A Guide to Financing Your Business
The word loan literally means a kind of credit agreement where a certain amount of money is lent out to another party in return for future payment of the agreed amount or principal value. In most instances, the borrower also adds finance charges and/or interest to the principal amount that the borrower has to repay as well as the total amount of the loan amount may be extended to cover. The lender or grantor also determines the interest rate, which are often variable, and terms and conditions of repayment. In order to qualify for a loan, borrowers generally need to prove their capacity to pay and they also usually have to convince the lending entity that what they are offering is the best available option in terms of price and services.
In general terms, loans are often given by banks and other financial institutions, sometimes supported by government bodies such as the Small Business Administration, or by private lenders. It is not uncommon for individuals to apply for loans from banks. In case you are applying for a loan from a bank, it is best to have your own financial information prepared before you visit the bank so you know whether you qualify for the loan. Banks normally want to see your credit report and if you have had bad credit in the past, your loan application may be turned down. If you plan to apply for a loan through a credit union, you will be required to complete a comprehensive application, which will include a credit report.
Collateral is what your property, home or other item is used as security against the loan. Items of collateral do not necessarily have to be real estate but almost all financial institutions look at collateral as a means of securing a loan. For instance, many companies in the mortgage market will ask potential borrowers to submit copies of their checking accounts, since these are considered collateral for loans. Since most people have at least one checking account that is in good standing, this is a good place to start.
Once you have decided on the type of loan you would like to arrange, your next step is to determine how much you can afford to pay each month towards the loan. The amount of collateral you provide to your lender should be enough to ensure that your loan gets approved. Most lenders require that borrowers have between two and five times the income of the median income family in order to qualify for a loan. A loan that has no annual percentage rate (APR) means that your monthly payment will be based on a set interest rate. You should consult your lender regarding the exact APR.
Your creditworthiness can be assessed by a lender by looking at your available debt obligations, your credit history, your employment history, your credit card use and any bankruptcies you may have. Lenders use a mathematical formula to arrive at your creditworthiness. Factors such as age, employment, income and credit card use are taken into account. Your creditworthiness will affect the terms of your loan. Some terms are more favourable to those with better credit and some more difficult to qualify for.
Small businesses can apply for a number of different types of loans. These include business cash advances, business lines of credit, commercial loans and small business consolidation loans. To find out more about the different types of loans for your small business, you should speak to your banker or a financial advisor. They will be able to explain in more detail about the various options available to you.