Business Loans: The Complete Guide and Their Many Uses

Last Updated on October 27, 2021

#1 What are Business Loans?

Business Loans are financial decisions you need to take when funds are needed for your business. Some entrepreneurs may think that they do not need one as the funding they seek is only small amounts and short term. Other entrepreneurs may be thinking that they can do without one because no bank has approached them. It would be good if you know now what you can or cannot do without a business loan.

You’ll have to consider the following if you want to know if you need a loan or not:

  • How much are your monthly operating expenses?
  •  What are your projected expenses for next year?
  • How far will this amount take you?
  • Do you have enough money set aside for contingencies?
  • Is your current income sufficient to support the repayment of the loan?
  •  If not, how fast can your sales grow to make up for it?

Business loans come in different types depending on what purpose they serve. Some entrepreneurs may prefer short-term/small capital loans while others would rather go for long-term financing that could give them the capital they need to expand their business.

#3 Advantages of Using Business Loans

A business loan can be your partner in meeting your financial needs that you cannot meet by yourself, whether it is for expansion or simply liquidity. Business loans come with different options depending on how high or low risk your business is considered. Some entrepreneurs have increased their levels of profitability after getting a business loan as this gives them the opportunity to invest more towards the growth of their business. It also gives them enough time to prove themselves if they think they can do better without borrowing so much money. Moreover, borrowing less than what you really need helps minimize unnecessary interest charges.

You just have to make sure that you are borrowing the right amount. This is because borrowing too much would mean higher interest rates and more capital to pay off later on.

It is time for entrepreneurs to realize the importance of having a business loan so as to be able to compete favorably with other businesses that can afford it. Whether you want to expand your business or just achieve financial freedom.

There are business operating expenses that business owners simply can’t pay for out of pocket. In the past, business owners had to rely on banks or financial institutions to lend them money until they got their business off the ground. Sadly, this practice has been very expensive and time-consuming – putting business credit in serious jeopardy. Fortunately, a business loan is a great alternative that can save a business owner a lot of time and hassle once he or she goes into it with the right information.

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As far as business expenses go, there are plenty of ways in which business loans can save you money. For one thing, they help cover unexpected business expenses that often arise when business owners least expect them. When it comes to business, you never know when you may need additional inventory or supplies; business equipment that breaks down unexpectedly; business repairs; business insurance (such as commercial general liability insurance); advertising and marketing expenses; business taxes; legal fees for contract negotiation and other business services; an unexpected loss of profit due to slow sales or increased business costs; employee bonuses or raises; business events like weddings, conferences or seminars; travel expenses such as gas money and airline tickets (or train passes if your town doesn’t have a train station).

#4 What Type of Funding Do You Require ?

Every small business needs a certain amount of funds in order for them to get going. The type and the amount of money required varies from one business plan to another. You need to consider many factors while deciding on your funding requirements – your startup capital, how soon you will require it, what sources are available, and so on.

The Different Funding Types Explained

We have classified the various forms of small business funding into four broad categories: Debt Capital, Equity Capital, Trade Credit, and Tax Incentives. Let’s take a look at each form in detail:

1) Debt Capital

When you are looking for debt capital, you are essentially borrowing money. There are various types of debts which you can opt for, depending upon your requirement. The most common form of debt financing is a traditional loan that uses your personal assets as security. With this type of business funding, the bank will lend you money only after assessing your creditworthiness through detailed research on lending criteria. Loans against property and home equity loans are also available in some cases to fund small businesses.

2) Equity Capital

With equity capital, an entrepreneur invests his own money into his business. It’s easier to raise such funds since the investor knows the owner personally and has more faith in him than he would have had with a stranger or an unknown person. The disadvantage with this form of finance is that the owner’s personal assets are at risk, in case the business fails to generate adequate returns.

3) Trade Credit

Trade credit is primarily for established businesses with a good track record that has been operating in the market for several years and has a wide customer base. Under this form of financing, you can get your suppliers and vendors to extend trade credit to you, i.e., give you goods and services on credit till such time as you can afford to pay them. This will not only help you bridge the cash-flow gap but also open up new markets, which would otherwise be difficult or expensive for a new company to tap into. However, keep in mind that these suppliers may demand higher prices for their goods and services on credit.

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4) Tax Incentives

At times, tax incentives can be one of the best sources of funding for your business. For instance, if you are an entrepreneur setting up a new plant or factory, you may be eligible to claim an investment allowance. Similarly, many states provide attractive subsidies and grants to businesses setting up operations in certain economically backward regions. Also worth considering is the research and development (R&D) subsidy where part of your R&D expenses can be claimed as a deduction under income tax rules.

While all these forms of financing sound good on paper, let’s not forget that they come with their own set of requirements. So before choosing any form of small business funding, make sure you know the terms and conditions.

#5 How to Apply for Business Loans ?

A business can be hugely rewarding, but it doesn’t come cheap. The costs of business loans are numerous and the application process is rigorous. Knowing what to expect when applying for a business loan will help ensure you get started on the right footing.

The first thing business owners need to do is understand their business’ needs fully before deciding which type of business funding to apply for. Loan types vary depending on how fast they need access to cash, the purpose of the loan, repayment schedules, tax money collected from customers that makes its way back into business coffers through refunds or rebates, etc…

Business loans can be business lines of credit, business overdrafts, business credit loans, merchant cash advances, equipment loans, etc.

Once you’ve identified your business needs, there are 5 simple steps to follow that will help ensure business loan applications get approved with minimal hassle.

1. Understand the Terms and Conditions of Your Loan Agreement with Your Lender

Your business plan serves as a checklist to determine what type of business funding is best for you. There’s no scientific way to tell whether or not certain types of business lending exist with specific lenders but it’s worth investigating so you know exactly where your business stands with your lender at all times. Clearly understanding all terms and conditions in writing before accepting an agreement is always better than trying to make sense of business loan terms and conditions after the application goes through.

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2. Make Sure Your Tax Reporting is on Point with All Legal Requirements

The business lending process requires business owners to provide verifiable proof of business earnings per month, as well as business expenses per quarter. Verifying business earnings can be done by submitting a profit and loss statement from a tax return, or your latest business bank account statements containing all transactions. The latter option only works if you have been keeping your business accounts up to date from day one – most business lenders will agree to use the most recent 12 months worth of business bank statements. Various types of business funding come with specific requirements for tax reporting, so it’s important your business is aware of all requirements before applying.

3. Prepare the Right Documents to Support Your Application for Business Funding

There are business lenders out there that actually advertise business loans without business credit checks but this is rare. Credit checks are always standard procedure with business funding, which means business owners will need to have excellent business credit scores before applying for business funding. Those business owners who have seen their business credit score drop since opening or operating a new business may want to consider improving their business’ cash flow first by making sure all invoices are being paid on time and customers are happy so they can improve their business credit score at the same time. It’s also important not to take too much time between applying for one type of business loan versus another because this could negatively impact your application as business lenders analyze business credit scores as part of business funding applications.

4. Know the Current Business Lending Rates and How They Can Affect Your Business Loan Application

Regardless of whether business loans are secured or unsecured, business owners need to know if they’re being offered a business loan at a decent rate. There are many ways to find out about the current business lending rates so it’s important business owners compare different business loan offers before making their final decision.

5. Protect Yourself by Being Aware of What Terms and Conditions Apply to Your Particular Business Loan

Business loan terms and conditions differ from business lender to business lender it’s important business owners read through these carefully before accepting any business funding application. If there are specific requirements you’re unsure about, make sure you ask for clarification and get things written down in your business loan agreement that will ensure no problems come up once the business funding application has been approved.

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