Category: Starting a Successful Small Business >> Basis of Your Small Businesses

The Basics of a Small Business Loan


Getting loans for small business is not easy due to certain requirements that need to be satisfied. There are several banks and credit institutions that offerloans. You must apply and qualify to get the loan. Some small businesses, who the bank rejects, do not understand What caused their disqualification. Others get loans with many strings attached.


To understand loans, it is important that one be familiarized with the seven fundamentals of borrowing.
  • Credit worthiness
  • Types of loans
  • Amount of money needed
  • Collateral
  • Loan restrictions and limitations
  • The loan application
  • Lender evaluation standards


Credit worthiness
The first thing that a money lending organizations is going to check is your credit. This ensures them that if they give you a loan, you will be able to repay them. Your credit will be based on five questions.
  • The borrower’s background and ability to manage a business
  • What you will do with the money
  • What is the time frame for repayment
  • Will the amount requested make allowances for unexpected developments
  • Your outlook on business
Your answers will decide your fate in getting the loan and what limitations or restrictions are applicable to you.


Kinds of loans
There are three kinds of loans that are offered: short term, term money and equity capital.
  • Short term loans are expected to be paid back after a month or two. Such a loan could be taken to finance your accounts receivables.
  • Term money is divided into sections: one for loans of more than a year but less than five years, the other more than five years.
  • The term “Equity Capital” is sometimes confused with term borrowing. In equity capital, you employ people who are willing to invest and recover the investment on the interest they will get.


Amount of money needed
The money you need depends on what business you are trying to pursue. To decide an approximate amount, you can get quotes that will allow you to estimate how much it will cost to set the business up. Combining this with other expenses will give an approximate figure for the loan.


Collateral
Collateral is something of value to be used as security to guarantee repayment of the loan. Sometimes the only collateral the bank would need is your signature, other times certain guarantees and documentation are needed. The securities could include endorsers, co maker, guarantors, assignment of leases, trust receipts and floor planning, chattel mortgages, real estate, accounts receivables, savings accounts, and life insurance policies.


Loan restrictions and limitations
Most institutions in the business of lending money are interested in making sure that you make a healthy profit. They do this by putting limitations and restrictions on the way you would do business and refrain from bad management. These restrictions and limitations are often considered a burden, but should be seen as a valuable time for improving your management techniques.


The loan application
Once you clearly understand the loan aspects, you are ready to fill out the application form. The application form will have you list all necessary information. If you are confused by the form you can seek advice from the bank's customer service. Be aware that the SBA’s (Small Business Association) form will be more detailed than most customer service representatives.


Evaluating the application
Application forms will be reviewed on the following points:

  • Past revenue of the company
  • Collateral offered
  • Debt paying to suppliers
  • Ratio of debt to net worth