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BUSINESS LOANS
Businesses require an adequate amount of capital to
fund startup expenses or pay for expansions. As such,
companies take out business loans to gain the financial
assistance they need. A business loan is debt that the
company is obligated to repay according to the loan’s
terms and conditions. According to the U.S. Small
Business Administration, before approaching a lender for
a loan, it is imperative for the business owners to
understand how loans work and what the lender will want
to see from the owner.
A business loan is borrowed capital that companies apply
toward expenses that they are unable to pay for
themselves. Some business owners use business loans to
pay for salaries and wages until their new company gets
off the ground, while other companies put borrowed funds
toward office supplies, inventory or business projects.
Lenders want to know how the business intends to use the
borrowed monies, so business owners must make sure to
have a clear outline for how the money will be spent.
According to an October 2010 article by David Bangs in
Entrepreneur.com, it is important to impress the lenders
by being professional, or they may decline the loan
application.
Types
Businesses have a variety of loan options to choose
from. Traditional bank loans are the most popular source
of funding, however securing a loan from a bank is no
easy task. According to a March 2010 article in
Entrepreneur.com by Karin Price Mueller, banks are
tightening their lending policies due to the economic
downfall, making it more challenging for businesses to
receive financial assistance from commercial loans.
Aside from commercial loan options, businesses can apply
for home equity lines of credit if one or more of the
company owners are homeowners.
Loans are not given out for free. Lenders charge
interest on loans as the price paid for borrowing the
money. It is important to know whether the interest is
fixed or variable. A fixed interest rate means that the
interest rate remains the same for the duration of the
loan and its payback period. A variable interest rate
indicates that the interest rate can fluctuate based on
a variety of determinants. Other features of a loan to
pay attention to are the payback period (months or
years) and what the lender will use as collateral if the
business is unable to pay the loan back timely.
Significance
Business loans allow companies to have a chance at
success. As such, loans are in high demand, but not
every company that applies for a loan will receive one.
When applying for a business loan, lenders evaluate the
company’s history, the amount of debt the company has
and whether the business seems risky. Risky businesses,
such as startup companies, are often not the winning
recipients of traditional loans.
Considerations
Businesses that take out loans with high interest rates
should make plans to pay the loan back as quickly as
possible, so the interest owed does not accrue into an
exorbitant amount. High-interest loans are best used for
short-term financing needs.
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