Most new businesses are financed by personal savings, but if you need additional capital for your business, you may want to consider a business loan. The financing you receive from a loan can help you with start-up costs, launch a new marketing campaign, hire new employees, or expand into a new market. Loans can be obtained from a variety of lenders, including your local bank, peer-to-peer lending sites, or microlenders.
How Business Loans Work
Business loans are a common way to finance a business in the United States. These loans are used to finance a variety of business projects, from expanding an existing business to creating a whole new business.
There are several types of business loans available in the United States, including bank loans, Small Business Administration (SBA) loans, and private investor loans.
- Bank loans are the most common and can be obtained through banks and other financial institutions. These loans often require collateral, such as property or assets, and banks often require up-to-date financial reports and good credit.
- SBA loans are a popular option for small businesses that may have difficulty obtaining conventional loans. The SBA guarantees a portion of these loans, reducing risk for lenders and allowing small businesses to obtain lower interest rates.
- Private investor loans are another option for businesses seeking financing. These loans are obtained from people who invest their own money in a business instead of a bank or financial institution. Private investors often demand a stake in the business in exchange for their investment.
In addition to these types of loans, there are also other forms of business financing such as seed capital, venture capital, and lines of credit.
In general, business loans are subject to specific interest rates and repayment terms. It is important that borrowers understand the terms and conditions of the loan before accepting it, and that they do proper financial planning in order to meet the payments.
Business loans are a valuable tool for financing a business in the United States, but it is important to understand the different options available and the terms and conditions of the loans before accepting it. In addition, it is important to do proper financial planning.
To get a business Loan, Follow these 6 Steps:
1. Put your documents in order
Every lender requires some paperwork to get started. For a business loan, the most common things lenders require are:
- business financial statements
- business tax returns
- Business plan with budget projection.
- personal financial statements
- personal tax return
To prepare for your meeting, ask a trusted business advisor, such as your CPA, what documents lenders typically need to approve a loan for a business like yours. You can also call the bank or organization ahead of time to ask.
When you meet with your lender, check to see what documents they need, make sure yours are complete, and submit them right away.
2. Present yourself professionally
When you meet with lenders, make sure you are well dressed and in good appearance. When you talk about your business, be clear, specific, and realistic about your goals and what you need the money for. The worst thing you can do is give the impression that you are more “bloated” than “substance”.
The best way to meet a lender is through a referral. Ask your CPA, attorney, or friend to introduce you to a lender to get you off to a good start.
3. Be prepared to answer questions about your business
When you meet with a lender to obtain funds for your business, you will need to discuss your business plan, past financial performance, and financial projections comfortably. Familiarize yourself with this information ahead of time, so you can speak with confidence and clarity. You may want to bring your accountant with you if you need help.
4. Know why you need the money
“I just need the money” doesn’t inspire confidence or that you’ve thought it through. Do you need the money for the equipment? Sales and marketing efforts? Employee recruitment? Review your business plan, list your start-up expenses, and determine how much money you’ll need. Be prepared to give your lender an overview of these expenses.
As a new company, don’t plan to spend money on expensive entertainment. Your lenders will be more interested in how your money is being used to grow your business.
5. Be prepared to talk about your personal finances
Virtually all lenders will do a personal savings and corporate credit check. Be prepared to discuss any previous credit problems or problems.
6. Propose a payment plan
Most places have some flexibility with their payment plans, and if you come up with your own terms, your lender may appreciate that you’re thinking about how to repay them rather than just figuring out how to get the money.
One type of payment plan is a line of credit, which allows you to borrow money as needed, as long as you don’t exceed the maximum amount. The advantage of borrowing a line of credit is that you only have to pay interest on the amount you borrow, and you can repay it at your own discretion. The downside is that most lines of credit are subject to annual renewal, and if your lender decides not to renew the loan, you’ll have to pay it off in full at that time.
You can also propose a term loan, which is for a specific amount and is repaid on a specific payment schedule. Interest can be variable or fixed, and most term loans are repaid within 1 to 10 years.
Additional tips
Consider using your suppliers and vendors as funding sources. For example, if you need an illuminated sign for your store, the company you contract with to make the sign may provide you with financing so you can make monthly payments instead of paying cash.
Try bartering as a way to finance your business. For example, your ads in the local newspaper could be paid for the bagels you make.
After you Get the Money
Getting the money is only the first step. You should work to be a good customer so that your lender will work with you if you need help later. Here are some tips to make sure you stay up to date with your lender:
Fulfill your agreement. Make sure you understand your loan requirements and stick to them as much as possible.
Provide your lender with regular financial statements and other required documents on time.
Be proactive. Contact your lender if there is a problem, such as not being able to make your loan payment on time. Keep them informed about the state of your business, whether you have good news or bad.
Pros and Cons of Business Loan
A business loan is a common way to finance a business, but as with any form of investment, there are pros and cons that must be considered before making the decision to apply for a loan.
Pros:
- Allows you to obtain capital to invest in the business: Business loans offer a way to obtain capital to invest in the business, whether it is to expand the business, buy equipment or inventory, or finance specific projects.
- Flexibility in the use of money: Business loans usually have a free use, which means that the funds can be used for anything related to the business.
- Access to lower interest rates: Business loans usually have lower interest rates than other forms of financing, such as credit cards or personal loans.
- Possibility of improving credit history: If punctual payments are met, a commercial loan can help improve the credit history of the business.
Cons:
- Secure requirements: Many business loans require collateral, such as property or assets, which means that the business will have to commit valuable resources to obtain the loan.
- Interest and commissions: Business loans usually have interest and commissions, which means that the business will have to pay more than what it received on loan.
- Debt risk: Business loans increase the debt of the business, which means that the business will have to pay back more than it received on loan and that it will have less financial flexibility in the future.
- Risk of default: If the business is unable to meet payments, it could face serious legal and financial consequences.