How Do You Go About Getting The Best Business Loans For Your Business?

Small businesses run on business loans. If you run a small business - or would like to start one - you'll probably need to raise money, at one time or another.

You may want to expand on your success, or you may suddenly need extra cash in an emergency.

No matter what the reason, if you need to tap outside sources for cash, you essentially have two choices: borrow money or sell an ownership or equity stake in your business.

This site focuses on raising money by using business loans, which has the big advantage of keeping business ownership in your hands.

Borrowing money is one of the most common sources of funding for a small business, but obtaining a loan isn't always easy.

What Business Loan is Best?

It is common, for a start-up business, or someone that has never owned a business, to find themselves applying for a “personal” loan.

This is not always a wise move, mixing business loans with personal loans.

However, often it is the only means available for first time business owners.

Most entrepreneurs borrow money privately from friends or family members, or apply for business loans from a bank, or other institution. Some do both.

Develop Business Creditability

Business credit can help you get a business loan, without using your personal credit.

Establishing business credit can be done by:

1. Opening up a business credit card account and paying it in full.

2. Buying equipment and supplies from companies that will report good standing to the business credit bureaus.

3. Having a good business plan with potential earnings, letters of intent, and any type of customer contracts already laid out.

Understanding the Bank's Point of View!

1.What sort of person are you, the prospective borrower?

2.Your ability to manage your business.

3.What are you going to do with the money? The answer to this question will determine the type of loan, short or long-term.

4.When and how do you plan to pay it back? Your banker's judgment of your business ability and the type of loan will be a deciding factor in the answer to this question.

5.Is the loan large enough? In other words, does the amount requested make suitable allowance for unexpected developments? The banker decides this question on the basis of your financial statement, which sets out the condition of your business, and on the collateral pledged.

6.What is the outlook for business in general, and for your business particularly? The banker wants to make loans to businesses, which are solvent, profitable, and growing.

2 Basic Financial Statements Required

1. The "Balance Sheet" 2. The "Profit and Loss" statement.

The former is the yardstick for solvency, and the latter, for profits.

A continuous series of these two statements over a period of time is the principal device for measuring financial stability and growth potential.

A key question determined from these 2 financial statements is "Is Your Firm Credit Worthy?"

The ability to obtain money when you need it is as necessary to the operation of your business, as is a good location or the right equipment, reliable sources of supplies and materials, or an adequate labour force.

Before a bank or any other lending agency will give you a business loan, they must feel satisfied with the answers to the following questions:

General Information

What is the condition of accounts payable?

What are the salaries of the owner-manager and other company officers?

Are all taxes being paid currently?

What is the order backlog?

What is the number of employees?

What is the insurance coverage?

Accounts Receivable

What is the accounts receivable turnover? A

re the accounts receivable total weakened because many customers are far behind in their payments?

Has a large enough reserve been set up to cover doubtful accounts?

How much do the largest accounts owe, and what percentage of your total accounts does this amount represent?

Inventories

How much raw material is on hand?

How much work is in process?

How much of the inventory is finished goods?

Is there any obsolete inventory?

Has an excessive amount of inventory been consigned to customers?

Is inventory turnover in line with the turnover for other businesses in the same industry?

Or is money being tied up too long in inventory?

Fixed Assets

What are the depreciation policies?

What are the details of mortgages or conditional sales contracts?

What are the future acquisition plans?

What Kind of Money?

4 Basic Kinds of Business Loans

There are four basic kinds of business loans

Short Term

Long Term

Equity Capital

Government Loans

Keep in mind that the purpose for which the funds are to be used is an important factor in deciding the kind of money needed.

But even so, deciding what kind of money to use is not always easy.

It is sometimes complicated by the fact that you may be using some of the various kinds of money at the same time, and for identical purposes.

Keep in mind that a very important distinction between the types of money is the source of repayment.

Generally, short-term loans are repaid from the liquidation of current assets, which they have financed.

Long-term loans are usually repaid from earnings.

Short-Term Bank Loans

Or you can use them for purposes that take longer to pay off--such as for building a seasonal inventory over a period of 5 to 6 months.

Usually, lenders expect short-term loans to be repaid after their purposes have been served.

The unsecured loan is the most frequently used form of bank credit for short-term purposes.

You do not have to put up collateral because the bank relies on your credit reputation.

