How Do Business Loans Work?
To many people, a business loan is one of the things they think about when they want to start or expand their business. A business loan is based on your business needs and your qualifications to run a company.
You need to put the following into consideration before applying for a loan:
- Determine why you need to borrow the funds – This helps you figure out if the reason you are borrowing the funds for your business is valid enough or not. Do you really need the funds or there are other better ways you may get financing?
- How you intend to repay the funds – Do you have a well thought out plan on how you are going to refund the money back? If not, this is the time to sit down and think it over before heading to the bank to ask for a loan.
- What the money will be used for – You need to have a well thought out budget before getting the funds. This will help you not move away from the set budget and also help you stop impulse buying. You might be buying office furniture and but a new copier that wasn’t necessary. Having a documented reason on how you will use the funds helps you stay disciplined.
After thinking of the above points, you need to set a target on when you want to start applying for your loan. You should always start applying for your business loan early enough. It is prudent to apply before the need arises because lenders take a long time to approve loan applications. They have to go through a lot of paper work to ascertain if you are credit worthy. You also need to compare lenders. Look at the interest rates offered by the banks and pick one that you believe suits you best according to your needs.
Banks require documentations like your business plan that includes financial statements and projections about future revenue. Your plan should indicate what you intend to do with the money. Will the money issued be used to market the business or for buying supplies needed for the firm? While making financial projections, always be realistic. You are allowed to be optimistic on how your company will run but do not overly lie. Make predictions that make sense to you and your bank.
As loans to banks are a business opportunity, the bank will always need to know how they will get their money plus the interest back. In this regard, most banks will look at personal finances of the borrower just in case the business happens to go under. Usually, banks will require you to use personal assets such as a car or a house to secure a loan. These will be used as collateral. Banks may also ask business owners or directors to provide personal guarantors as part of receiving the loan. If the borrower(s) is unable to repay the loan, the bank may access the surety’s assets to secure the loan. However, this is highly unlikely if the guarantor did not list his assets.
Once your loan has been approved, you should always make your repayments on time to avoid having a bad credit history. Even with your best efforts, your loan application may be denied by your financial institution. If your loan has been declined, seek feedback from your bank. You can always check your credit history or if your loan was declined due to a high loan to value ration. If the latter is the case, then you can decrease the loan amount and try again.
Business loans are a good way to get financing for an existing business, but not quite easy for a startup. There are however lenders who are willing to partner with startups. It may be a daunting task to get funding as a startup but you don’t have to be discouraged. Always have your documentation in order before approaching your bank and be well prepared with the reasons why you need financing for your business.
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