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Choosing the Right Business Loan For Your Company

Operating a business takes money and just about everyone has heard the expression you have to spend money to make money, but where do you get the money if you aren’t independently wealthy, or established? A business loan is the answer to most business needs. It doesn’t matter what size a business is, almost every business owner at some point has to consider a loan. A business loan can help a business get started, expand once it’s on its way and growing, or get a business through the tough spots that happen occasionally. Deciding on a business loan is a key step, but which loan is right for you and how do you decide between the many different various types?

Skip the Loan and Use Plastic

Some business owners opt for a slight variation on a business loan and choose to use credit cards to back their startup, expand on an existing business, or help their business through a tough stretch. The positive reason for using credit to fund your business is that it is often easier to get, or already existing in a personal credit card, but there are a couple of serious negatives to using this type of business financing. The first negative is that unless your existing credit line is unlimited there might not be enough funding on your credit cards. The second negative to using personal credit cards is that your personal and business cash flow is not separate. This can create havoc if you need to use your credit for important personal needs and it can have a similar effect on business funds if you suddenly have to tap into your credit for personal reasons. Lastly, the interest rate on credit cards is normally much higher than any of the various types of business loans.

A Bridge Between Credit Cards and Business Loans: Lines of Credit

A line of credit operates much the same as a credit card. You apply for a business loan line of credit and based on your qualifications you are approved for up to a certain amount. You are not charged on the loan until you actually use the money and are only charged for the amount you actually use. Another similarity between lines of credit and credit cards is the loan is often an unsecured loan meaning no assets are used to guarantee the loan such as homes, cars, the business itself. However, unlike a credit card business lines of credit have interest rates much closer to a traditional loan level.

On the downside those interest rates are usually variable like a personal credit card and go up or down over the period of the loan. Another downside to lines of credit is that like a credit card your payments will usually be only a little more than the interest rate each month.

This may seem like a plus at the start because the monthly payments are so low. The catch there is that lines of credit to not extend forever. There is almost always a set number of years for the loan amount to be available. At the end of that time (and sometimes within the last two years of the payback) money is not longer available. After that period, the payments are higher to make sure the money is completely paid back by the end of the loan.

If you have the discipline to make yourself pay more than the minimum every month in order to pay down the loan, this can be a good loan to get. It allows for times when money is tight. You can pay the minimum at those times without risking a default on your loan.

Traditional Types of Business Loans

Even if you do not have an extensive amount of credit, and if you don’t think a line of credit is right for you, all is not lost. There are many more traditional styles of business loans to choose from:

- Working Capital Loans: These loans are what most people think of when they consider getting a business loan. They come in two types, secured and unsecured. Unsecured versions of working capital loans are usually only available to those business owners with stellar credit, a sound business plan, and an established business with a proven track record. Startups are usually too risky to be granted unsecured working capital business loans. Secured working capital loans are a little easier to get although the amount of collateral needed to obtain these loans is often based on the credit of the borrower. These loans make it possible for all types of business to conduct their affairs on a day-to-day basis with available cash. Loans are commonly secured with homes, and other valuable assets.

- Accounts Receivable Loans: These are short term types of financing available when you hit a tough spot and now you have money coming in at a particular time. Your business’ records of accounts receivable act as a security for such loans. On the downside the interest rates of these short term loans are usually higher than a long term standard loan, and you can end up in a vicious circle of using your assets (receivables) before you get them and then not have money left before your next income period. This type of loan should only be considered in a select few types of cases of emergency such as the need to meet payroll, purchase inventory at a value, or other necessities.

- Business Only Loans: This type of loan is applied for using the capital and assets of the business alone and not any personal credit or credit history of the owner. It is only available to a business with a solid record of reliable income, the long-term prospect of fluid operation, and very strong business credit scores.

Other Function Specific Loans

There are times during business operation when you need a loan for a specific type of purchase such as to buy new or replace old equipment, the purchase of real estate for the business, or other dedicated needs there are loans designed to be separately available for just those times.

Getting The Loan

The best way to ensure success in getting your business loan is to be prepared. Enter your bank with a well-formulated business plan in hand and make sure your credit is up to par. If you know of any spots on your credit history, be prepared to explain them. Lenders are human too, and know that there are situations that are unavoidable but if you can prove your trouble is in the past and you are on more solid footing it will help a lot in getting the loan you desire. Letters of explanation to go along with your loan package help if there were situations such as illness, or caring for a sick loved one that caused problems in the past.

Business Loans – Information for Business Owners

A business loan provides financial aid to business of all sizes (i.e. small businesses, medium-sized businesses or start-up businesses). It is ideal for business owners who need funding to enhance or expand their business. When you need a loan for your business, you must adopt a strategic approach. Cautious planning is necessary for ensuring success in obtaining business loans.

Business Plan

When you are considering applying for a business loan, it is important for you to take enough time to create a convincing and detailed business plan. Your business plan should include information, which will assist your finance broker as well as the lender/credit provider in providing you with the right type of finance and advice. Here is a list of information you should include in your business plan:

>> Your business structure

>> The purpose and goals of your business

>> Your past and future plans for your business

>> The profit and loss projections and cash flow forecasts of your business

>> Your marketing strategy (i.e. the products or services your business provides)

It is also important to state in your business plan the specific purpose for which you want to use a business loan.

