Small Business Lending Basics

Businesses of all sizes frequently acquire loans for numerous needs. Before journeying into the world of company management and ownership, individuals require some knowledge of small business lending basics. Some lenders prefer to work with companies established for 3 to 5 years, while others readily assume the risk of new business ventures. Lenders provide various loan types to accommodate different business aspects including start-up expenses, cash flow, expansion, investments and inventory.

Small business owners must understand that each loan application, regardless of intention, automatically transfers to the individual’s credit report. Here, other creditors have the opportunity to view a company’s borrowing and payment history. For this reason, ensure loan acceptance by filling out applications thoroughly, providing all the necessary documentation and detailed business plan or records requested.

Pre-loan Preparedness

Company owners and potential owners must prepare appropriate documentation prior to the loan application process. An applicant must prove the ability to repay the loan and the commitment to the business. Part of the paperwork a first-time business owner requires includes personal financial statements, and 3 years of tax returns.

Financiers desire a well-constructed, detailed business plan, featuring monetary requirements, cash on hand, necessary equipment and facilities, collateral, projected income and expenses, in addition to contingency plans. Include personal experience and qualifications and the experience and qualifications of associates or employees. Established business loans require similar documentation, but also include profitability and loss records in addition to the company‘s tax returns.

Choosing a Business Partner

Consider a loan officer or creditor as a business partner. During every part of the company’s lifespan, this person or institution invests in the venture and expects a return on that investment, albeit the loan amount plus fees and interest. Include a personal bank as the first place of loan inquiry. As an established client, potential or established business owners already have a relationship with the facility. Acquiring a loan from a familiar environment may improve chances of acceptance.

Before choosing a specific financier, ask the lender for references or interview other business owners. Determine which facility treats clients fairly, provides assistance with applications and documentation, supplies entire loan amounts, and how the institution handles small business hurdles. Loan brokers evaluate the needs of small businesses and provide suggestions regarding other lending institutions. Higher rates accompany these loans for services rendered. However, in many instances, the firms supply approvals not otherwise easily acquired.

Loan Types

Small business applying for loans can expect interest rates ranging from 8% to 14%, plus application fees (typically <$100) and other stipulations. Beware of low cost loans that add hidden fees that in effect cost the proprietor more in the end. Loan types vary in the amounts available and the time of repayment. If desiring to pay off a loan in its entirety prior to the projected period, ensure no early repayment penalties apply.

Term loans require monthly payments over a specified length of time. Proprietors use short-term loans for needs that ensure a quick return. Companies repay the loan in one lump sum in a year or less. Line of credit loans provide small increments of money to generate constant cash flow. Many businesses acquire and pay off these loans annually.