Find out how a business lender loan can help jump start a new business.
New or established businesses often seek a business lender loan to invest in equipment or cover other expenses needed to start or run a business. Institutions offering business lender loans are more likely to approve candidates who have enough cash to make loan payments or who have a history of running a profitable business. Ideal loan candidates also have enough collateral to handle unexpected expenses, but if all business owners had such sterling qualifications, business lenders wouldn't need to exist. Instead, institutions provide business lender loans to candidates who have good credit, a solid business plan and a detailed plan for spending the loan money.
Business lenders specialize in different types of loans, and finding one with the right terms is often a factor in a company's success or failure. Financing falls into two categories: debt and equity. Each has its advantages and disadvantages and companies may have an easier time getting one or the other, depending on the age and strength of the business.
Business startups usually have an easier time attracting equity investors than getting bank loans, because the new companies have not yet established good credit histories and have no record of turning a profit. When selling equity, business owners raise money by taking on co-owners, who put up money in exchange for a share of the profits. According to Forbes, equity investors are legally entitled to full disclosure about a business's direction and finances. If they feel the business is not being operated in their best interest, they can sue.
Debt financing is much different than financing obtained from a business lender. As a business establishes itself and brings in clients, it will be in a better position to apply for a bank loan. An institution that lends to a company generally does not have a say in how the business is run, nor is it entitled to a share of the profits. However, borrowing money from a bank is expensive, and if the business experiences a cash-flow shortage, it may be difficult to repay the loan.
Most of the time, business owners use a combination of equity and debt to obtain funds. Equity makes more sense initially, because it does not have to be repaid if the venture fails. Businesses take on debt to resolve cash flow shortages once operations are up and running.
Collateral is an asset used to guarantee to a lender that a loan will be repaid with interest. Examples of collateral include stocks or bonds, company inventory, real estate or equipment. A business loan backed by collateral is known as a secured debt. Most short-term or long-term commercial loans meant to be repaid in more than one year require collateral.
To make sure the collateral covers the full amount of the loan, lenders appraise the value of the property or financial holding. If the owner fails to repay the loan, the bank is entitled to seize the collateral assets. Using company equipment as collateral may prove detrimental because the lender may take the equipment when the business needs it to increase its revenue.
Owners of startup businesses often pledge personal property such as a house or savings investments as collateral. In this scenario, the owner loses the assets if the business defaults on the loan. To prevent this type of loss, many owners form limited liability companies (LLC), which protect personal assets from business liabilities. Most small business lenders, however, require owners to pledge personal property, in which case, an LLC designation means little.
According to Business.gov, collateral is not always required to obtain a business loan. If the business plan is strong and the loan is considered low risk, the use of collateral can be avoided, resulting in an unsecured loan. However, the reputation and credit of the business must be strong enough that the bank feels certain the loan will be repaid. A credit card is one example of an unsecured loan. Sometimes lenders grant unsecured working capital lines of credit, which give businesses the option of borrowing money as they need it.
In lieu of getting a loan from a financial institution or other traditional business lender, Entrepreneur suggests that owners of startup businesses consider approaching their parents or family members for a loan. In addition to perhaps being more patient, relatives might be inclined to lend money at no interest. Friends or colleagues also sometimes tend to be fairly lenient lenders who might offer an interest rate at a couple of points above that of a high-yield savings account. In a crunch, a new business owner could even borrow startup funds from a 401K fund and replace the amount once new investors come on board. Similarly, a consumer loan or a mortgage may provide alternative sources of business funding.