Decisions to Make

Once you have assessed your needs for a business loan, you should investigate which finance products suit your needs for a business loan as each loan has varying features for you to choose. To help with this process, here is a list of things to consider and which you can discuss with your finance broker:

>> The loan amount required

>> The loan term (i.e. the period in which the loan will need to be repaid)

>> Interest rate type and repayments (i.e. fixed or variable)

>> Loan fees, and

>> Loan security (i.e. the type of security offered by you)

Finance Products

There is a variety of business loans available to choose from. Here is a brief summary of common business loan products specifically designed by lenders/credit providers for business owners, which can assist your individual situation as a business owner:

Commercial Bill Facility

A commercial bill (also called a bank bill or bill of exchange) is a flexible credit facility that can give your business a short-term or long-term injection of cash. The finance provided by the commercial bill can help your business in the event that you may need to solve an unexpected or urgent problem, and you do not have the required cash flow. You agree to pay back the face value of the commercial bill plus interest to the lender/credit provider on a specific maturity date.

Overdraft Facility

The purpose of establishing an overdraft facility is to provide working capital for your business in the short-term, before receiving income. An overdraft facility should not be used for capital purchase or long-term financing needs. The overdraft is a normal trading account facility for your business, whereby the lender/credit provider permits you to use or withdraw more than you have in the trading account. But, only up to an agreed amount and any negative balances typically need to be repaid within a month.

Line of Credit

A line of credit (also called an equity loan) can provide access to funds by allowing you to draw an account balance up to an approved limit. The loans are designed as a long-term debt facility and are usually secured by a registered mortgage over a property.

Fully Drawn Advance

This is a term loan with a scheduled principal and interest repayment program. The loan provides access to funds upfront, which can be used for funding long-term investments that will expand the capacity of your business, such as purchasing a new business or even purchasing equipment. Fully drawn advance loans are usually secured by a registered mortgage over a residential or commercial property or a business asset.

Short-Term Loan

A short-term loan can provide short-term funding needs for your business. You can take out a short-term loan if you want to take advantage of a very quick financial opportunity or to help you get out of a financial cash flow crisis. The loan offers a fixed sum advance and requires a periodical interest charge to be paid by you. Short-term loans typically require a security to be provided.

Business Equipment Finance

If you decide to expand your business operations and take benefits of potential tax advantages, you should consider taking out business equipment finance, as the finance arrangement allows you to buy, lease or hire a new vehicle or specialised equipment (e.g. cars, trucks, forklifts, printing, computing, medical and office equipment as well as plant equipment and machinery). Typical finance arrangements to consider for business equipment finance are asset lease, commercial hire purchase, chattel mortgage or equipment rental.

Truly, there are several finance products available in the market to help business owners. When you seek out finance for your business, don’t be in a hurry. Consider all the alternatives in detail and then choose the one that is right for you and your business

Business Loans Are Not Hard To Get

There has been a tremendous amount of talk in the media over the last few years about how small businesses cannot access business credit (loans, lines of credit, working capital advances or business credit cards).

In fact, several small business associations claim that 41 percent of small businesses cannot access business credit or business capital.

I say they are wrong. What they are actually saying is that they cannot access business credit on the terms they want or in the form they desire.

Clearly, getting a business loan in 2004 through early 2008 was a lot easier than it is now. But, what really happened was that business loan underwriting standards where drop or lessened – allowing individuals and business owners, many of who should not have gotten credit in the first place, to obtain risky loans – loans that were not repaid and could have never been repaid; very similar to what mortgage banks and mortgage brokers did with home loans.

They underwrote risky loans just to collect origination and processing fees then sold those loans off to investors (again collecting additional fees) – holding no risk in the end. What this did was put a lot of unnecessary toxic business credit in the market – loans that should not have ever been made.

Think about it this way. Let’s say that on a scale of 1 to 10 based on a loan difficulty – with 1 being the easiest option of obtaining a business loan. Prior to 2004 – business loans had a number of about 5. They were not easy to get or hard to get. Banks just followed standard loan underwriting protocols. Thus, those who should get business loans did and those who shouldn’t – didn’t. At that time, underwriting was based on costs of funds and risk of repayment.

But, when congress open the secondary market for these loans (just like they did for secondary home mortgage loans with Fannie and Freddie) – banks realized that they could quickly collect underwriting fees then pass off those loans without assuming any risk. Based on this (just like with the housing market) – they lowered their underwriting standards (why not as they had no risk – it was all up side for them). Thus, the difficulty number for business loans dropped from 5 all the way to 1 (where anyone could get a business loan regardless if they qualified or not).

Therefore, for years, business owners were able to quickly and easily get business capital if they were willing to pay the bank’s or lender’s fees.

Now that the market collapsed, the difficulty number for business loans has once again returned to its normal position of 5 – making them not easy or hard to get.

The 41 percent who claim that they cannot access business credit today are the ones who should not have gotten credit in the first place.

The bottom line is that business loans are not hard to get – they were just really easy to get a few years ago and have now resorted back to where they should be on the difficulty scale.

To obtain a business loan today – you must first understand why your business needs outside capital (it has to be for growth – anything else is wasted money) and then understand how your business, as it stands, can leverage itself to obtain those funds – there are as many ways to obtain business capital [out] as there are request and each one is no harder than it should be.