Business Loans

Every day people go to financial institutions to borrow money for everything from homes to cars. However, individual consumers are not the only ones who need loans. Businesses borrow money from financial institutions, private funding groups and even friends and family to fund everything from start up businesses to moving into a new location. Although many people dream and actually follow through with starting their own business, over half of new businesses fail in the first year. This makes getting a business loan even harder to get, financial institutions want to make sure that businesses are solid and creditworthy. Therefore, over time, a complex system of checks and balances has been used by many lenders in order to make sure that businesses are worthy of borrowing their money. Even though the means of getting a loan has improved, with the growing number of businesses out there, Business loans are just as complex as ever.

There are many different types of commercial loans; all differ based on the borrowers needs. Some borrowers need money for equipment, some just need extra money on hand for the "what ifs" that owning a business brings. Although there are several choices, the most common Business loans are equipment loans, real estate loans, business capital loans, lines of credit and business credit cards. All of these types of loans come with different requirements and there are many more loans such as corporate loans that are only for larger companies. The size of your company will determine the type of loan you will get, who will handle your loan, and the size of your loan.

Equipment Loans

One of the most common types of loans that businesses get are equipment loans. Equipment loans can be given to companies to purchase equipment at startup or to buy newer equipment after the company has been around for a while. The type of equipment varies, but can include everything from trucks and farm equipment to office equipment such as computers. Most financial institutions will use the equipment itself as collateral. Collateral is something that the borrower and lender agree upon that the lender can take if the borrower does not pay their loan. For equipment loans, borrowers can choose to take collateral out on just one piece of equipment, or in cases of large amounts of equipment, they may take out what is called "blanket" collateral, which is collateral on all the equipment owned by the company.

Lines of Credit

A line of credit is a temporary source of financing. Typically the term on a line of credit is between twelve and twenty-four months. A line of credit is basically a set amount of credit that borrowers are allowed to draw and pay off within the limits set by the financial institution. This means that if you need money, the financial institution will take it off of your line of credit and put it in your deposit account. This type of loan is a lot like the home equity that many individuals seek. A line of credit is truly meant to help with short term needs. For example if you need to buy inventory during a peak time of business, borrowers can use the line of credit, but once the inventory is sold, you should pay down the line of credit. That is the reason why lines of credit are for such short terms. By having these terms so short, the usage of the line can be more carefully monitored.

Real Estate Loans

Real Estate Loans are loans to purchase commercial and residential real estate. Borrowers may get a real estate loan to purchase their own real estate that their business intends to occupy, or real estate for another business or individual to occupy. This means that a borrower could take out a loan to purchase property and then rent that property out to another business.

Although there are probably other ways to seek loans for your business, the three most common places to get a loan are banks, money from family and friends, and venture capitalists. All of these sources of financing have their pros and cons, and they are based solely on the business themselves. Borrowers should do a lot of research about each type of lender before making a decision, in order to be completely informed.

Private Funding

Many people choose to get loans from their family and friends in order to start their own business or improve upon an existing business. Although these loans are not the type of loans we talked about above, they can become just as complicated. If a friend or family member is willing to lend a borrower money, there is often much more pressure to pay the money back, and the lack of legal interference can cause stress on these types of relationships. However, there are reasons that a borrower would rather borrow from a friend or family member. If they can get the money, they are often not going to have legal ramifications if they can not pay the money back right away. Also, borrowers will more than likely get their money without having to put down collateral.

Banks

Banks are probably the most common places for borrowers to seek Business loans. Almost all banks can offer some kind of business loan, but there are many factors that effect what time of loan that they can provide people. Smaller community banks may only offer smaller loans. If you are a bigger company, especially a corporation, you will probably need to seek funds from a large bank. Banks are going to carefully scrutinize all potential borrowers before allowing them to receive a loan. This includes performing credit checks, conducting interviews, and viewing business plans, among other things. Most banks will require you to provide collateral or have some sort of financial security before they give you a loan.

Credit is a factor that will come up constantly when a borrower is trying to get a loan. It is more than just a list of paid and unpaid debts, credit looks at several different factors as a whole including collateral, cash flow, character, and net worth. Although there are some things that can be overlooked, bad credit is typically not one of them.

