A Beginners Guide to Business LoansRoemarie Ann Periabras
A Beginners Guide to Business Loans
Business owners regularly find themselves facing problems with cash flow for numerous reasons. Without access to credit facilities or cash, numerous business owners find it awfully hard—if not altogether impossible—to keep their business open and running. Moreover, even if your business isn’t facing difficulties with cash flow, it can be most of the time difficult to seize growth opportunities without having additional capital.
Making use of loans is a sure-fire way of taking advantage of exciting opportunities to expand and grow your business; with the right finances, you’ll never have to say “no” to good ideas. The issue of business loans is, however, a little intricate.
Searching for a Lender
Before you start applying for a business loan, you need to answer a number of critical questions to help you establish which one is best for you:
- What do you need the money for?
- How much money do you need?
- How long will it take you to pay it back?
- How quickly do you need the money?
- How long have you been in business?
- How much collateral, if any, do you have to put up for the loan?
- What is the current financial shape of your business?
But before deciding on acquiring a loan, there is a need to establish a source of borrowing. A lender can be an individual or an institution. Further, the way the lender relates with the client has numerous implications. For instance, a family friend issuing a loan for a business will have extremely different terms and conditions as compared to a banking institution offering the same, since banks tend to be strictly regulated by financial laws. However, common to both is the fact that a promissory note ought to be attached to the signed agreement. On the other hand, it is worth noting that, loans offered by friends and family tend to be flexible unlike those issued by financial institutions such as banks.
It is prudent to formulate a repayment plan regardless of how flexible your loan or lender is. It is often tempting to default loans issued by close friends and relatives. However, this comes with the danger of losing immense trust among the said parties. Therefore, a repayment plan comes handy in attempting to clear loans in good time and within the established schedule. Repayment schedules come in personalized designs all aimed at providing the user with the opportunity to repay everything as per schedule.
Prompt repayment of loans is important, even when they are offered by close friends. It is in this way that you earn good credit scores in order to access loans in the future. Lenders have often been on the lookout, not only for those that totally default loans, but also those that delay in repaying their loans. Such borrowers often earn a poor credit score, preventing them from accessing any money from other credit facilities in the future.
Today, most countries have a credit reference bureau. You will be reported to this authority if you fail to clear your loan in good time. How will this impact your business?
Getting reported to the credit reference bureau hurts your credit history. This essentially means that you will be blacklisted by major financial institutions. As such, you will not be able to borrow in future unless you seek to clear your name by repaying your loan and acquiring a clearance certificate. This just highlights how important it is to repay your loans without any slack.
Almost all loans attract interest. In fact, perhaps the sole benefit of loans to financial institutions is the interest earned from loans issued to clients. However, some loans from friends may be free from interest rates. Interest rates are often determined based on the type of loan requested. Most business loans attract specific interest rates outlined by financial laws. Numerous interest laws are in place to cushion you from rogue lenders. Most laws set the maximum interest rate to be 10 percent. As such, you are protected from exploitation.
Interest rates may vary from time to time. However, many lenders tend to maintain a constant interest rate in a bid to rope in more clients. Lenders are often free to set their rates based on various factors such as regulations, competition and profit margin. You need to carefully understand the loan terms and interest rates before signing for anything. Further, it is necessary to always be on the lookout for the constantly fluctuating interest rates before deciding to take a new loan.
Loans with fixed rates may be enticing. However, you may be disadvantaged in a few instances. For instance, if you apply for a fixed rate loan and the interest rates reduce over time, you will still be paying a higher rate than you should be with the prevailing interest rates at that point in time. It is wise to consult financial analysts on the best time to take loans to avoid repaying more than is really necessary.
Security interest is yet another important entity in loan issuance. This is especially important for beginners since new borrowers are often expected to provide collaterals. Collaterals come handy when borrowers default loans. But, there are laws that determine what collaterals should be offered for what loans. Mostly, only valuable property is taken as collateral. Such property often has high resale value.
Any type of lending demands responsibility on the part of the borrower. If your repayment schedule is flawed, then you should be worried of being slapped with numerous law suits besides being the guest of debt collectors.
Liability comes in different forms depending on how you choose to borrow your loan. Taking one either as an individual or a sole proprietor means that you will be held personally liable in a court of law. On the other hand, when you pose as a corporation when taking the same loan, the lender will choose to sue the business entity instead of you as an individual. What then are the ramifications of such an arrangement? Can a lender seize your personal account? The answer to this lies on how you choose to borrow your loans; as an individual or a corporation?
You often have little to worry if you are taking a loan as a corporation as opposed to borrowing the same thing either as an individual or a sole proprietor. The implications of failing to repay it are obviously different. Being sued as an individual is, of course, very demoralizing for any investor. However, there is immense danger if your business begins to fold right before you finish paying off your loan. If this happens, you will be forced to dig into your own pocket in an attempt to repay the loan. Again, failure to clear this will mean that you will be held personally liable. Obviously, paying a business loan from your own pocket will mean that you are prone to bankruptcy. It is, therefore, wise to evaluate your business stability before taking one in the first place. Keeping a track record of your business performance is the first step in such an evaluation.
It is worth noting that there ought to be a loan agreement for any kind of borrowing to have legal backing. This is an understanding between the borrower and the lender which outlines the various pledges and promises made by both parties. Despite having the same concept, there are diverse types of loan agreements depending on the type you choose. Before making such an agreement, it is routine business to state details surrounding your personal character, cashflow and credit history. And since it is a legal contract like any other, you need to be honest in your declarations even when such an agreement is verbal.
Besides demanding that you produce security interest as collateral, many lenders will need you to have guarantors. This is the rule in almost all financial institutions offering loans. However, strictly speaking, a guarantor loan is one that is considered as being unsecured and that the guarantor agrees to repay it in the event that the borrower defaults on the payment schedule. If you have a poor credit history or you constantly find your loan getting rejected, this is perhaps the best option you have. However, the disadvantage of this is that you may end up repaying more than you should.
Guarantor loans have numerous requirements on the part of the guarantor. Apart from having a good credit score, guarantors are often required to be homeowners for the obvious reason that when there is a default on the loan repayment, their home can be used as leverage. Guarantors to loans can be family or friends, provided that they have a good credit history and financial stability. Once they have been cleared by the lender, the guarantors can go ahead to guarantee your loan. If you default on your repayment schedule, your lender will pursue your guarantors. In the event that your guarantor is unable to repay it on your behalf, you will both be liable in a court of law if the lender decides to sue.
Most people would like to think that a cosigner and a guarantor are the same thing. However, in the strict sense, cosigners often come into play when the lender has doubts over the repayment ability of the borrower. On the other hand, guarantors are often a requirement in guarantor loans. In this context, you will need a cosigner in case your lender casts doubt over your repayment ability or credit history.
You may take advantage of a guarantor loan to build your credit score. Prompt repayment of this loan puts you in good financial standing enabling you to borrow other types of loans in future. Of course, the converse is true in the event that you default or delay in repaying this loan.
Source: Allison Green (Business Writer and Financial Analyst)