Small Business Loans: The Basics of Small Business Borrowing
Are you
thinking about starting a business but have no money to do it with. Well,
you're not alone. This article will tell you the basics of borrowing money
A loan
is money that is borrowed, and has to be paid back along with interest. If
the money is borrowed from an institution such as a bank, this is called a
commercial loan. Money that is borrowed from a friend or a relative is
called a personal loan.
The
borrower, or debtor, is the business or individual that takes out the
loan. The lender, or creditor, is the source from which the money was
borrowed. The term, or period, is the time that is specified during which
the borrower has to use the money borrowed before he has to repay the
loan. The maturity of a loan is when a loan term reaches its end. The
Principal is the amount that is borrowed from the lender. When you or your
business borrows money, the lender wants to know when they will get their
money back. Keep this in mind when you are looking for a lending source.
If the
business is not able to repay the loan, the lending source has a right to
legally come after assets to recoup it's money. The extent to which you
are personally liable depends on the business structure your business is
operating under.
If you
are approved for a loan, that you will have to make scheduled payments
(typically on monthly basis) plus interest. A loan can sometimes be set up
as a balloon loan. A balloon loan will typically require smaller initial
payments and one lump sum of what was borrowed as the final payment at the
end of the term.
Borrowing from Institutions Business loans generally fall into two main
categories: short term and long term loans. A short term loan is a loan
that is to be payed back within one year. Examples of short term loans
include:
Working
capital loans Accounts receivable loans Lines of credit Long term loans
are loans that are to be payed back typically from one to seven years.
Long term loans are typically used for: an expansion of a business the
purchase of equipment real estate Most business loans that are used for
starting a business are long term loans.
When you
approach an institution for a business loan, it will be looking at you as
the business owner as closely as it will be looking at the business
itself. One of the ways lending institutions make money is by lending
money and they want to be as sure as possible that they get back their
money with the interest owed.
The time
between applying for a loan and learning that you have been approved (or
disapproved) can vary. If you are disapproved, you may be told almost
instantly. If you are approved, it may take a few days though it usually
takes longer. It may even take several months to learn whether you or your
business has being approved for the loan.
Borrowing from Family and Friends If you don't want to, or can't get a
commercial loan, you can consider getting a private loan from family or
friends. This is usually real informal. However, you need to be careful
because this can lead to ruined relationships.
If you
are getting a private loan, it is in the best interest of the lender to
have an agreement put in writing. The written agreement should state the
principal, the interest charged and the terms of repayment. This puts the
lender in better position either write off the loan on his or her tax
return or to legally come after you.
Jose Valdez is the owner/webmaster of
http://www.aguidetostartingabusiness.com
http://www.findbusinessarticles.com and
http://www.allhomebasedbusinessideas.com
