Do You Need a Business Loan?
Understanding the ins and outs of business lending will allow entrepreneurs to make informed decisions about the future of their enterprise.
Many people rely on loans to help meet certain financial needs. Since owning your own home is very expensive, it's common to use a mortgage to purchase one and pay it off slowly. Other expensive but necessary things like a car or college degree are often paid for with loans. That's why it's not surprising to know that many businesses, from corner stores to global corporations, rely on loans to grow quickly and meet the needs of their customers.
Small business owners often rely on business loans to get their company up and running, or to expand and seize a market opportunity. A loan can accomplish all of these, but they also come with their own unique risks. Understanding the ins and outs of business lending will allow entrepreneurs to make informed decisions about the future of their enterprise.
Business loan basics
"Before committing to a business loan, be sure to evaluate all your options."
In most instances, a business loan isn't much different than any other conventional form of financing. Once a business applies for a loan, the lender will check to make sure the borrower has the ability to pay it back, in addition to any interest. As legal advice website Nolo explained, the lender may also require some form of collateral before making the loan. In a typical mortgage, the collateral is the home itself, and if a borrower can't make regular payments, the lender has the right to own the home. Business collateral might take the form of any property owned by the business, including real estate or equipment.
There are also several laws that pertain specifically to business loans which vary from state to state. For example, as Nolo explained, many states have usury laws which limit the amount of interest a lender can charge. This is generally no higher than 10 percent, but business owners should check their state's laws to be sure they are getting a good deal.
Come with a plan
In addition to the usual requirements, it's typical for business lenders to require borrowers to submit a specific plan for how they will use and pay off the loan. A loan application's success or failure has a lot to do with this business plan. To write one effectively, Entrepreneur suggested prioritizing the basics :
- Cash flow - both current and anticipated
- Collateral - especially personal assets
- Co-signers - ideally with solid credit history
- Marketing strategy - proving you know what you're up against
- Management plans - to show you can get results
Every lender's appetite for risk is different, so it's important to also perform research on institutions that might be more willing to help given the business's situation. Being prepared can save ample time and money.
As is probably clear by now, obtaining financing for a business is no small feat. Fortunately, there are a number of programs available to make things easier on businesses looking for a good loan.
The U.S. Small Business Administration may be a great place to start. The SBA offers a variety of business financing programs , including the 7(a) Loan Program which is designed to meet most needs. This option doesn't directly provide financing, but can essentially give a business a stamp of approval in the form of a guarantee from the government. With this certification, a business may have an easier time getting approval from a reputable financial institution.
This is just one of countless special opportunities afforded to U.S. businesses. With these options in mind, entrepreneurs can go into the loan-seeking process ready to grow and flourish.
Learn more about Vectra Bank's business loan options.