What is a business loan?

What is a business loan?

What is a business loan?

A business small or large requires money. Start-up costs, working capital and even expansion costs are all expensive and require a specific amount of money to be successful. Because of this, companies usually require business loans to fund their financial needs. A business loan is a strategic kind of debt, wherein a company willingly  takes on a certain amount of debt believing or knowing that the success of their product or service will pay off the debt several times over.

If you’re looking to start a new company or want to improve an already existing one then a business loan might be just what you need to reach your goals. Because the size of a business loans are usually quite big it’s of the utmost importance that you completely understand the risks and inner workings of a business loan before you decide to approach a lender of any kind. Here’s what you need to know about business loans.

How a Business Loan Works

A business loan works by providing the money or capital that a new or already established company needs to put toward costs that they cannot afford to cover themselves. Depending on the company a business loan can pay for any number of expenses including but not limited to employee salaries, inventory or product and office supplies. A company will frequently use their loan to cover these costs until they are back on their feet and able to pay them with the income that they are producing through the sale of their product or services.

Obtaining a business loan can allow a company to flourish and create opportunities that are not possible without a loan. For this reason business loans are in high demand but also hard to be approved for. A lender will always want to assess the risk of lending money to a business based on previous debts, history and experience; the riskier the business looks the less likely they are to receive a loan.

Typical Requirements for a Business Loan

It can be hard to say who will be approved for a business loan and who will be rejected as there are many variables that can affect the outcome. There are however, some general guide lines that should help you decided whether or not it’s a good time to apply for a business loan.  

1. Do you have good personal credit?

When you apply for a business loan your personal credit will be taken into considerations as you are the face of the company. Because the company is yours the way in which you handle your personal finances is a reflection of how you will handle your company’s finances. Good personal credit is especially important for those looking for capital to start a new business. If your personal finances aren’t in good shape then you probably won’t be able to get a start-up loan.

2. Does your business have good credit?

If you already have an established company and are looking for capital to improve or expand it then your company needs to have good credit. Lenders aren’t likely to loan money to a company that has been managed into debt or is leeching money when it should be trying to turn a profit. Good credit is the corner stone of a business loan.

3. Do you have any assets?  

A company typically needs some kind of asset to put up against a business loan. This obviously depends on the kind of business and the lender but generally speaking an asset can be the real estate that the company owns and works out of or even the equipment or machinery. If you’re looking for a start-up loan be prepared to put up collateral for the loan.

4. Do you have a concrete business plan?

In order to be approved for a business loan you must provide the lender with a business plan that outlines all the information on how you expect to make your business profitable and how long it will take. A lender wants to see that there is a logical time line for the return on their investment. This is one of the most important parts of the business loan process, if you don’t have an appropriate and well written business plan then don’t expect to be approved.

5. Do you have any business experience?

Unfortunately if you don’t have any experience in the managing of a business or in the particular industry in which your company belongs, it can be very difficult to get a loan. Most lenders need to see that there is at least one partner that has some experience; it eases some of the risk for them. Adding someone with experience to your company’s team will not only help you be approved for a loan but it will help to increase the success rate of your business in the future.

6. Does your business have any amount of debt?

If your business has too much debt then you might find it difficult to find a lender who is willing to approve you for a business loan. A potential lender will see that most, if not all of your income is going towards paying off the debt and not towards growing the business. Lenders usually look for businesses that have minimal debt as they are more likely to handle a loan reliably.

Application Checklist

Once you’ve decided that a business loan will help your company grow you’ll need to do all the paper work and fill out all the forms. Here are some of the documents, legal papers and financial statements that you’ll need.

  • Business licenses
  • Articles of incorporation
  • Copies of any contracts you have
  • Franchise agreements
  • Commercial leases
  • Bank statements
  • Documents that outline  your accounts receivable and accounts payable
  • Personal and business income tax returns
  • Profit and loss statement
  • Projected financial statements

Being prepared is the best and most important thing you can do when applying for a business loan. The competition is tough and the requirements strict, but in the end a business loan can help you create the successful and profitable company that you’ve always wanted. 

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