Business loans can be a useful tool when you’re running your own business. They’re especially helpful if you need capital to expand, purchase equipment, or hire employees. But before you dive into business loan applications, it’s important to understand how they work.
In this article, we’ll discuss the ins and outs of taking out a business loan, from the various options available to different types of loans, risks involved, and how much financing is required.
What is a Business Loan?
When you apply for a business loan, you’re applying to borrow money from a lender. Typically, the lender will want some form of collateral against the loan, for example, a tangible asset like equipment or property. If you don’t have collateral to make the loan repayable, the lender may deny your loan application.
Types of Business Loans
There are different types of business loans that might apply to your business. These include:
Equipment Financing
If you want to buy new equipment, but don’t have the cash on hand to pay for it, you can finance it. The finance agreement allows you to use the lender’s money to pay for the equipment. This is a common way to get a small business loan. However, if you don’t own the equipment at the end of the financing term, you’ve just rented it.
Business Line of Credit
A business line of credit is a short-term loan. It usually lasts as long as the business needs it to. You apply for a line of credit with the lender, and they give you a specific amount of money. You don’t have to return the money if you don’t have the cash to cover it.
SBA Loan
The SBA (Small Business Administration) offers many different types of small business loans. Some of these are guaranteed loans that are collateralized by the SBA, and some are unsecured business loans.
Business Term Loan
A business term loan is a loan that lasts for a specific duration. The money is available until the date the loan ends, which can be the day you return your collateral to the lender, or when you pay back the loan.
Merchant Cash Advance
A merchant cash advance is a short-term loan that has stricter requirements. You agree to pay back the loan from a percentage of your business’s future earnings. The lender is taking a risk since the loan is collateralized by only future business earnings.
Business Credit Card
A business credit card is a way for you to borrow money without the need for collateral. You get a business credit card from your bank, and you have a spending limit. Your bank will allow you to make purchases for less than the limit. You’ll make payments that are at least the minimum required payment each month.
Short Term Loan
A short term loan is a loan that is due in a few weeks or months at the most. This can be useful when you need quick cash to cover bills or expenses. You might have to pay an exorbitant interest rate on the money you borrow, so it’s best to repay the loan quickly.
Commercial Mortgage
If you need to finance a commercial real estate purchase, you may need to secure a commercial mortgage. A commercial mortgage is a type of secured loan in which you take out a mortgage on an office, restaurant, and retail space.
Accounts Receivable Financing
If you have an account receivable, or sales revenue, you can use a revolving line of credit to borrow money against unpaid invoices. This can be useful if you need cash to cover expenses or buy inventory.
Business Acquisition Loan
When you buy a business, you often need to borrow money to pay for it. If you have enough cash, you can pay cash. However, if you don’t have enough cash, you can get a business acquisition loan to buy the business. These loans are often based on the value of the business itself.
Startup Business Loan
A startup business loan can be useful if you need cash to start the business. You might need to pay for startup expenses, or you might need to buy inventory.
Pros and Cons of Taking out a Loan for Your Business
There are some benefits and disadvantages to taking out a business loan. It is generally more secure than taking out a personal loan, but it can be expensive.
One of the most important things to consider is the length of time it will take to pay it back. While a personal loan may be repaid in just a few months, a business loan can take as long as five years. When you take out a business loan, be sure to consider how long it will take before you start seeing any profits and whether or not you can afford to pay back the loan once you start seeing profits.
There are also some risks involved. If you default on the loan, you could face financial difficulties and even bankruptcy. So, before deciding to take out a business loan, make sure that you fully understand all of the risks involved.
Business Loan Application Process
You can apply for a business loan in a few ways. The details are specific to the lender, because every type of loan has different requirements. However, the main steps to applying are:
1. Apply Online
Most applications are handled online. You usually have to fill out a form on the lender’s website.
2. Provide Your Business Information
When applying online, you’ll usually have to supply some basic information about your business. You’ll fill out an application form that asks for information like your name, address, and tax ID number.
3. Supply Collateral Details
Most business loan applications require you to supply collateral details. This means supplying information like: your assets, assets history, liabilities, and your lender relationship.
4. Provide References
Some lenders ask for references when you apply. However, they’ll usually ask for references later in the process. You can usually provide references on the lender’s website after you complete the application form.
Tips for Applying to Small Business Loans
Here are some things you should keep in mind when applying for a business loan so that it isn’t only successful, but stress-free as well.
Know Your Numbers
Numbers are the building blocks of finance, so it’s critical to have a thorough understanding of your company’s financials before you apply. This will help you determine what terms you’ll need to secure the loan and help you negotiate an appropriate interest rate. Some of the numbers you’re looking for are:
- The annual sales volume of the company
- The company’s annual operating expenses
- The company’s total liabilities
- The company’s total assets
Develop a Plan
Before you apply for a business loan, you will want to have a plan in place. This plan will help you determine what kind of financing you’re going to apply for, how much money you’ll need, and how you’ll repay it. Lenders prefer to provide financing to business owners with well constructed business plans, as these are more sound investments.
Be Strategic
When applying, you’ll want to be strategic with the way you approach your financing request. This will help ensure that you get the most out of the opportunity while keeping your costs down. What kind of financing will help you get the funding you need to grow your business? While it may not make sense to request a business loan to support everyday expenses, using it as a part of a larger strategy toward scaling or growth can be smart.
Negotiate Terms
If you’ve done your research and know you’ll need a certain amount of funding, then it’s critical to negotiate terms. When negotiating terms, you’ll want to look at the terms that are most appropriate for your company’s needs. This will help you negotiate a lower interest rate and possibly a longer repayment period.
Know Where to Look
The key to finding funding for your business is knowing where to look. Business loans are a great way to get the funding you need, but you need to know what to look for and how to approach them.
Business Loans Can Help Your Company Grow
Business loans are a great way to get the money you need to start up or grow your business. They can help you start up with a small amount of startup capital, or they can be used to fund the larger expansion of your business. A business loan can be taken out in a few different ways, including taking out an individual loan from a bank, applying for a business loan from your local bank or credit union, or even applying for a Small Business Administration loan.
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