Long Term Borrowing

Some people break it down into two forms: (1) Intermediate. Loans longer than 1 year but less than 5 years.

(2) Long-Term. Loans for more than 5 years.

However, for your purpose of matching the kind of money to the needs of your company, think of term borrowing as a kind of money, which you probably will pay back in periodic installments from earnings.

Equity Capital

Yet there is a big difference. You don't have to repay equity money. It is money you get by selling a part interest in your business.

You take people into your company who are willing to risk their money in it.

They are interested in potential income rather than in an immediate return on their investment.

Government Loans

In most instances, these loans are available when the business or owner can prove that the community will prosper, based upon the business at hand.

For the most part, government loans are based upon personal credit.

How Much Money Do You Need?

Figuring the amount of money required for business construction, conversion, or expansion, term loans, or equity capital, is relatively easy.

On the other hand, the amount of working capital you need depends upon the type of business you're in.

While rule-of-thumb ratios may be helpful as a starting point, a detailed projection of sources and uses of funds over some future period of time, usually for 12 months, is a better approach.

In this way, the characteristics of the particular situation can be taken into account.

Such a projection is developed through the combination of a predicted budget and a cash forecast.

The budget is based on recent operating experience plus your best judgment of performance during the coming period. The cash forecast is your estimates of cash receipts and disbursements during the budget period.

Thus, the budget and the cash forecast together represent your plan for meeting your working capital requirements.

To plan your working capital requirements, it is important to know the "cash flow" which your business will generate.

This involves simply a consideration of all elements of cash receipts and disbursements at the time they occur.

These elements are listed in the profit-and-loss statement which has been adapted to show cash flow. They should be projected for each month.

The Most Common Type of Business Loan

Acquisitions or a loan to acquire an existing business

Inventory loans

Account Receivable Loans

Working Capital Loans which converts a companies assets into working capital

Equipment Leasing

Commercial Property loans

Warehouse financing

International business loans

Franchise loans

What Kind of Collateral is Required?

At other times, the bank requires additional assurance that the money will be repaid.

The kind and amount of security depends on the bank and on the borrower's situation.

If the loan required, cannot be justified by the borrower's financial statements alone, a pledge of security may bridge the gap.

The types of security are: endorsers, and guarantors; assignment of leases; trust receipts; mortgages; real estate; accounts receivables; savings accounts; life insurance policies; and stocks and bonds.

Who gives business loans?

These lenders offer business loans, however, often times these loans must be secured.

This could mean offering up your personal assets as collateral. Although, the business is yours to do with what you want, these loans are very risky to any un-established business.

Women and minorities have an even wider selection of places willing to loan them business capital.

Organizations such as the Women’s Business Ownership, and Women Entrepreneurship in the 21st Century cater to lending money to women that wish to start-up a business,

Minority business loan programs are also available. Many businesses and government agencies or organizations allocate special funds to lend to minority business owners. The Minority Business Development Agency is a federally funded agency that specializes in fostering minority-owned businesses. This agency can help minorities with personalized assistance, and financial planning to secure adequate financing for business ventures.

One type of investor that can loan a business money is called an “Business Angel.” These are professional investors who invest solely in companies.

Business Angel investors are an excellent source of early stage financing. Often, business angel investors will finance a business loan that may appear a risk to commercial banks, or may appear too small to venture capitalists.

One downfall to angel investors, they are often highly involved in the business itself.

Many business owners do not want someone else running the show, and opt to stay away from angel investors for business loans.

Venture Capitalists are in the business of loaning money to businesses that offer strict investment criteria, and specialize in very specific high-growth industries.

In return for capital, venture capitalists will acquire stock in the company. Venture capitalists generally look for businesses that can show profit within three to five years, and then they move on.

However, during those three to five years, venture capitalists play a very active role in shaping the business. This often leads to a lack of control by the business owner.

Both angel investors and venture capitalists can be found by asking your business lawyer or accountant. Or you can conduct your own search via the Internet.

Many individuals turn to family and friends to acquire a business loan.

Others may seek financial assistance through business partners or potential customers.

No matter whom you ask to lend you the money you need for your business, having a good business plan or blueprint is the key.

No investor, large or small, wants to invest in a business that doesn’t have a good foundation, and that always starts with an excellent blueprint.

Here are Business Loan Articles that may help

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