in addition to the credit history for your business. Lenders also want to see a guarantee of repayment from all the business owners. Lenders also want to see tax returns for you and the business for the past three years. They are especially interested in profit and loss statements. Also, they want to see your balance sheets and all projections on cash flow. They also want to see financial statements and any projected financial statements.
How Can I Use A Business Loan?
Business face unique challenges. One of the biggest struggles is getting others to believe in your vision the way you do. Not only do you want them to believe in it, but you typically would like some financial backing. In the event, you are not able to persuade people to just give you money, you may need to consider a business loan. The good news to this is you can use a business loan for just about anything for your business. Depending on the type of business loan, you may need to use it for specific pieces of your business. However, that is only if you opt for a specific type of loan, such as an equipment loan. You can use a business loan for upgrading your software or computer equipment. Or you can purchase real estate or a larger building. You may even need it to hire more employees.
No matter what type of loan you consider, you should have a business plan. Many lenders ask to see your business plan because they want to ensure you have a plan. They want to make sure their money is going to grow your business. It is possible that a lender does not require you to have a business plan, but it always a good practice to have one. This helps you understand your goals and provides you steps to move forward.
What Are Small Business Administration (SBA) Loans?
There many types and variations of a business loan in which you could apply. One of those types is a small business administration (SBA) loan. It is a loan that is backed partially by the Small Business Administration branch of the government. These loans are less risky for the lender because it is partially guaranteed. The loan is still being issued by a lender. It is not issued by the SBA, even though the name of it makes you think it might be. If you cannot repay the loan, the SBA covers the part of the loan that they backed. It is almost like insurance for the lender.
The terms of this type of business loan varies based on the loan. There are no additional limitations on this type of loan because of its backing by the SBA. They range in amount from as low as $500 to as much as over $1 million. They also can offer an interest rate as low as just below 7 percent. The repayment terms for a SBA range from 5 years to 25 years. The typical length of a loan is around 10 years.
There are four different types of small business administration loans. There are micro loans, which are typically available to childcare organizations and small businesses. These loans are usually up to $50,000. Disaster loans fall into this category and they are reserved for damage sustained from natural disasters, such as, but not limited to hurricanes and flooding. There are real estate and equipment loans covering those items that are needed for the business to operate. Also, there is an all purpose small business loan that is the most common loan and that is the 7(a) loan. There are many business loan companies available to provide these various loans.
What Are Equipment Loans?
An equipment loan is a special type of business loan that helps businesses purchase heavy machinery or large equipment. When your business uses an equipment loan to make large purchases, it allows you to save cash. Instead of using large amounts of money now, you can make a monthly payment. Typically, you can only get an equipment loan for a piece of equipment that you are purchasing. You cannot use it on existing equipment. You are using the equipment that you plan to purchase as collateral. That means if you default on your loan, the lender can take possession of the equipment. This gives the lender a little more security in lending you money.
Typically, lenders prefer that you invest in equipment that retains value. Equipment such as semi trucks, tractors, and cranes fall into this category. You may also be able to use this type of loan on ovens and other kitchen equipment for a restaurant. You may also consider equipment such as computer printers and servers, or equipment for manufacturing. There are many benefits to an equipment loan. Lenders often require less documentation than with other loans. You typically get an answer in less than a week, so you can have money quickly.
What Are Term Loans?
Another type of business loan is a term loan. It is the most popular loan of all the business loan types. This type of loan helps business owners procure items that are a large expense that they may not have the cash to pay. These loan covers a large amount of items. These loans can also help improve the credit rating for a business. Whenever you may regular and timely payments, it helps increase your credit score. It may be difficult for a business to have a good credit score. In some cases, a term loan may help.
Nontraditional and traditional lenders provide term loans. These loans are similar to personal loans in that they are for a set term. They are not revolving lines of credit. The length of these loans are usually from one year to five years. You make regular payments on these loans. They can be monthly, or possibly weekly payments. These loans are flexible and easier for a well established business to obtain.
Lenders prefer to give these types of loans to businesses that have been operational for two years. Lenders like to see that the business is solvent with a sound debt to income ratio and continues to have a steady flow of revenue. New startup businesses may find it difficult get an approval for this type of loan. Interest rates vary widely, as they can be as low as 6 percent and as high as 30 percent. Lenders tend to require a large amount of documentation before approving businesses for this type of loan.
What Is Revolving Credit?
Revolving credit is a term with which you should be familiar if you use credit cards. This type of business loan closely resembles credit cards and works in a similar way. A line of credit is a preferred way for businesses to obtain credit. It gives your business much more flexibility. This allows your business to have the money you need when you need it. You are given a set amount of money and you are able to only take as much money as you need. You can continue to borrow money against your line of credit until you reach your limit, or for a set amount of time. Those terms are decided at the time you agree to the loan.
The interest rates for these types of loans are higher than other loans. However, you only have to pay interest on the amount of money you are using. You do not have to pay interest for money that you are not using. Lenders tend to approve these loans for business with good credit.
Why Should I Get A Business Loan?
