When people start up their own company, they may have many dreams. Perhaps they involve getting global clients or starting a chain of shops. Alternatively, people may wish to give something back to their local community, for instance through donating gym equipment to worthy causes.
Before new companies can get up and running, many need to secure sufficient finance. One way to achieve this is through a business loan. It may be that this is something you are considering taking out at the moment, and you are in need of more information. If this is the case, this article will explain what they are and how they work.
What Is A Business Loan?
It relates to money lent by a financial institution to help fund the operations of a business. It can be used to purchase equipment or property, pay employees, or finance inventory. It can also be used to help with company expansion. Business loans are generally easier to qualify for than personal loans.
These loans can be a helpful financial resource for new business owners looking for capital but who don’t have access to traditional lines of credit from banks or other major institutions. There are many different types of business lenders out there and each offers unique benefits, depending on the type of business you own/startup and your personal needs as a borrower.
Unsecured Business Loans
An unsecured business loan is a type of financing that does not require collateral (e.g. business equipment or real estate). Traditional lenders will acquire an asset as security and use it to cover any defaults in payment, but with this kind of business loan, there isn’t such assurance. This leaves the borrower at higher risk. Unsecured business loans can be suitable for those whose credit score disqualifies them from secured loans.
Many loan companies provide helpful free content on their websites. By visiting them, you can learn more on unsecured business loans, including whether it’s ethical or Sharia-compliant business funding. There are often client reviews and FAQs that discuss charges, additional costs, and who can get one.
Secured Business Loans
Business loans are usually secured by company assets, as we have previously discussed. Should the business default on the loan payments, they will lose the equipment or property that was used as collateral for the loan. If the business has assets that are not easily seized (such as inventory or accounts receivable) unsecured loans may be a better option.
A secured loan might also require collateral from an individual who is considered to have strong enough credit to serve as a guarantor for the business. If you do not want to put up your personal assets as collateral but still need financing, consider asking friends and family members if they would like to invest in your company. It should go without saying that this tactic only works well with those whom you know very well – and where you are confident you can repay the loan as agreed!
Regulation
Business loans are not regulated by any federal or state agencies that protect consumers.
Having said that, lenders must abide by fair lending practices and other consumer protection laws in order to stay compliant with the IRS.
Interest Rates
The interest rates on business loans can vary, based on multiple factors, including but not limited to:
- Industry type
- Amount requested (higher loans means higher interest)
- Term length (longer terms equal lower monthly payments)
- How it’s repaid (installments vs balloon payment)
Regardless of what you borrow, the business loan interest rate is usually fixed. Unsecured business loans usually have higher interest rates than secured business loans because the lender is taking a higher risk.
Business Loan Fees
They can vary based on the amount of time it takes to process your loan. In some cases (and providing you submit all the required documents in a timely manner), there will be no fees for processing or underwriting. Some lenders charge origination fees, which are basically an upfront fee that gets tacked onto the total borrowed amount – they are usually waived if the loan is repaid.
The charges vary depending on how much you borrow and a range of other factors specific to each lender’s program. Examples are industry type, monthly payment frequency, term length, etc.
Repayment Terms
Any loan you take out will have specific requirements that should be followed closely in order for your business to continue receiving funding from the lender or investor. It’s also worth discovering what happens if these rules aren’t met, so you know what to expect ahead of time.
Business loans can come with both short-term and long-term repayment plans, which means there is something available for every type of budget.
Lenders
The companies that offer business loans are different from those that provide consumer financing. There are a variety of lenders who specialize in small businesses and who understand the unique needs associated with this type of loan. These companies can help you find a good deal on your next business credit card or line of credit, as well as assisting you with tax planning for your new company.
As with many types of small business finance options, banks are usually at the forefront of these services. This is because they have lots of experience dealing with entrepreneurs, and they understand their unique concerns and needs. Small businesses owners often try contacting banks first because they can sometimes offer advantages over other lending companies.
General Advice
You could also approach angel investors or check out peer-to-peer lending through such sites as Prosper. You could also research crowdfunding to see what it could have to offer you. There may also be ways you can raise some extra cash yourself by making a few sacrifices, selling things, or taking up a side hustle.
It’s essential that you read up in advance and get the most suitable loan from a trusted source. In turn, it could provide the cash injection your business sorely needs in order for it to become established and thrive for many years to come.
