What is a Business Loan?
A business loan is, simply put, a loan offered to a company or business. The distinctions between the two are few: personal loans often have higher interest rates, and business loans are held in the name of the business, protecting individuals in that business from personal liability for the loan.
There are two key types of loan – the secured business loan, and the unsecured business loan. A secured business loan means that the lender secures your loan against valuable assets of yours. In the event that you fail to honor the terms of your loan agreement – by missing repayments or failing to repay the full amount in the stipulated time – the lender has the right to sell any assets the loan was secured against and retrieve their money.
An unsecured loan does not require physical assets as collateral, and may be cheaper up front – but can cost more in the long run. With a lack of physical assets with which to recoup the money in the event of default, the risk is higher for the lender, resulting in increased interest rates and altered borrowing terms. In some cases, lenders may ask for a ‘personal guarantee’ from a third party, such as the CEO of a partner organization. This third party becomes a guarantor for the unsecured loan, agreeing to step in and pay up if the business involved cannot.
What You Will Need to Apply for a Business Loan
- A business plan. Do not borrow a penny unless you know exactly where the money is going and what the money is doing. The risks involved in taking out a loan are too great not to plan accordingly – and without a cohesive plan, you may not be able to use the money to its greatest effect for your business.
- You need to be able to demonstrate to a lender that you will be able to make the repayments stipulated in your loan agreement. To do this, you must have a firm grasp on your company’s finances, and evidence to show you are more than capable of making the loan payments.
- This is especially important if you would like the element of choice with regard to the business loan you get. Creditworthiness describes your company’s reputation with borrowing money, and whether or not it is reliable enough to receive new lines of credit. Showing a new lender that you have a high credit score, and no historical issues with repayments in the past is a great way to secure a better deal.
- If you are angling for a secured loan, you’ll need to be able to provide security for that loan. What assets does your business have that could be valuable enough to shore up your loan agreement? It may be your office, or your office’s furniture, or any machinery if you have a manufacturing floor.
The Different Types of Lenders
- Traditional banks. These are the larger financial organizations, with a lot of money behind them – enabling them to offer you the best interest rates most of the time. Their customer service orientation means they can also offer you deals to keep you loyal – such as additional insurance alongside your loan. Banks are risk-averse, however, and are more likely to approve a loan if you have a positive credit history.
- Alternative Lenders. If you are not yet in a position to petition for a secured loan, alternative online lenders may be for you. These are where you’ll find unsecured loans to allow you to start up a business – albeit for a more expensive overall cost.
- Peer to Peer Lenders. Via various online and networking platforms, entrepreneurs and businesses are matched up with aggregated pools of investors, from which money is lent and paid back in interest. These kinds of loans tend to be smaller, and paid back quicker than the standard business loan, but are an easy route to a swift cash injection.