- November 18, 2021
- Posted by: Roger Walker
- Category: Finance & accounting
Banks and financial institutions offer small business loans for small businesses to get funding for various requirements. For example, if a business requires money to buy material or equipment, they can apply for a loan from the bank. Here, we will present how do business loans work. Loans can be secured (where you use some asset like real estate as security) or unsecured (no collateral).
How do business loans work?
Loan approvals are done by evaluating the profitability of an enterprise. The bank gets information about your business, you and its performance through the credit bureau to decide whether or not it should approve the loan. It depends on several factors, including operating costs, cash flow, competitors in that market, the opportunity for growth, etc. Read also: Four Qualities of a Smart Loan
Types of business loans
There are different types of business loans that the bank can offer, from working capital financing to real estate financing.
1) Working Capital Loan: This type of loan is a short-term loan which a small business usually requires for operating expenses. The most common examples include paying salaries and purchasing raw materials or inventory.
2) Real Estate Loan: This type of loan is provided when you are buying commercial real estate. The bank’s primary concern, in this case, is the value, profitability and location of the property.
3) Mortgage Loan: It is a form of loan in which you buy or refinance your home by borrowing money from a bank. A mortgage can be open against any type of home, be it an apartment or a house.
4) Consumer Loan: If you are borrowing money for personal use like buying furniture or car, this type of loan may be offered to you by the bank.
Managing business loans
If you have received funding from the bank, make sure that you pay back the full amount on time to maintain a good credit history. If you have been refused a loan, it is not the end of the world – you can still look for alternative sources of financing from friends, family or even from your own savings.
In case you have received a business loan from the bank and have run into an issue that needs to be resolved, you can get in touch with a professional for assistance. A business credit counselor can help understand your loan repayment options and assist you in getting the maximum benefits through them.
Rules for business loan approval
When applying for a business loan, the bank looks at various factors to decide whether or not it will fund your company. Some of them are listed below:
1) The applicant’s credit history, especially regarding repayment of loans and failure to repay debts
2) Amount requested for financing as well as current liabilities including intercompany dues etc.
3) Company’s past history including its financial records and tax returns
4) The market value of the business itself especially for a real estate loan
5) The creditworthiness of the borrower including his financial status and commitment to repaying the debt.
A business loan is often the best way to start or expand your small business. Make sure that you apply for a loan only when it is absolutely necessary and you are confident of repaying it within the given time period.