The Basic Fundamentals of Business Loans
Business loans come in all shapes and sizes, yet all share certain core principles. Most require collateral security until meeting criteria for an unsecured loan secured by your reputation and relationship with the lender.
Avoid using business financing for personal expenses or risky investments that have little chance of success; doing so puts yourself and the business at unnecessary risk.
Common Types
There are various types of business loans available from banks, online lenders and alternative financing providers; all operate according to a basic principle: A lender provides funds that must be repaid with interest over an agreed-upon timeframe.
Conventional business loans, commonly referred to as term loans, are one of the most sought-after solutions. Offering an easy application process with predictable rates and repayment terms, conventional business loans make an excellent option for various uses.
Small business startups should also explore revenue-based financing, in which an investor provides capital in exchange for a share of future revenues up to a certain threshold. This strategy may provide a great alternative for start-ups unable to qualify for traditional business loans.
Common Uses
All business loans work along the same principle: Your company borrows a lump sum from a lender and repays it plus interest over a specified term. They may be secured or unsecured loans and used for various purposes.
Extending the reach of your business operations often requires significant financial investments. You might need to purchase new equipment, increase production capacity, hire additional employees and open more locations or enter new markets. Furthermore, investing in marketing activities such as advertisements, social media promotion and trade fair participation may help expand your brand and attract more customers.
Business expansion loans are one of the most frequently utilized forms of financing, but most lenders do not lend to businesses less than two years old or those already with debts outstanding.
Expanding Business Operations
Small businesses requiring additional funding often turn to business loans as the means for increasing revenue, improving assets, and decreasing liabilities to prepare themselves for growth. To secure one of these loans, typically creating a detailed business plan detailing how you plan to increase revenue, improve assets, and reduce liabilities is key in getting approved.
Expansion is the hallmark of success for any successful company, enabling it to serve more customers and make greater profits. Expansion may come in the form of adding employees, franchises or locations, increasing marketing activities, offering new products or services, merging or acquiring other companies, expanding online or even opening branches in foreign countries.
Debt financing allows your expansion through borrowing a set amount and repaying it with interest over time. Working capital solutions, like invoice factoring or factoring, may also help bridge seasonal gaps in cash flow.
Increasing Working Capital
Working capital increases can help businesses better manage their cash flow, meeting short-term obligations and planning for sustainable long-term growth. Furthermore, increasing working capital helps establish an impressive credit profile while strengthening relationships with lenders.
There are various strategies for increasing your business’s working capital, including invoice financing. This form of business loan gives advance funding on unpaid invoices so that payments can be made based on prearranged terms while also decreasing debt service expenses.
Another way is to invest in trade credit insurance. This will safeguard against defaulting accounts receivable and free up working capital by eliminating bad debt reserves. Furthermore, this can help your business extend competitive credit terms to customers, increasing customer retention and sales volume.
Purchasing Equipment
When purchasing new equipment to increase production or expand your business, a business loan is often the best solution. Lenders usually require personal guarantees for these loans – meaning if repayment fails they could hold you personally responsible.
Building business credit should be one of your top priorities before applying for financing, and using lenders that report to credit bureaus. Not only will this lower the likelihood of default but it could help qualify you for additional capital when needed in future loans.
