Thursday, February 27, 2014

Things to Consider When Getting a Business Loan

Whether you are just starting your business, in growth mode, or just cruising along – there will come a time when you consider getting a small business loan.  A small business loan is essentially a way of financing your business when you would otherwise be unable to.   The number of reasons why you would get a business loan are as varied and numerous as the types of business loans available.  Business owners usually look to lenders to provide business loans to finance vehicles, equipment, real estate and other expenses.  They are generally short term loans (6 to 10 years) but could be longer based on the type of financing required.  Some type of collateral will generally be required by the lender to secure the loan.  Usually this is the vehicle, equipment, or real estate being purchased with the loan.

Lenders usually provide business loans to finance vehicles, equipment, real estate and other expenses. These loans are generally for a short term, such as six to seven years, but the duration can often vary based on the type of financing required.  Some type of collateral generally must be used to secure the loan - usually the vehicle, equipment or real estate being purchased with the loan or what is called a “blanket lien” on other assets. You should also expect to pay a loan origination fee, and of course interest.  The rate of interest will depend on a number of factors including your credit rating.  Business loans can offer the security of a fixed monthly payment and a fixed interest rate, although variable rate loans may also be available.

You may be considering a small business loan if you have the ultimate business idea to grow your business, or you want to spend more on marketing and growth, or really have outgrown the space you are in.  Well, every good idea needs one thing - money.  Success in getting financing of any type, including a loan for your loans for small business is not an easy task.  In today’s economy, lending is tight, and only those who can prove they are not a risk are able to reap the rewards.

When considering getting a small business loan, it pays to be knowledgeable about what a lender will look at before loaning money to a business.  There are a number of different financial items that a lender will look at.  Knowing these criteria beforehand and having the answers in place will go a long way in getting you that loan.  The first thing that a lender will look at is your ability to repay the loan.  An established business will definitely have an advantage as it has a proven track record and can provide financial statements from prior years that can show growth and profitability (or the potential for it).  A business that doesn’t have high profits but has an excellent marketing plan to expand into a new key market also has the key information that the lender will want.  A start up business has the disadvantage of not having a track record of any type, and may need to overcome this disadvantage this with excellent business planning and a well thought out marketing strategy that will show how the business will make money and how it will pay for the loan.

The second factor that lenders look into when considering a small business loan is your individual credit history.  Just as if you were getting a personal loan, the lender will pull the three major credit reports and will check scores for credit worthiness before issuing a small business loan.  Being prepared by checking over your credit reports and being familiar with your credit score is always a good idea when apply for a loan.  Be sure you are checking for inaccuracies and errors, if there are any you should start the process to correct the information.  Doing what is needed to correct any past due accounts will also be helpful.

Lenders will also consider equity prior to issuing a loan.  They will look for some form of equity in any business before lending money to it.  Most of the time, they expect the business owner to have invested at least one quarter of the total value themselves.  Along with equity comes collateral, and before issuing a small business loan, a lender may ask for some type of collateral.  Lenders are more willing to invest in a business if there is a secondary way for them to get their money back.  A business that has collateral that can be sold off in the event of defaulting on a payment will have an advantage on getting a loan over another business with no collateral.

Finally a lender will look at business experience.  You will need to show them that you have the business experience to make things happen.  Lenders are never too eager to lend money to someone starting a business in a field which they have no prior experience in.  Either you will need to gain the experience before getting a loan or have plans in place to hire someone with that experience to run the business for the lender to be comfortable in loaning the money to the small business. Knowledge equals profit in the eyes of the lender.  It is critical that you consider what the lender will require from you when seeking a business loan.  This can only help you in getting a little bit of an edge and perhaps having someone give your small business loan application deeper consideration.

Knowing how to get a small business loan may seem like a difficult proposition, but in reality it’s not too difficult when you are armed with the right information. Knowing what a lender will require is a good start.  You will also need to consider what type of loans you are looking to take advantage of (small business loans, lines of credit, specialized loan programs), and more importantly what you are going to use the funding for.  That will help ultimately determine what type of loan you should be looking at.

So really think about what you need the money for.  Of course there are urgent needs, long term needs, and things that you just need to help your business run.  Each of them may require a different type of loan, with a different term.  The main types of loans to consider for your small business are ones to pay for inventory, to increase working capital, and for real estate purchases.

