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
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
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
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