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Business loans
A Business Loan Guide:
New business loan and small business loan

Practically every company, from a new business to a small business or well-established large business, needs to take out a business loan at some stage of its business life. Business loans can be used for all kinds of things including initial expenses, financing operations, or major investments in equipment and staff.

After securing the loan, businesses normally make monthly repayments that include a portion of the original amount borrowed—the capital—plus interest to the lender.

If you are looking for a business loan, lenders will expect you to prove your commitment to the business and demonstrate that you have the ability to repay them. Many lenders will also expect to see that you have made a personal financial commitment to the business. You will not necessarily have to put up your home as collateral, but some lenders may prefer it.

Be absolutely clear that lenders provide business loans as a way to make money, not to provide support to struggling businesses.

Reasons to take out a business loan

The most common reason to secure a business loan is to allow you to grow and develop your business. You may want to open new branches, enter into new countries, or expand the size of your existing operations. If your business is doing well, many lenders will want to share in that success by giving you a business loan.

There are other reasons for companies to want additional funds by way of a business loan:

  • To develop better facilities

  • To construct renovations

  • To invest in costly tools and equipment

  • To enhance working capital

  • To build up the company’s inventory

Sometimes businesses choose to take out a business loan even if they have adequate capital to spend. They do this as a safety measure, so that they have the cash to cover any unexpected expense or emergencies.  

Tips for new businesses looking for new business loans

Getting a new business loan can be a stressful and nail-biting experience, especially if you are a new start-up. If you are a new business, do not imagine that you can secure a new business loan simply by having a dazzling good idea and a huge dose of enthusiasm. Before you meet with your loan provider for the first time, make sure you are thoroughly prepared. You need to impress your potential lender by demonstrating a high level of business knowledge and commitment. You must also have a detailed business plan including an in-depth analysis of your industry, realistic financial projections, and understanding of your customer base.

Different types of business loans  

  • Standard business term loans are the most common general purpose loan for larger amounts. They can be used for working capital, expansion, refinancing, and acquisitions.

  • Short term loans are normally set up for terms of one year or less. They are repaid in a lump sum at the end of the term, instead of monthly. They are best suited for smaller amounts and are ideal for seasonal inventory build up or small investments with quick returns.

  • Lines of credit are more general business loans that are often set up to protect against cash flow problems. Instead of getting the full amount of the business loan, the lender will allow you to borrow up to a certain amount per year. You can withdraw the money in increments as needed.

  • Equipment financing is generally easier to obtain than general lines of credit, simply because the equipment you buy will act as collateral for the loan. It is also less risky, in that if you fail to make your repayments, all you lose is the equipment, not your entire business.

  • Credit card advances are business loans based on your company’s credit card sales track record and your expected future earnings. This is a good choice if your business has at least a three-year history of accepting credit cards. As credit card sales generally give a good indication of future earnings, you will be able to get a good rate.  

Factoring

A sound option for many small businesses is factoring, sometimes referred to as receivables financing.

Factoring is essentially selling your invoices to a third party. Instead of waiting for your customers to make payments, you can exchange your invoices for instant funds. However, you will be charged a small fee by the factoring company of between 3% to 5%.

This option may be a good small business loan choice f you have:

  • less than three years in business

  • cash flow problems

  • slow-paying customers

If you require a new business loan, a small business loan, or another type of business loan, be sure to compare business loan providers carefully before you find the right new business loan, small business loan, or other business loan that's right for you.

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