Collateral

Collateral is something that financial institutions seek in order to protect themselves against total loss in case a borrower can not pay back their loan. It can be a tangible thing like a home or other real estate or non tangible things like stock, bonds, or the contents of a bank account. Almost all business loans require some form of collateral, if they don’t they are called “unsecured loans.” Unsecured loans are rare, most financial institutions require some form of protection. There is another option that is a form of security, similar to collateral. This is a guarantor or cosigner. A guarantor or cosigner is a person with strong credit who will sign for the loan with a borrower. If a business has a guarantor and they default on the loan, the guarantor can be held liable for paying the loan. Nearly all Business loans will require the business owner to sign as a guarantor; a cosigner is typically an individual who is not involved in the company but provides financial strength.

Cash Flow

Cash flow is the collective look at how much money you or your business brings in, how much your expenses are, and how much you have left at a given time period. To determine a potential borrower’s cash flow position, you take all of their cash inflow and subtract all their cash outflow. What is left over is your available cash flow. The higher the available cash, the better your cash flow is. Most of the time, financial institutions look for an excess amount of cash amounting about 20%. This is a very telling factor about your finances. If you can barely pay your bills as it is, getting a loan may put the business at to high of a risk of not being capable to pay back the loan. The extra cash flow is important because it gives business owners extra flexibility in case they have an emergency or unexpected need for cash.

Character

Character is pretty much just what is says, the character of the business or business owner. Do they have a lot of bad credit? Do they often pay bills late? Have they been involved in business deals before this one? How did they go? These are all questions that lenders ask, when evaluating a potential borrower’s character. Character can be something that can make or break your chances of getting a loan. If you have great character, but not a lot of collateral, the financial institution will be more willing to work with you, than if you have a ton of collateral, but two failed business and bad credit.

Net Worth

Net worth is what you own versus

There are many factors that are considered when a lender is screening a potential borrower for a loan. As it was stated above, these factors are more likely to be stringent at banks and with venture capitalists, then with loans from friends and family. Things such as your credit, your business's credit, your personal business history and experience, are all considered when considering people as potential borrowers.

Credit is probably the most important factor that is considered when a potential borrower seeks a loan. Credit is the record of you financial life, a sort of report card of all the financial interactions you have performed throughout your life. This includes things like paying your cards and bills on time, bankruptcy, and loan charge offs amongst other things. If you have never declared bankruptcy or defaulted on a loan, your credit will probably be good. However, negative marks on your credit can and probably will prevent you from getting a loan. Financial Institutions don't want to lend money if there is a perceived high risk in the loan. If a potential borrower has declared bankruptcy in the past, or has had charge offs, that increases the chance that they will default (again) on their Business loans. There are also credit companies that report on the financial health of businesses. They measure many of the same things, but instead of looking at personal credit, they are looking at the health of the business as a whole.

A potential borrower's business experience is probably one of the most significant factors in deciding whether or not they qualify for a business loan. Business experience is not just experience in general, but specific experience in the area related to the type of business you have or what to start. If you want to start your own Italian restaurant, but you've never worked in a restaurant, and don't know anything about Italian food, then you are going to be hard pressed to find a business lender that is going to want to give you a loan. Studies have shown that experience makes a big difference in whether or not a business will succeed, and that means that banks are taking an even bigger risk when they loan to inexperienced borrowers. Since this is such an issue financial institutions expect proof of extensive experience before they allow people to borrow money. This is mostly achieved through the creation of a business plan.

A business plan is an extensive layout of a borrowers proposed business. Potential Borrowers research everything from operational costs, to the cost of furniture for their business. They look at other similar businesses to see what they did, and how their businesses performed. From this, they decide what they are going to do in their business to meet or improve those standards. They study how much money businesses made, the best locations for certain types of businesses and who they will hire to work for them. This gives lenders an idea of how prepared a business is, whether or not they have thought everything through, and ultimately, whether or not they should get a loan. Even if you have collateral, a cosigner, and stellar credit, a bad business plan can lose a loan for your company.

As one can see, Business loans are extremely complex loans. There are many different types and they can be borrowed on many different terms. If a person seeks to borrow money for business purposes, they should go to several different financial institutions, find out everyone's rates, what their terms are, and what each bank can do to make your business run more smoothly. It is extremely important that if you have any questionable credit that you get it cleaned up before you visit any financial institutions, this will probably be one of the first things that potential lenders check before they even consider given a potential borrower a loan.