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Business Loan

A business loan is a type of loan for business related purposes. It can also be termed as a commercial loan. Generally, when a loan is taken, debt is created to be repaid with a certain amount of interest. In the same way, when a loan is intended for business purpose, there occurs a liability i.e. debt to be repaid with interest amount.

A business loan is a type of loan for business-related purposes. It can also be termed as a commercial loan. Generally, when a loan is taken, debt is created to be repaid with a certain amount of interest. In the same way, when a loan is intended for business purposes, there occurs a liability i.e. debt to be repaid with interest amount.

A business loan can be helpful in the following ways:

  • for the startup company to explore their business
  • it can be helpful to businesses to expand their operations
  • for purchasing equipment or stock for the business
  • to bear daily expenses
  • helps in raising capital for the company etc.

The main purpose of providing a business loan is to meet the needs of the company immediately. Loans can be available for any type of business company whether it be sole proprietors, shopkeepers, self-employed persons, partnership firms, privately held companies, small scale or big scale businesses, etc. There are also various types of loans such as term loans, start-up loans, working capital loans, secured or unsecured business loans, etc.

For beginners, it gets difficult to understand the process and the question arises as to how to obtain a business loan. Many of them have never applied for such a loan and so they might be unaware of the criteria and documents to be provided.

Here is a simple guide to let you know the concept thoroughly and get yourself prepared for obtaining a business loan from the following five steps:

1. Purpose for loan

The main thing to remember is why you need a loan. The below points may help you to decide the purpose of obtaining a loan.

  • Starting a new business- If you are starting a new business then you may be short of funds to establish your business. For such purposes, you may apply for a business loan. In such cases, you may apply for a microloan or a business credit card.
  • New Asset/Equipment- There are also equipment loans available. This loan can help to purchase new plant and machinery, equipment, furniture, and various assets for the business. It is a mortgage loan that is secured by equipment and so if you fail to repay the loan, the lender may seize it.
  • Meet daily expenses- If you are facing problems with cash outflows then a short-term loan can be useful. Even this can be useful in managing day-to-day expenses such as payroll, rent, etc. A working capital loan can be obtained.
  • In need of a small amount of money- Microloans can be obtained if you are in need of a small amount of money. Microloans are smaller loans for loan amounts of less than $1,00,000 USD. The U.S.Small Business Administration (SBA) had a microloan program.

2. Eligibility

The requirements for business loans may vary. The points to be considered for small business loan application are-

  • Credit score- The lender for its safe side may observe your personal and business credit scores. This will help the lender to assure that you will repay the loan amount. If your credit score is high then your chances are high for approval of a business loan and the interest rate may also be low.
  • Security- The lender asks you to pledge the asset whether it be collateral or personal. That means in collateral, equipment, or inventory is pledged and in personal guarantee, a business loan is secured with your home, savings, and personal assets so as to secure the amount the lender has provided you as a loan. Any default in repayment of a loan may seize your security.
  • Income- Before applying for a loan, check your revenue if you meet up with the expectations.
  • Time in business- For obtaining a loan, a traditional bank’s criteria is that you have to be in business for 2 years whereas there are some online lenders that can approve loans for businesses operating for less than 6 months.

APPLY FOR BUSINESS LOAN

3. Business loan lenders

There are a few types of lenders from which a loan can be obtained.

  • Traditional banks- Obtaining a loan from traditional banks gives you the advantage of low-rate interest. These banks offer loans to well-qualified applicants at a low rate of interest as compared to other lenders. But at the same time, the main disadvantage of obtaining a business loan from traditional banks is that it is based on your credit scores. Bad credit scores are not approved. Processing time is very hectic in traditional banks.
  • Online Lenders- There are different types of loans offered by online lenders such as microloans, term loans, lines of credit, and merchant cash advances. The advantage of obtaining a business loan from online lenders is that their documentation requirements are less than traditional banks and the disadvantage is they offer a higher rate of interest as compared to others.
  • Microlenders- Qualified applicants can obtain micro-loans from microlenders for up to $50,000. They are not-for-profit organizations. Even their requirements are less.

4. Documentation

The following list of documents your lender will advise you to furnish for obtaining a business loan.

  • Profit and loss statements
  • Financial statements
  • Personal tax returns
  • Business tax returns
  • Business licenses
  • Articles of incorporation
  • Personal bank statements
  • Business bank statements
  • Business plan
  • Building lease

5. Submission

This is the final and last step i.e. submitting your loan application. If you have chosen an online lender then the application is to be submitted online whereas in person it is submitted depending on the type of lender you have chosen. A lender may need the following information-

  • Your name
  • Your business name
  • Loan purpose
  • Desired loan amount
  • Social Security Number
  • Business Tax ID
  • Annual income/revenue

After submitting the loan application, a loan approval decision is received from the lender after a few days. Approval of a loan is given by the lender by sending a loan agreement to sign and then the loan amount is issued.

Conclusion

For obtaining a business loan, you may contact Vakilsearch. It is the largest legal service platform. They deliver a good response regarding your legal queries.

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