How do I secure a business loan?
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UPDATED: Sep 7, 2012
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There are several steps involved in securing a business loan.
The first step would be for businesses or entrepreneurs to show they are worthy of a lender’s investment. Lenders typically desire to see a company’s financial history which includes a business’s credit history, revenues, the current balance sheet, and equity.
Just as is the case with people, businesses will face a credit check before a lender decides whether or not to offer them a business loan.
Lenders may expect entrepreneurs to submit a business plan in order to convince lenders that the proposed enterprise would be profitable to invest in.
Additionally, most lenders desire borrowers to offer collateral for a business loan. Collateral is any valuable asset that can be used to limit a lender’s risk in giving money to a stranger. In the event that a borrower—or business, in this case—is unable to make payments on their business loan, then their lender will seize ownership of any offered collateral. The lender can then sell the repossessed collateral to make up for the cost of the lost business loan.
Collateral can be divided into two categories: assets that are wholly owned by a business or entrepreneur and assets that are partially owned due to a remaining balance. Lenders will typically only accept assets that carry titles of ownership as collateral.
While there are many valuable assets and items in the world, collateral is most commonly offered in the form of real estate. Other less common forms of collateral for a business loan are inventory, savings, and equipment depending on the nature of the business. Lenders do not typically consider vacant land to be collateral. Some lenders will even accept exotic vehicles as collateral, including boats, RVs, and aircraft.
Since many lenders are very conservative in their estimation of collateral, borrowers should keep detailed records of the current market value of offered collateral.
Borrowers must understand that the offered collateral for a business loan will be seized by lenders in the event of default. This can result in a business losing its inventory, equipment, and having accounts drained. For entrepreneurs or business owners that have offered their home as collateral, this can result in foreclosure.