You and your business associates are the best ones to decide if a business loan is right for you. There are some points to consider when deciding if a business loan is right for you. First, let us look at the reasons why you might want to go to a business loan shop. Are you in a position where you need to expand, but your current space cannot handle anymore people or equipment? If you can show that you have had steady growth for several years, it can help your chances for an approval. Perhaps you need more equipment or you need to upgrade your existing technology.
If upgrading your existing system helps improve your productivity, which can in turn bring in more income. Do you have a seasonal business and you need to stock up on items you need for the next season? If you do not have a steady flow of income at this moment, a loan may help you obtain the items you need. Perhaps you need to build up your credit. You may not have any credit because you are a new business, or your business do not have the best credit. Obtaining a loan may help you build positive credit. Any of these reasons may be a valid reason for obtaining a loan.
There many be just as many reasons why you should not obtain a personal loan. Are you already behind on all of your bills? Or are you in danger of falling behind? Perhaps you do not have a good business plan. You may need to revisit is and make adjustments to your business plan before you consider taking out a loan. It is important to have an understanding of the position of your business. You should realistic about the circumstances of your business. It is great to be ambitious about your business plan and know how much you are able to achieve.
Can I Be Denied For A Business Loan?
Yes, you can be denied for a business loan. It is probably more common that you realize. You could be denied because you may currently have too much debt. You may also be denied because you have limited cash or you may not have enough collateral to put towards the loan. It could also be that a lender does not want to take a risk in the current market. If the market is in too much turmoil, a lender may not take the risk. You may have poor to bad credit history or a terrible business plan.
If you want to ensure that you are approved for a business loan, you should make sure you have better cash flow and work to improve your credit. You may also want to consider non traditional lenders. You may have better luck with a lender that is willing to lend money to a business that has less than perfect credit. If you know that the market is not in a good place, you might want to wait until the market is in a better place. You can watch the market for when there is a better market in which you can apply for a loan. If you are denied a loan, find out why. Pay attention to what the lender tells you. Make corrections where you can and apply for a loan when your business is in a better place.
Are There Downsides To A Business Loan?
There can always be a downside to a business loan, but it depends on your position when you obtain the loan. One of the major downsides is your business is taking on more debt with a loan. You could put your business is a bad financial position if you enter into a loan that you cannot afford. Remember, you should always have a realistic picture of your financial position before you obtain a loan. You should have a clear picture of the budget for your business. This means you need to know how much money you are spending on expenses.
This also means knowing how much money you really make, not how much money you think you should make. Now, is the time for you to look at the cold hard facts and numbers. If you do not have a budget for your business, you should create one now. Do not hesitate with creating a budget. There are many websites available to you to help you create a budget. Before you even start to shop business loans, you need to understand how much you can afford to pay per month.
The last thing you want to do is risk losing your business. This is your dream and you have worked hard to create it. Do not let a bad financial decision ruin that for you. Do not be your own worst nightmare, either. If you remain realistic about your current position and where you can go, you have a chance to survive. If you begin to believe your business brings in more money than it actually does, you might set yourself up for ruin.
What is the Major Difference To Long And Short Term Loans, Besides The Obvious?
When you are considering a business loan, you have some choices available to you. Among those choices is the short term versus long term loan decision. I am going to make an obvious statement, here, so forgive me. A short term loan means you have a short term in which to repay the loan. You may have to repay those types of loans in days, weeks, and possibly months.
Short term loans put a large amount of pressure on you as the business owner as you try to repay the loan. You may have to dig into your cash reserves to pay back a short term loan. The original purpose of the loan was probably to keep your cash in place. A short term loan must be repaid in three months to eighteen months. If you need money for a short period of time and can repay the loan quickly, then a short term loan may be the right one for you.
Long term business loans are repaid in monthly payments over the term of the loan. This relieves the pressure on business owners because they tend to have one to twenty-five years to repay the loan. The lender you choose determines the terms of the loan. While the long term loan accrues more interest than a short term one, it also spreads out the interest over a longer period of time so you are not scrambling to repay the loan. If you would like to spread the repayment plan over a longer period of time and you do not mind paying more interest, the long term loan may be a better option for you.
When you are looking for a business loan, it is important to understand the position of your current financial outlook. You want to make sure that you are in a position to repay the loan. Before you start looking at a business loan shop, take a look at your business plan and your expansion plan and ensure that it makes sense. If your business has positive revenue and it continues to grow each year for at least the past five years, you might be in a good position to obtain a business loan.
If you are behind in your bills, or in danger of becoming behind in your bills, you might want to reconsider obtaining a business loan. The intention of a business loan is to put your business in a better position so you can expand your business by obtaining a large space or upgrading equipment. You must keep in mind that you are not just putting yourself at risk, but you are also putting your business and any partners at risk, as well.
Julia Peoples is a long-time business manager focused on providing decision making assistance to the public. She works with people at key points of their lives who are making important retirement and financial decisions. She has had many articles published that educate the public on sound financial decision making.
Julia writes for those who are working towards financial freedom or a better understanding of how finances work. She has shared her financial insights with individuals on a one on one basis for years.