Business loans are the loans that are provided to businesses for different purposes by the lenders. These loans may or may not have lesser restrictive requirements, which enable businesses to secure their funds. Business loans can also provide further incentives for the borrowers that can minimize the expenses of their business.
What is a Business Loan?
Businesses, whether small or large, could be engines of the economy. However, there is a great need for these enterprises to find ways of funding which then leads them to acquire business loans. Many businesses find the lending process to be frustrating and complicated. Yes, it could be difficult to obtain funds but it is still needed to maintain the flow of cash in your business.
Should I take a Business loan out for my business? (Video)
Here are some ways of improving your odds of getting a business loan
- Put yourself in the shoes of the lenders. Lenders usually ask themselves why they should let you borrow money. So, if you are applying for a business loan, consider it as if you are applying for a new job. You also need an impressive application.
This means that you should understand your financial status and decide on the things that you can put as collateral, such as your own house. Business people who do these are the ones who strongly believe in their businesses. Credit quality and cash flow are other factors t consider, too. Make sure to look professional.
- Determine how much amount of money you need. Some businesses are fond of borrowing a monetary amount that is really higher than what they need. This can cause you to be rejected by lenders.
- Learn from your previous mistakes. If lenders reject you, you should know why. Figure out your mistakes and do not do the same mistakes again when you seek another business loan lender.
- Use poor credit as collateral. Others in the B2B environment use poor credit with receivables as collateral. For alternative lenders like internet lenders, they will charge you with higher interests but will have a relaxed standard.
- Always consider working with SBA lenders. Working with Small Business Administration-backed is the first step for you. Most businesses think that they are not eligible. These SBA loans oftentimes have lower interest rates and have reasonable repayment terms. It does not mean that if an SBA lender rejects you, others will also. Not all business lenders are like this.
- Determine what you are getting into. This means that you need to learn the Annual Percentage Rate (APR) of the business loan you are applying for. You should know what the fees are and the pre-payment penalties. Always be informed.
- Online lenders may also provide funding. As mentioned, if other loan alternatives fail, for instance, those who have bad credit, online lenders can also be an option. Aside from eve higher interests, they have also known for poor transparency onerous terms. So, ensure that if you are badly in need of money, you should be able to pay the debt.
- Small banks are more helpful compared to big banks. There are bigger banks that only prefer to work with large customers. If you are planning for a business loan, try out small banks first.
When Should You Apply for a Business Loan?
Source Bank loan process
Yes, it is true that not all reasons of borrowing money for your business are good but that does not say that there are no good reasons for you. Well, if your business is now ready to go to a next level but you are currently short of capital, you might want to consider applying for a business loan. Here are the factors that would tell when you should apply for a business loan:
- Expansion of Physical Location
If your business space is already becoming limited for your operations, there might be a need for you to expand. However, expansion of the physical location of a business is not cheap. You surely need funding to make this happen. The expansion is a good indication that your business is growing but along with this growth is the need for you to be financially prepared for it.
- Building Credit for the Future
If you are thinking of applying for larger funding in the coming years, applying for a small business loan today is a great step. Start with a smaller loan so that you can effectively build your business credit.
If you need to buy equipment to improve the operations and performance of your business, you need a loan to finance the equipment such as machinery or IT equipment and other tools. Equipment loan sometimes requires the equipment to be the collateral like for car loans.
Inventory is one of the highest expenses for any type of business. Just like to buy equipment, there is a need for you to keep replenishing your inventory with high-quality choices. Business loans are common to seasonal businesses because there are times when you need large cash t o support your inventory.
Whatever you may have for applying for a business loan, be sure to take the loan that will serve you business right. Ensure to pay the business loan over a period of time as your business succeeds. All business decisions that you make is risk-taking and business loans are one of them.
What are the Types of Business Loans?
A business loan is taken into account for several reasons. It is an excellent tool to secure financing that can maintain any business operations. Whether you want to invest it in necessary equipment or start a new branch, a business loan is a perfect solution that you can ever have.
Not only that, it is easy and simple to gain because there are amazing lending institutions for you. With a good credit score, you can get the loan you apply for conveniently. You can also have enough capital during tough economy issues.
Before you apply for a business loan, there are types that you need to consider. Here is the list of the types of business loan.
Unsecured Business Loan
An unsecured business loan is a type of loan that does not require any collateral. However, it is primarily based upon the creditworthiness of a small business borrower. Its best example is the signature loan. When you have a good credit score, you have more chances to qualify for an unsecured business loan. But, most of the banks out there prefer to secure loans with collateral such as equipment, real estate, and other business assets.
