What is a Business Loan?
A business loan is an investment that consists of a sum of money given by a bank or any other type of financial institution to small – and medium-sized enterprises (SMEs) for the purposes of starting, expanding, improving their business activities. Banks offer business owners a range of fixed-interest rate loans with set repayment terms. This means that the loan is fixed with an established number of repayments to be made over a set period. There are various types of business loans, which vary according to their purpose and repayment terms.
Can I Get a Business Loan?
Yes! Business loans are provided by lenders to businesses for acquiring or upgrading capital assets. An asset is something that has value and ongoing usefulness, like buildings, machinery, equipment, fixtures, and furniture. Businesses use these types of loans for things like expanding inventory or purchasing new equipment. Businesses can access funds through many different sources of financing and a Business Loan is very attainable!
Applying for Business Loans
Every bank sets its own requirements when it comes to small business loans. Small business administration lenders--the most common type of these lenders--follow regulations set by Congress. These regulations require that borrowers have less than $10 million in assets and a net worth of less than $6 million. Banks may have other requirements, such as a minimum credit score, a specified level of liquidity or collateral, and a maximum debt-to-income ratio.
Types of Business Loans
Loans are an important part of most businesses. They can be an especially important part of small business success because most new businesses don't have the kind of credit history or assets that would make them attractive to banks or other financial institutions. There are many different types of loans for any number of different reasons. Some require very little explanation; others, like venture capital loans and mezzanine loans, can be a little more difficult to understand.
Venture Capital: This type of financing is given to startups that have yet to produce a profit. Venture capital businesses are able to give funds on either fixed-interest rate loans or equity investments.
Working Capital Loans: These are loans given to established businesses, where the business owners use the loan to pay for certain business expenses. Working capital loans make it easier to cover cash flow problems that are caused by a slow collection of receivables, or an increase in payment terms offered to clients.
Preferred Stock: This is also known as a PIPE (private investment in public equity) loan. It involves the business owner issuing a predetermined number of stocks to a lender, which can either be a bank or an individual investor. It is different from a venture capital loan in the sense that it offers no leverage.
PIPE Loans: These are similar to preferred stock because the amount offered by the business owner doesn't have any bearing on his company's valuation or credit rating. Also, it does not entitle him to any additional shares or control of his company. The main purpose of the preferred stock is for the investors (a bank or an individual) to receive dividends.
Private Loans: These are usually issued by banks and other financial institutions allowing business owners to obtain funds without having their credit history checked thoroughly.
Seasonal Loans: A seasonal business is one that performs large amounts of business during some times of the year. Loans are provided by banks to help cover expenses during slow periods.
Term Loans: These are granted by financial institutions for a set period, typically several years. Term loans are not repaid until maturity or they may be refinanced so they have a longer period of time to repay the loan.
Commercial Loans: These loans are geared more towards established businesses with low-risk ratios, which have a track record of meeting their repayment schedules. Commercial loans may be repaid in equal installments or through balloon payments.
Bridge Loans: Bridge loans are also known as gap financing. This type of financing is given to a business owner who is about to close on another financial deal and needs money quickly in order to meet his current obligations.
Business Loan Eligibility
When applying for a business loan, most people are under the impression that their credit score is what lenders will base their decision upon. While you have to have good credit in order to qualify for a business loan, there are many other factors, often overlooked by the borrower when applying for funding.
- Have been in operation for at least several months.
- Be able to meet the requirements of the bank.
- Be solvent and have a low rate of delinquent payments.
In Order to Qualify
When applying for a loan, you will be required to provide many of the same kinds of information as an individual seeking credit from an ordinary lender. However, since your business is less likely than any private person to have sufficient income and credit history, you must be prepared to provide additional information.
- Top business managers' resumes.
- Business profiles or articles published in some magazines or newspapers.
- Current balance sheet and income statement for the business.
- Last year's tax returns.
- A Business plan.
- Legal documents such as articles of incorporation.
- Accounting records with a Schedule C.
- Proof of insurance with general liability and workman's compensation.
- A market analysis report of your industry.
A business loan can be used for any number of reasons. It could be to purchase inventory, hire new employees, or expand your marketing team. No matter what you use it for, a loan is an excellent way to grow the company and increase revenue by taking on more customers. We have helped many businesses receive loans in order to meet their goals and we would love to help you too!