Before you can go about getting a business loan, you need to know the different types of businesses so that you can determine under which category your business falls.
Types of Companies
Private and Public Limited Companies – A Private or a Public limited company is regarded as a legal entity that stands separate from the owner or shareholders. If the company is sued, or otherwise loses money, then the shareholders only have liability towards the capital they have in the company.
Any investor that lends this type of company money secures the loan from the assets of the company rather than the owner or the shareholders.
Partnerships and Sole Proprietorships – This type of business is dependent upon the people who run the business. If the business wants a loan, then the lender might ask for a personal guarantee from the business’ owner. That guarantee is kept as collateral by the lender.
In case of default, the loan is covered from the personal assets of the owner.
Weigh the Risks
If you want to get a loan for your small business, then you first need to find out the personal risks that may be involved. In any case, if your business does not have sufficient assets like land, property, equipment or inventory to be put up as collateral against a loan, then you as the business owner might need to provide a
guarantor.
In a larger business, a guarantor might be one of the directors of the company. In a smaller one, a guarantor is like a cosigner – if you default on the loan, the investor will go after your assets or the assets of your cosigner.
Reasons for Getting a Loan
You may need to take out a business loan for a number of reasons. You may want to start up a new business, or need to buy some property or equipment for your existing business.
You may also want to get a loan if you need to purchase a new vehicle for your small business, or if you want to provide your business with some very much-needed capital.
One of the biggest reasons that small business owners take out loans is to stay liquid while they’re starting up their businesses. Having cash in reserve is always a good idea, as there are always expenses that crop up, especially in the initial stages.
Getting a Loan
Once you’ve decided that your small business does need a loan, you have to go about applying for one. Generally, the amount of a business loan can vary widely, anywhere from $50,000 to $1,000,000 or more. The easiest way to get a loan is to approach the bank that you already do business with. But banks are more restrictive, and if your credit history isn’t pristine, or you have no history at all, you may want to search out alternate lenders – credit unions, or online brokers and lenders.
If you decide to go the online route, you’ll need to fill out the inquiry form provided by the online broker or lender. Within a few minutes they will get back to you with a few questions related to the business, your assets and the type of loan you want.
If your responses are satisfactory, you might get a positive response right away. The lender usually evaluates the amount of money they can lend on the basis of your assets and credit history. If your business is approved, a credit agreement will need to be completed before you finally get the money. The lender will also require a few supplementary documents that support you loan application, such as valuation of your property and your latest account statement. The process usually does not take more than a few weeks time.
Sooner or later, every small business will need additional funds in the form of a loan. Make sure you borrow only what you need, ask questions and read the fine print.
