Fundamentals of a Business loan

What is a Business Loan?

A business loan is an amount taken from a financial institution specifically for business.

Just like any other loan, there will be a debt creation which is to be repaid along with the interest on the principal amount.

There are many types of business loans like bank loans, asset-based financing, mezzanine financing, microloans, invoice financing, business cash advances and cash flow loans.

Fundamentals of a Business Loan

Before taking up a business loan, it is important to consider various factors which influence your business and the loan.

These factors will help your lender understand the facts of:

  • The purpose of your loan
  • Your loan affordability
  • Your repayment capacity

The basic points to be considered before taking a business loan are:

  • Loan application

You will first have to give a loan application to your lender with the basic information about you and your business.

It is important to review all the information and see to it that it is all correct and complete.

There will be a document verification process to ensure that the information you gave was true.

You should also provide the necessary documents along with the loan application.

 

  • Your credit history

Before providing you with a loan, the financial institution will check your credit score to ensure that you will be able to repay the loan amount.

Your credit history determines your repayment history, your income level and any other debts you have on the date of your application.

It helps you qualify for your loan and the type of interest you will be getting on your loan amount.

It also affects your credit limit.  A good credit history qualifies for a greater amount of loan and a poor credit history qualifies for a lesser amount of loan.

 

  • Your business plans

The business plan you provide to the bank gives an introduction to the purpose and strategy of your business for which you wish to take the loan.

The information about the business plan includes both financial and organisational goals.

A typical business plan is just a summary of your business including your organization structure, a brief about your customers, your market of business, competitors, and a complete set of projected financials.

This type of document should be as detailed as possible and it has to be prepared with the assistance of a professional.

 

  • Financial statements

You should provide your financial statements to your lender.  The period for which your financial statements are required depends on the policy of your lender.  Financial components include:

  • Balance sheet

A balance sheet will give a clear view of your financial assets and your liabilities.  Your balance sheet will provide the lender with a snapshot of your company’s net worth on any particular date.

It allows the lender to assess your ability to meet your existing obligations in addition to repaying the money lent for your business.

  • Profit and loss statement

The profit and loss statement is a statement containing your company’s revenues and expenses for a period of time.

This statement will show your lender the details of where your money is coming from and will prove that you have a steady cash flow.

  • Cash flow forecast statement

A cash flow forecast is a statement that provides an understanding of your business’s potential growth and opportunity.

The main point is that a lender will see to ensure that your future profit margins will be good enough to cover up your loan amount.

  • Bank statement

Most lenders might need to see your bank statements to calculate an average balance and to confirm that you have a healthy financial history.

 

  • Tax returns

To verify your income, many lenders will need to check both your tax returns and business tax returns.

Attach all the documents required to provide with the lender to have a quick reference in any case.

  • Personal tax – Your tax returns include your income tax returns that provide all the information about your earnings.
  • Business tax – Business tax returns are also required by the lenders to let them see that your business has a good position to repay the loan taken.

 

  • Collateral for a secured loan

There will be collateral needed by the lender that assures your loan amount.  It gives the lender the impression that if you default the loan amount, they will be able to recover their funding from the collateral security.

This collateral can be any document with the details of the value of any person or business property that can be used to secure the loan amount.

You can choose to provide any of your assets as collateral if you can prove its value in the market covering up the loan amount.

 

  • Nature of your business

The nature of your business is important for seeing the financial institution from which you wish to take the loan amount.

It affects the type of loan you take from the lender and also your rate of interest and other terms of the loan.

The nature of the business can be seasonal or cyclical.  Seasonal businesses need financing for the short term.  But for cyclical businesses, the loans are designed to support a business through depressed periods.

 

  • Consider your industry

Before taking up a business loan, it is important to consider the state of your industry.  Businesses that are in good condition while the others are in decline will often receive better terms of funding.

 

  • Past Credit Problems

For starting your business, your personal credit history plays a key factor in any lender’s decision to approve your loan.

In case your credit history contains late repayments, judgements or tax liens, makes it very difficult to get a loan till these entries are removed from your credit report.

If any time you declared bankruptcy or have defaulted on a loan, you will permanently cease to get a federal loan.

Conclusion

Consider all of these factors and fundamentals before taking up a business loan.  See to it that you possess all the required qualities and documents needed for the lender to approve your loan.