Many lending institutions or banks ascertain the loan-to-value ratio of your declared collateral. They based in on the nature of your asset. When you need a high amount of business loan, it is better to ask your chosen banker. You have to understand that banks are different when it comes to set value. In doing so, you can get the loan that your business completely needs.
Nonetheless, there are various lenders who consider unsecured business loans in a different manner. They apply a lien on business assets until borrowers fully pay the balance. This allows you without a superb credit score get a small business loan. When you do not have enough credit score, this is the loan that is an ideal solution you should grab.
Secured Business Loans
A secured business loan is a common type of funding for small businesses. It is a business financing that is secured by personal guarantee and a collateral (a valuable asset). Whatever your option to secure your loan application, you promise your chosen lender to pay your debt if you are unable to pay your loan, a bank institution can employ the collateralized asset to recover their losses.
At the end of the day, you can get a more wonderful loan offer with lower interests and longer payment terms. Instead of taking advantage of loan sharks near you, choosing a secured business loan is an efficient decision. You just have to do your responsibility to avoid complex issues in the future. When you do not want to get your valuable asset, repay your debt.
Applying for business financing cannot only be a daunting task but also a frustrating one. Though you pass all the requirements, you may still not qualify. Bankers strictly secure business loans as they want to eliminate their risks. If you have an amazing credit score and profitable small business, your loan can get approved fast.
Although the process takes time, you can have enough principal within a peace of mind. If you need cash right away, this type does not suit to your situation. You should select other types of business loan.
Residentially Secured Overdraft
A residentially secured overdraft serves as a safety net when your expenses are high. It can also be an essential part of your budgeting techniques. It is said as a residentially secured overdraft because you will use your property as a security for your overdraft. When you make this as your number one option, you can enjoy various benefits such as low-interest rate and no monthly fees. But, choose a reliable service provider to make satisfaction guaranteed.
Commercially Secured Overdraft
Aside from residentially secured overdraft, you can apply for a commercially secured overdraft. Whether you want a flexible short-term finance or variable interest rate, you can experience your goals depending on your lending institutions.
When your present bank does not have the factors you weigh in mind, you are very fortunate because there are many outstanding providers for you. With enough time and unmatched patience, you can find the one that best suits to your case.
Applying for commercially secured overdraft can give your business ample budget. You can operate it successfully. When you need to buy materials for your product manufacturing, it could be a great financial assistance on your part. You can also have enough money for business expansion and other indispensable ventures.
Residentially Secured Term Loan
Do not you have sufficient budget to develop your small business? Do you want to buy premises for business expansion without cash in your bank account? If that is the case, worry no more as there are residentially secured term loan that is designed to cater all your criteria.
You do not have to borrow money from the modern lending institutions because they can tremendously affect your business as well as life. Use your residential property as a collateral to get a secured term loan.
As a borrower, you have to be more careful to avoid choosing unreliable lending companies. With a trusted provider in the industry, you can experience a good loan term, low application fees, low monthly expenses, secured residential property, and much more.
Whatever your credit amount is, you can pay your debt. Within a long term payment, you can acquire high revenues and Return on Investment (ROI) for your loan. As a business owner, you have to try your best to grow your residentially secured term loan to prevent predicaments you cannot afford.
Commercially Secured Term Loan
Apart from borrowing a term loan that is residentially secured, there is a commercially secured term loan. When you cannot make your house as a collateral, your small business can be a good valuable asset to secure your loan.
This might be a risky decision, but you can lessen loan related adversities with a reputable banker. Within a reasonable loan term payment, use the money to improve your business. You can employ it from equipment development, principal, business expansion to marketing strategy.
Business Loan Features
A business loan is what entrepreneurs should choose when they lack the budget for business growth, marketing, and success. Instead of borrowing loans from illegal providers like loan sharks, they should apply for a business loan. When you have the same situation, you should make a dependable and incredible lending institution as your leading option. For sure, both of you and the lender will feel ensured.
You can protect your valuable assets such as residential property and equipment. Your chosen banker will also have an assurance that you can pay your debt within a loan term. As a borrower, you should have enough background on a business loan, types, and features.
To guide you, below are some business features you have to understand.
