Business Loans – How to Obtain One

Obtaining a business loan can be difficult, and without a business plan, it is nearly impossible unless you have a well established enterprise with several years of positive financial reports. Even with a well-prepared business plan, trust in the business owner plays a huge role in whether the business loan gets financed. Lenders not only…

Obtaining a business loan can be difficult, and without a business plan, it is nearly impossible unless you have a well established enterprise with several years of positive financial reports. Even with a well-prepared business plan, trust in the business owner plays a huge role in whether the business loan gets financed. Lenders not only appreciate a good idea with a well researched out plan, but they greatly depend on the character of the borrower. It's important to know that a start-up business can not obtain 100 percent financing through conventional or special business loan programs. Financial institutions want to see a certain amount of the owner's equity in a business and the Small Business Administration (SBA) has programs that can be more flexible than banks.

Equity financing consists of the entrepreneur's own money plus any capital that they can borrow from friends or family. Typically, this money is repaid at a later date or upon the sale of the company. The investors may also receive part of the company and may then want to exert a degree of administrative control in the operation of the business. Entrepreneurs should carefully discuss the exact details of these arrangements with any investors and commit the terms of occupation and repayment to a written contract.

Bank financing or debt financing means borrowing money, usually from a bank, that must be repaid over a set period of time with interest. Debt financing can be either short-term, with full repayment due in less than one year or long-term, with repayment due over a period greater than one year. The lender does not gain an ownership interest in the business, and debt obligations are typically limited to repaying the loan with interest. Loans are often secured by some or all of the assets of the company. In addition, lenders commonly require the borrower's personal guarantee in case of default. This ensures that the borrower has a sufficient personal interest at stake to give paramount attention to the business.

Traditional types of business loans include term loans, lines of credit and SBA loans. These loans usually require good credit, positive cash flow and a stable business history. For businesses that have not established these attributes, there are alternatives such as: Equipment loans, Accounts Receivable financing or factoring, Purchase Order financing, Asset-based loans (secured by real estate, equipment or inventory) and cash advances through future credit card sales . To summarize, in order to obtain a business loan, a business owner should be prepared with a business well prepared business plan, good character, 2-3 years of financial statements. If these are not available, there are alternative financing options available.