What Is a Business Loan and How Does It Work?

27-05-2019 | Dojo |

My readers know my stance when it comes to debt and how much I try to stay away from it. The only 2 possible loans I’d accept right now would be a mortgage, to leave our daughter with a house, when she’ll be a grown up, and a business loan, to speed up the development of my own graphic and web design business.

While I never thought jumping to borrowing money is a good business decision, there are indeed many reasons why a business owner would look into a business loan.

If you are in the position to look into this type of loans, let’s try to get more details about how they work:

What Is a Business Loan and How Does It Work_

What’s the deal with business loans?

Business loans are loans that are based on the needs of your business. They’re also based on your own qualifications, and they’re meant to start and/or run your business.

However, that’s just the beginning.

The lender will also take a close look at your personal finances since you’ll be the one responsible for repaying the loan if the business flounders or for some other reason you’re not able to make the payments.

Being a frugal and knowledgeable person would help a lot, since it shows you know how to save money, you know how to better invest and be careful with your money.

Someone who is constantly late with payments, whose credit history is a mess and can’t save a dime might not get the funding they deem vital for their business development, since the lender has almost no guarantee that the business loan will ever be paid off.

Most lenders tend to require the use of personal assets, like vehicles or homes, to secure the loan.

Also, most lenders will work in conjunction with a government agency known as the Small Business Administration because it backs many of the loans of this type that are underwritten by the lenders.

Business Loan Financing Options

Banks might give business loans through their own internal lending programs, but then again, they might choose to have it guaranteed through the SBA. Loans that are SBA backed include one program known as the 7(a) primary loan program.

This covers a wide variety of small business financing options. There is also the CDC/504 Program. This one assists businesses with modernizing their features or obtaining new facilities.

If your company has already been established and has a proven track record, the CDC program will be ideal for you.

Documentation

Most lenders will require you to provide them with a business plan that’s complete with financial projections about future revenue and current statements. This plan should indicate your intent for the borrowed money, like paying for your supplies to meet the demand for them or increasing your efforts at marketing.

As you can imagine, creating the proper documentation and outlining exactly how you are going to use the money, will increase your chances to get the loan.

To improve the chances of being approved for a loan, there is a counseling program offered by the SBA and run through a volunteer program. It’s known as SCORE, and it can assist you with the creation of a business plan that will meet the requirements of your chosen lender.

If you’re planning to apply for a business loan, you should begin the process as early as possible. This is partly because the process is a difficult and long one. Borrowers have been known to have to go through many lenders before finally being approved.

Throughout the process of dealing with a lender, you might even be asked to provide them with documentation that you didn’t anticipate them needing. It’s critical that you remain patient during the process.

There you have it in a nutshell. Now you know what a business loan is and how it works, the different types of programs and even a program that can help you with the preparation of your business plan. Hopefully, this will make the decision to get one a bit easier for you.

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