Many would have heard that one must spend money to earn it. Well, it becomes truer in case of the business platforms. It involves capital investments that pay for inventory, equipment, salary concerns, and future expansion plans. In addition, it also involves advertising for business growth. Though it might all sound simple yet handling them is completely different. This could become a nightmare especially if the company is just a startup!
Raising the business from the ground initially requires great effort and financial aid. But not all are privileged with such options. In such cases, one of the best solutions is to look for a business loan. Though it might sound scary it is the best option one could come up for. Business loans are nothing more than a money lending procedure that one is obligated to repay to the lender following the loan’s terms and conditions. There are various types of these business loans available today so it is advisable for any entrepreneurs to familiarize themselves with the idea of this so-called “Business loan” to make the smart move and avoid unwanted hurdles.
How does this Business loan work?
People lend money all the times but when it comes to business it becomes more of an inevitable factor. Every business people would have lent certain money at a certain point in time. But with the competition getting harder it becomes more important to equip oneself with updated info and the tools to get the business on the path of success.
This idea of lending money for business is different from a personal loan. They are also classified into various types. But all of such types fall into following two major categories.
Secured: Here the money is lent to the borrower as he/she places their business assets as a security for the money. If the borrower fails to repay the money the lender could use the assets to collect his rightful return.
Unsecured: Here the Money is lent without placing any business assets as security and hence the name. This provides the little freedom for the borrower.
So it becomes more important to analyze the situation and choose the type that best suits your needs.
Business Type Matters!
Even though all the business organizations could get a loan of some kind but the number the options tends to differ on what they do.
So it is essential to get familiar with your options before running blindly into borrowing money.
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Different Types of Business Loans
1) Bank loans
This is one of the most common types of loans that people would reach out to. The bank will also consider the financial status of the organization and the individual to estimate the feasibility of loan repayment.
Here the concerned person also bears the responsibility of the loan amount where the organization fails to make the necessary payment.
2) Short term Loans
As the name suggests the money is borrowed only for a short span of time say few days to months.
3) Availing through Credit facilities
Here one could borrow the money with the help of the business credits. The borrower has to pay only the interest on a monthly basis and could return the complete payment once they have it.
4) Assets based Loan
This is one of the most common types of money lending practice in society. Where one tends to borrow money with the value of assets they own. On Failing to pay back the lender gets to own the asset. This could land, stock, property, machinery and etc.
5) Peer to Peer
It is more of social lending practice where one lends the money from the investors. Here the borrower provides the personal guarantee for the safe return of the money.
6) Invoice Finance
Such a practice is quite different from the routine ones. Here the lenders collect the money from the invoices from your business. This is classified into two types.
- Factoring: Here the lender manages all the business processes and collects the money directly from your customers.
- Invoice Discounting: The lenders would release the money before the invoices are paid and you only have to pay the outstanding balance.
7) Working Capital
This method involves the idea of making day to day business payments. It also requires the personal guarantee of the directors of the organization that one is representing.
8) Cash Advance
It does not have a fixed interest rate as the borrower gets the money against his/her future debts. This process involves an initial fee and the daily charges until the complete debt is settled.
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How to Qualify for a Business Loan?
Business loans impose a greater risk for lenders compared to the personal loans. So they tend to follow certain strict criteria and the rules that have to be followed for secured money lending procedure.
Following are some of the eligibility criteria that need to be followed:
1) Business Age
Most of the money leading organizations consider how long the company has been in the market. In most case, they prefer organization with a period of 2 years. Some of these lenders would even consider a year old company to be eligible. But it involves various factors as well.
However, if your company has less than a year old of experience it is better to look for startup loan options.
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2) Annual Income
Your company’s revenue defines how good your business system is. So make sure it meets their expectations of $50,000 to $150,000.
3) Clear with your Proposal
Money lending organizations often look for a detailed plan on how you are going to spend the money and your repayment ideas. This builds your reliability which increases your success rate in getting the business loan that you opt for.
But be more careful as failing at any of these factors could really affect your loan approval.
Once you get clear with all these basic factors it is time we move on the actual step by step instruction on getting qualified for a business loan.
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4) Be precise with your Requirement
Pointing out the major reason why your business needs a financial boost up is a great way to determine the type of loan that works for you. It also makes it easy for lenders to understand how much you need it and why.
5) Be more Calculative
Some might think that it is better to have some extra money to spend on the upcoming expenses. But remember these are lent money which adds up the interest amount as the numbers go up. So, be clearer on how much you really need.
6) Credit reports are Important
Credit reports are the evidence of how successful your business is in the given years. This is similar to that of the credit score but on a large scale.
Credit score: This becomes the key factor when it comes it borrowing money. It defines the trustability of the individual and the organization. So, ensure that you have a good credit score (least is 650 for an individual) and also prepare the credit reports for your company as well. Keep In mind, that bad credit score could greatly affect your business loan plans.
7) Ensure your Eligibility
Most people often consider various money lending sources when it comes to financial needs. But it is paramount to know what works out and what not. So have a discussion with the lenders to understand their eligibility policies. This makes work simple and easy. Rule out the ones that with lesser chances.
8) Be ready with your Documents
Once you are okay with a lender organization it is essential to be prepared with all the necessary documents. This saves time and effort and makes the process more easy than ever.
- Bank Statements, (business loans based on bank statements are the most common ones)
- Personal Credit reports,
- Revenue Statements,
- Collateral ( in case of a secured loan),
- Balance sheets,
- Personal or Business Tax returns.
9) Be thorough with the Norms
Always make sure that you are familiar with all the lender’s norms. IF not it could get you into real trouble later. So, be more accurate on what it says. If you find it to be confusing it is better to talk to the concerned person before making the arrangements.
10) Collateral (in case of Secured loans)
Asset details: If you are looking for a Secured business loan it involves submitting assets as a guarantee for your loan amount. If not, take time to explore the unsecured business loan ideas (business loans without collateral). There are many online websites available that provide a piece of detailed information on the secured vs. unsecured business loans. So make sure you are making the right move here.
From all of the above-mentioned factors, it is clear that Business loans are more than just lending money. It involves quite a risk so one has to be careful and smart to tackle such situations to avoid further troubles in running the business more successfully than ever.