A major characteristic to consider when contemplating loans is the length of the loan and whether it is short term or long term. The length of loan is typically matched to purpose of the loan.  Long-term loans are used to finance the purchase, improvement, or expansion of fixed assets such as equipment, company vehicles, and real estate while short term loans are used to finance current or short term assets and liabilities such as accounts receivable, inventory, and accounts payable.

One type of short term loan is to fund inventory purchases.  Almost all small businesses need inventory to get started, and then also need to anticipate future inventory needs.  Your business will be a success or failure depending on your ability to be able to consistently give your customers what they want, exactly when they want it, and optimally give it to them before they know they even want it.  Meeting that demand keeps you in business; going above and beyond helps you grow. Since most small businesses are seasonal in nature, you may need more inventory before you have made enough to pay for it.

Lenders have special loans available to small businesses designed to be used to just purchase inventory.  Also called “inventory financing” it is a line of credit or short-term commercial loan made to a company for the specific purpose of purchasing products for sale.  These products or inventory will serve as collateral for the loan if the business cannot repay the loan.  Inventory financing is especially useful for businesses that must pay their suppliers in a shorter period of time than it takes them to sell their inventory to customers.  Lender loans to purchase inventory are generally short-term in nature and companies are usually able to pay them off the season is over with the proceeds of sales from their seasonal sales.

Loans to increase work working capital are similar to inventory financing.  They are short term loans designed to get and keep your business running.  Lenders will sometimes provide short term financing to small businesses to enable them to get off the ground and grow.  Working capital loans are a great way for small businesses to generate capital and start focusing on business growth. To be able to run and grow a business it is critically important to have capital on hand to cover costs, payroll, and any other unexpected costs that may occur.  If you are aware that you will have a slow period during the year, you can use the loan to meet your payroll or other recurring payment obligations.  Or you can use a working capital loan to stock up on inventory before the coming holiday season and you don’t have enough cash on hand.  You can even use your loan to buy things on sale!  Yes, take advantage of seasonal discounts offered to you by vendors.  You don’t have to exhaust all of your finances to meet your financial needs use working capital commercial loan to keep money in your businesses pocket as well as meeting your needs with cash to spare.

Perhaps you are looking to make a real estate purchase for your business.  Small business loans are available to finance real estate!  If your business is growing, turning profits, but you are busting at the seams in your office – you may be a great candidate for a commercial real estate loan.  You may want a completely new space for your business and warehouse, or you may just need to expand on what you already have.  Unlike working capital and inventory loans, real estate loans are a type of loan for small businesses that is long term.  Longer term financing is available to business owners to allow them to purchase commercial real estate or to expand their existing operations, and in turn grow their business and as a bonus bring jobs and money to the local economy.

Lenders are more likely to approve commercials real estate loans for existing businesses that want to purchase real estate to expand their operations. If a business has been established for a while and ready for expansion, then the lender has some confidence that the business is successful and will continue to be.  Of course the lender will look at your financial statements, and if you are ready to expand they will see that your company is turning a profit, has a positive cash flow, and positive forecasting numbers for the future.

And another consideration when looking for loans for small businesses, is do you qualify for a special loan program?  There are a number of specialized financing programs available to certain industries, groups, and business sizes.  One of the largest most diverse programs is through the small business administration.  The small business administration helps small businesses grow.  They offer special programs for veterans, women in business, and are perfect for those who many not qualify for traditional financing.  Small Business Administration loan programs are designed to help borrowers who may not meet the lending standards set by most banks. These can include issues such as a recent change in business ownership, a shortfall in collateral to secure the loan, business principals who have a low net worth or the need for extended payment terms.

These are U.S. government-backed term loans that are available at most banks and commercial lending institution.  In any given year, the SBA can guarantee tens of billions of dollars-worth of loans that support tens of thousands of small businesses.  Loan terms can last up to 25 years for real estate, up to 10 years for equipment (as long as the equipment is likely to stay useful during that time) and usually up to seven years for working capital. Interest rates are also competitive because the SBA limits the interest rate spread that banks are able to offer on the loans.

There really is a lot to consider when you are pondering the possibility of obtaining a business loan.  But, once you have done your research, decided on what and how much you need, you will be armed with everything required to get that business loan.

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