The business loan has a feature that allows you to make additional repayments. When you have enough money to pay your debt or do not want to have a long-term process, you can add your repayments. You can double your monthly payment so that you can fully pay your balance. If you have plans to make this action, you have to know whether your provider allows it. If they do not have such regulations, there are extraordinary alternatives for you.
Redrawing your facilities can help you pay a loan. When you apply for a home loan with a redraw facility feature, you can borrow the money you have repaid. Usually, it is offered with a range of interest rate loans. The higher your loan is, the higher your interest rate is. With a certified and qualified lending company, you can encounter fairer interests though you have a bigger amount of loan.
A redraw facility can also make you flexible on how you will repay your debt. When you have enough savings in your bank account, you can use it to fix your loan. Like additional repayments, you can pay off your loan as quickly as possible. As a result, you will never experience headaches on how to finish repayment process.
Lump Sum Repayments
Lump sum repayment is a single payment for a business loan. It allows you to repay your whole debt within a short run. If you have enough cash to be fully paid, you can choose lump sum repayment. Depending on your lender, you can achieve this feature of business loan features.
Switching between variable and fixed
When you apply for a commercial loan, you may choose a variable interest rate or a fixed interest rate. All over your loan, you can switch between the former and the latter. Both of them provide a lot of benefits. That is why you have to opt the one that suits you.
Are you going to apply for a business loan? If so, you have to be a responsible borrower so that you can borrow money again from your financing company. With the given business features, you will definitely have a hard time to pay off your debt. In addition, just use the money wisely. If you cannot handle it accordingly, you have to do your best.
When borrowing money from a lending institution is more complicated, be patient and determined in order to get what you need. You also have to boost your credit score so that you can increase your chance to get a high business loan approved.
How to Find an Outstanding Value Loan
Loans are provided by lenders to borrowers with a payment of the interest in return. Borrowers agree to pay their loan as well as the interests over the period of their loans within a series of periodic payments.
As your regular payments clear out your loan balance, the Present Value (PV) of payments must all be equal to the value of your loan. An example that best demonstrates this is the one below.
- Suppose your business takes a loan of 100,000 (PV) for 4 years at 6% interest rate and you have agreed to pay it in 4 equal installments with the amount of 28, 859.15 every year-end. The PV of the annual payments will be given by the PV of the annuity formula:
PMT = Periodic loan payment = 28,859.15
i = Loan interest rate per period = 6% per year
n = Number of loan payments required = 4
PV = PMT x (1 - 1 / (1 + i)n) / i
PV = 28,859.15 x (1 - 1 / (1 + 6%)4) / 6%
PV = 100,000
At the beginning of your loan, the PV of your loan installments is always equal to the amount of the loan.
Calculating Outstanding Loan Balance
As mentioned above, the PV of your loan installments is always equal to the amount of the loan. It also means that as the loan installments are already paid, the PV of the outstanding loan installments should also be equal to the amount of the loan at a certain point to say that it is equal to the outstanding loan balance. Outstanding loan balance equals to the PV of the outstanding loan installments.
You can use this information to compute your outstanding loan balance. For instance, after the payment of your first installment, the outstanding balance must be the PV of the 3 remaining installments like the example below.
Pmt = Periodic loan payment = 28,859.15
i = Loan interest rate per period = 6% per year
n = Number of loan payments remaining = 3
PV = Pmt x (1 - 1 / (1 + i)n) / i
PV = 28,859.15 x (1 - 1 / (1 + 6%)3) / 6%
PV = 77,140.85
Outstanding loan balance = 77,140.85
To further check, you can show this by simply computing the outstanding loan balance even without the use of the annuity formula. With every payment, the loan balance drops. As an example, after your very first payment, your outstanding loan balance is the original amount of the loan added to the interest per year and less your first installment.
Loan balance = Loan amount + Interest - Installment
Loan balance = 100,000 + 100,000 x 6% - 28,859.15
Outstanding loan balance = 77,140.85
As a business owner, a business loan is both a blessing and a challenge for you. Whether you are a start-up or already established, additional funds are always needed. Not only to make up for the losses but also the maintain the cash flow of your investment.
Oftentimes, it takes times to see the return of business loans on your investments. But as long as you are dedicated to repaying and using your business loans for the improvement of your business, everything will fall into place.
All of the information mentioned above can surely teach you everything you need to know about business loans. If you are thinking of applying for one, it will now be easier for you to choose which loan suit your needs best. Take time to know what business loans can do for you as well as your responsibilities as a borrower.