As a business owner, ensuring the near-term and future success of your company is no doubt your number one priority. However, as the old adage says; you’ve got to speculate to accumulate. Running a business costs money, it requires significant financial outlay before you can expect to see returns. One of the best ways to fund a business is through a business loan. Let’s find out more.
What is a Business Loan?
A loan is a type of credit that is issued by a bank or financial institution. Unlike a credit card, which is known as a revolving line of credit, a loan is a one-off payment that is paid back over a specified period of time.
Loans issued to individuals are known as personal loans, while loans that are taken out by companies are known as business loans. There are some key differences between personal loans and business loans that you need to make yourself aware of before applying. We’ll be covering these differences later in this article.
What are Business Loans Used for?
As we touched on earlier, running a business requires money. It can be an expensive process, particularly so in the early stages of a business before the company has established a stable revenue stream. What’s more, new businesses have a range of costs to contend with, including renting premises, equipment purchases, hiring staff, and manufacturing products. Without a steady cash flow coming into the business, these costs can quickly mount and put and can be difficult to manage. Getting a business loan can provide new companies with the funding they need to get things off the ground, it can give them the financial support necessary to begin and maintain operations.
Loans aren’t just for new businesses. There are many reasons why an established company might choose to take out a loan and the funds can be used for a range of different purposes. As a business matures, growth is a natural step. This could mean moving to a larger premises or developing new products and services. Both of these cost money, so a growing company may choose to take out a business loan to support the process. Many businesses also scale and expand into new territory and jurisdictions as they expand. This can incur various logistical and legal costs, so using a loan can help bridge the gap and expand in a cost-effective manner.
Whether you are new or an established business, taking out a loan can offer a range of benefits and opportunities. What do you need to know before applying for one?
Is Your Business Eligible?
Banks and lenders won’t issue loans to any business that asks. Applicants must undergo a stringent vetting procedure before the lender will decide whether or not the loan will be issued.
You will likely be asked to provide your business’s financial statements and income history in support of your application. Lenders will use this information to assess whether or not your business will indeed be capable of meeting the repayments in full and on time.
As a new business, you might not have the necessary financial history to qualify for a loan. However, there are loan options for businesses in this situation, although they may not offer as much and may have higher interest rates, so ensure the loan will work within your company budget before proceeding.
Business Loans Require Collateral
A business loan is known as a secured loan. What this means is that the borrower will have to put up some form of collateral as part of the application process. This is the key difference between business loans and personal loans, which are known as unsecured loans and do not require the borrower to put up collateral.
Businesses will be asked to put up some form of asset as collateral when applying for a loan. Typically, these assets will be in the form of property, equipment, stocks, or vehicles. If the business fails to make repayments on the loan, the lender can then seize these assets to cover the costs.
What this means is that business loans come with a degree of risk. You should never take out a business loan unless you are absolutely sure that you will be able to make the repayments. Failure to do so can have serious consequences for your company.
How are Loan Applications Approved?
After your business’s financial information has been reviewed and you have put up the required collateral for the loan, lenders, such as those you’ll find at Swedish startup Prekredit, will then look at your business’s credit score when making their final approval decision.
A business credit score is much the same as a personal credit score, in that it is a representation of a company’s financial history. These scores are compiled by the financial institutions Equifax, Experian, and TransUnion, who provide lenders with information on loan applicants when requested. If an applicant has a poor credit score, this could indicate that the business is financially unstable and unlikely to meet the agreed repayments, resulting in a loan refusal.
How Can You Improve Your Chances of Success?
Many business loan applications are refused because of simple, avoidable errors made during the application process. These can be avoided by staying organized and prepared, planning your application carefully and reviewing it in detail before submitting.
Ensure you have all financial documents to hand, including revenue reports and balance sheets, should the lender request these in support of your application. This can prevent any delays to the process and help you successfully secure your loan as quickly as possible.
The early stages of a business are absolutely crucial. Taking out a loan can be the perfect way to kickstart your business and give it the support it needs to get going. Even established businesses can benefit from taking out a loan, it can help them fund new product development strategies and grow their company to the next level. Use this guide to learn all there is to know about business loans and ensure your application is a success.