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Gone are the days where business owners were dependent almost entirely on banks or loans from friends and relatives. Today, there are many different sources available for business loans. Loans typically come in three primary forms.
- Short-term business loans provide capital for a business in need of cash to start operations. These loans are generally for one year or less.
- Intermediate term loans can help start-up businesses pay for equipment and cover large initial expenses. Such loans are usually for anywhere from one to three years.
- Long-term loans are often used to assist start-up businesses with initial costs such as equipment, furniture fixtures and commercial mortgages. Such loans are generally from three to seven years and repayment is typically made in installments.
Before approaching a lender it is important that you have a clear understanding of what the loan will be used for and how you can best present such information. It is equally important that you have a realistic plan for repaying the loan.
When working on a loan request, you want to include the following, some of which will likely be included in your business plan.
- The purpose of the loan
- Specifically how much money will be needed
- A management profile
- An overview of the market including your projected customer base and competition
- Personal and business financial statements and if possible, collateral that can secure the loan
Typically, if a small business owner is requesting a loan, the lender will want to see that he or she is investing a proportionate amount of his or her own money into the venture. In addition, for a larger business venture, the lender may want to see other sources of financing.
You will also need for a significant amount of supporting documentation when applying for a loan. Such documentation may include, but not be limited to:
- Incorporation or LLC organizational documents
- Proof of ownership or sale, if you purchased the business
- Material contracts
- Letters of reference
- Financial statements including personal tax returns for the last three to five years, a list of assets and liabilities and even credit references
- Tax returns
Receiving a loan will depend in part on the criteria and expectations of the lender. While one lender may say no, the next may say yes after reviewing the same loan request, business plan and documentation. If turned down for a loan, you can benefit from learning why you were rejected. If several lenders turn down a loan request for the same reason, you will know which area or areas you need to work on, whether it is improving your credit rating or rethinking your plans to purchase real estate for the business.
Once you have been approved for a loan, you need to work with the lender to obtain terms with which you feel comfortable. The due date and manner of payment will need to be determined. Will you pay the loan back in one lump sum or in various payments on a set schedule? Most often loans are made in several payments. Make sure such a payment schedule will work for your business in conjunction with your projected cash flow. Also of significant importance is the interest rate. You should get an idea of the going rate for similar loans and be ready to negotiate. Some state laws mandate the maximum amount of interest that can be charged on a loan. Below that, there is flexibility.
You will also want to look at other fees associated with the loan and what is considered a default of the terms of the loan. Read the loan agreement carefully and have a lawyer review it as well. Some of the terms are more common than others and some can be negotiated or even waived.
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