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Businesses need a liquid asset to grow and expand their operations. If you’re a startup or an established business looking to source out more working capital, you’ve landed the correct page. This article will tackle basic information on business loans. If you’re looking to grab a business opportunity that’s just come your way, you need to get familiarized with how a business loan works.
Finding a suitable funding method is essential for any business. Not all lenders offer fair and just terms, so you must evaluate them thoroughly before agreeing to a loan contract. From different lending models to interest rates, be informed of all the vital information about business loans.
To get you started, published here are some crucial aspects about business loans:
1. Considering Interest Rates
When you borrow, it’s essential to keep interest rates in perspective. You must understand how banks set interest rates and relate them to business loans. There’s a tendency to hunt for loans that come with lower interest rates. While this may be the logical thing to do, you must understand how interest rates work.
Growing businesses need to focus more on getting access to money than on the cost of interests. For instance, a bank may have granted you a lower interest rate, but the total amount isn’t enough to cover your financial requirements. This will only lead you to seek more loans.
It’s also worth mentioning that almost all banks offer the same rates. Borrowing money isn’t just about paying interest rates. When you get a loan, some banks require that you keep an offsetting balance. In cases when you can’t use up all the borrowed money, your real interest rate is higher than the actual one. In some banks, you’ll be required to pay a small percentage to keep a credit line open, regardless of whether or not you use it. These are just some of the downsides of loans.
There are more costs than just the interest rates. The key is to compare and evaluate which option offers you the best result and deal.
2. Different Types Of Lenders
Historically, loans have been a viable source of funding. Businesses use them for a variety of reasons such as when there’s a need to source out fast cash for added capital or if cash flow is somewhat experiencing a bottleneck. Businesses also borrow money from lenders when there’s a need to enhance and invest more in equipment and technology. Such reasons are why business loans always come in handy and are reliable.
Here are some examples of loans you can consider when in need of more cash:
- Small Business Administration Loan
The Small Business Administration (SBA) is a great place to find capital for small businesses. Among the most popular loans offered to small businesses are SBA loans. This has been a preferred lending option by startups since banks tend to hesitate to lend money due to higher risks, smaller amounts of money to borrow, and lack of business stability.
Most of the lender’s risk is eliminated by government guarantees covering up to 90% of the loan. Furthermore, SBA loans typically have better terms for borrowers, making it a win-win setup for both parties. A few downsides include reporting more paperwork, paying more fees, and the loan approval may take a long time. Traditional SBA lenders may have stricter qualifications as well.
- Traditional Bank Loans
On the other side of the fence, many businesses rely on conventional bank loans. One of the main advantages of traditional bank loans is their low interest rates and the fact that no federal agency is involved. Thus, they can be approved more quickly. Loans of this type, however, usually have shorter repayment terms than SBA loans. Depending on the term provided by the bank, you need to pay up the entire amount faster.
Banks consider credit scores, so you must understand the factors that affect them. You should also be aware that the approval rate of bank loans isn’t as high as other loans. They’re very selective of the business loans they allow, so there are higher chances for small businesses to be disapproved.
3. Financial Documents Being Audited And Reviewed
Balance sheets must show all assets, liabilities, and capital for your business, with the most recent one being the most important. Taking out a business loan means you need to be well-prepared in sharing your financial status and condition. Your financial documents’ three-year history will be audited and checked, but if you have a good credit image and own some assets that can serve as collateral, banks and other lending companies may not be as strict to auditing your balance sheets.
Doing your research and knowing all of the options available will make it a lot easier to apply for a small business loan. You should put a priority on paying back loans on time, regardless of the type. This will lead to improving your credit score and place your business in a positive light. Consider the ideas mentioned here, and you’ll be able to proceed with your operations without stressing about credits.