Business Loans What You Should Know?
Obviously, without the required capital, no business can run. Many business owners need to get some extra funds to either get started up or to get by in an especially difficult time. Under these circumstances, they will usually consider applying for something called business loans. These loans give business owners the access to cash needed for business start up, development or improvement and help them tide over a difficulty.
How does a business loan work?
Similar to a personal loan, a business loan is funding given to businesses by a lender usually to be repaid by a certain date with a certain amount of interest. The lender can be a bank, an individual or an organization. In spite of your business size, the lender you work with will want to see firm documentation that supports the viability of the business as well as purpose for the loan.
These business loans can be used for many different reasons. Some common reasons include: buying or investing in commercial property, expanding operations, purchasing equipment or inventory, acquiring a business or franchise and refinancing of business debt. In general, most business owners will pursue a loan at some point, as they need additional capital at various stages of business development.
What are different types of business loans?
When looking for a business loan, many business owners think they’ll just go talk to a lender and then hope that lender will loan them money. However, what they often aren’t aware is there are many types of business loans, with different qualifications and rates.
If you are a business loan seeker, figure out the main business loan types to help know which might be the best fit for your situation.
Term Loans – The most typical type of business loans is a term loan. These loans generally allow you to borrow a large amount of money needed for working capital, expansion, refinancing and acquisitions. You need to pay them back monthly over a term on the base of the expected lifespan of the assets being purchased.
Short-Term Loans – In general, these loans, usually with a term of at most one year, are used for seasonal inventory or small investments. They need to be repaid in a lump sum when the term is over, instead of being repaid monthly. These straightforward loans are commonly used for small amounts, such as $100,000 or less.
Secured/Unsecured Loans – Basically, there are two kinds of loans available to business owners through financial institutions and other lenders: secured and unsecured. For a secured loan, business owners secure the money borrowed by collateral, like cash, inventory, receivables or equipment. If the business cannot pay off the borrowed money within the term limited time, the lender can take legal action to reclaim and sell the collateral. On the contrary, an unsecured loan doesn’t require any collateral. However, the business owner usually requires a high credit rating, to gain an unsecured loan.
Lines of Credit – Lines of credit, more common forms of business loans, are often set up to secure against cash-flow difficulties. Instead of having a check made out for the full amount of the loan, lenders will allow business owners to borrow a certain amount each year. The funds can only be taken out in increments as needed. The flexibility comes at a cost, though: if the money is not repaid rather quickly, it can accrue significant interest. For this reason, lines of credit are usually used for short-term cash flow, not for long-term needs.
Equipment Financing – This type of business loan is generally easier to obtain, as the equipment you purchase serves as direct collateral for the loan. If the borrowed money is not paid back as per contract, the equipment must be given back. According to the size of your business, equipment financing can cover huge expenses up to several millions of dollars.
What documentation will be needed to apply for a business loan?
Specific documentation will vary from lender to lender, but there are a few common things you should prepare before applying for a business loan.
- Addresses and contact information for both individuals and businesses
- Tax returns and credit references (if a co-borrower or so-signer is involved, their personal information is required)
- Business income & expense report and balance sheet for existing business
- Purpose of loan and itemized use of proceeds
- Individual and business budgets and debt information
- Documentation of other forms of income
- Pay stubs and proof of all income listed on application
- Start-ups (6 months of operation or less) will need a business plan, financial projections, start-up budget and proof of equity
Useful Tips on Applying for Business Loans
Getting a business loan sometimes can be difficult. But, if you take the following tips, the process will be made much easier.
1. Personal Integrity Usually, lenders check whether you have a criminal record. They may also go over your accountability to the community through various sources such as your family ties and home ownership.
2. Lenders will also check credit history for both the business owner and the company . A good credit history helps greatly in obtaining a business loan. Perhaps, they can excuse a late credit card payment. However, if the business owner is involved in a heavy debt or mortgage and has defaulted on payments, it can be hard to gain a loan.
3. Though lenders prefer good credit and clean character, the collateral owned by the applicant can create better chances. Generally, the collateral is in the form of solid property which could get a good price. The property could be anything from vehicles and buildings to machines and any other equipment.
Business Loans for Special Groups in America
There’re several business loans for special groups in the United States. If you belong to one of these following groups, you will be able to benefit from these business loans.
A. If you are a veteran, you can try veteran business loans. Among all the veteran business loans, SBA Patriot Express Pilot Loan Initiative is the most attractive. The program is available to veterans and members of military community who wish to start up or expand their business and afford quite some advantages.
B. Slightly different from veteran business loans, military business loans are only available to these soldiers or military members who are on duty now and wish to start or expand a business. Military business loan lenders will offer a series of services and assistance to military members in need.
C. If you have a minority background and plan to start and expand a business, minority business loans are prepared for you. Both unsecured and secured ones are available and have their respective benefits and requirements. You can make a choice based on your demands.
D.Women business loans are a nice gift for women who want to develop their own business but meet financial troubles. There’re lots of public and private organizations involved in the application of women business loans, all of which try their great efforts to assist women in fostering or expanding their business.
SBA Loans: Financing Options for Small Businesses
Whether you’re looking to start a new business or expand an existing business, you might need financing help. Of course, a commercial bank or other financial institutions could be a common lending avenue for you.
However, as a smart alternative, the SBA (Small Business Administration) offers a variety of small business loans and grants programs to help businesses across the nation.
The Small Business Administration, a U.S. government agency is dedicated to offering support to small businesses across the nation. In other words, SBA loans are offered for business purposes such as business start-ups, acquisitions and expansion, working capital and debit refinancing.
Another important purpose is that SBA participates in various loan programs designed to help business owners especially for those who cannot qualify for a traditional bank loan. Simply put, small business loans for bad credit are also available through the SBA.
Significant features that an SBA program offers are lower down payments, easier qualifications (compared to other business loans) and longer term financing. Even better, these programs are made available to both men and women owned small business.
So, for those who have trouble qualifying for conventional small business loans for women, turn to SBA loans for help.
Among all these SBA programs, there are also programs especially designed to offer business financing for military veterans – called Express & Pilot Programs. These small business loans for veterans feature lowest interest rates and streamlined and expedited loan procedures.
However, be noted that SBA just offers a government-backed guarantee on part of the loan. These loans are actually made available through banks, credit unions and other lenders who partner with the SBA.
Several Common Types of Business Loans
Commercial Business Loans is a common and popular choice when you need more funds to run or keep your business. There are secured or unsecured ones offered by lenders. Secured ones require you to take your asset as collateral but feature low interest rate. If you have no collateral, you can choose unsecured commercial business loans which require high interest rate or food credit.
Business acquisition loans will help you a lot when you try to acquire a business and can’t take actions because you lack enough funds. But to get the loan, you have to meet several strict qualifications. You not only have to own a stainless credit record, but slow should have the ability and knowledge to promote the long-term development of the acquired business.
In case that you want to benefit more from federal support, government business loans are what you need. They mainly come from the Small Business Administration. The SBA facilities a number of different loan programs to serve various needs of small business owners, including Patriot Express Pilot Loan Initiative, CAIP and CAPLines. 7(a) Loan Program,Microloan Program and CDC/504 Loan Program are some common SBA business loans. These loan programs usually come with more flexible loan terms, etter interest rate and stronger management assistance offered by the lenders.
According to the SBA, there are more than 630,000 new business startups in the United States in 2007. In addition, around 65% of small businesses are financed by traditional loans through commercial banks. So, for most new businesses, winning a start up business loan is one of the first goals to start a business.