Where do I get a business loan?
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UPDATED: Oct 16, 2012
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Borrowers can find business loans from several different lending sources. Business financing enables aspiring entrepreneurs to pursue their dream of launching a commercial entity.
Unfortunately, while current business loans news is filled with the fact that the ongoing credit crunch has left little financing available for commercial borrowers, it does not often cover the variety of lending sources that are still very actively approving applications.
Traditionally, banks were always the first (and often only) source that borrowers would consider for a business loan. Banks can sometimes offer low interest rates and long repayment plans. Unfortunately, banks can also be quite strict in their requirements. Additionally, many banks demand collateral in exchange for a business loan.
Collateral is any asset of value that secures borrowed money, thereby minimizing a lender’s risk. In the event that a business goes bankrupt or the borrower is unable to repay their loan—the bank can seize whatever was offered as collateral and liquidate it to recoup the lost money. While there are many types of collateral, the most common form is a home since real estate is usually the only asset that is valuable enough to cover the cost of business loans.
Due to their various sizes—which range from megabanks like Bank of America to small community banks—borrowers should shop around to compare the various policies, requirements, and even “personalities” of banks. Some banks will be far more open to accepting customers that are looking to borrow business loans while other banks will be unable to offer credit for an enterprise.
The Small Business Administration (SBA)
Prospective borrowers can also look into the Small Business Administration (SBA). The SBA is a guarantor of business loans rather than an actual lender. While the SBA process can be just as long as the banks’ loan approval process, in the end borrowers who are usually not deemed “wise investments” by traditional financiers can qualify for an SBA business loan.
Similarly, the Department of Veteran Affairs also offers several business programs to help veterans that have an entrepreneurial drive. These military loans are offered through the SBA.
Family and Friends
Prospective borrowers who have wealthy family or friends can ask them for money.
A common trap family lenders and borrowers fall for, however, is the desire to issue money interest-free. Be forewarned though that this practice opens up the possibility of inviting a future IRS audit or penalty.
In order to avoid later entanglement with the IRS, both the borrower and family lender should write a promissory note that details the amount, interest, lifetime, and miscellaneous information of the financing agreement.
But the IRS isn’t the only risk. Both the borrower and lender should remember that debt can often weigh heavily on relationships—especially if a borrower defaults.
Although credit cards are very versatile, they do carry high interest rates. Borrowers may be tempted to gather a veritable “warchest” of credit cards in their quest to launch a business. This may not be the wisest choice though.
Not being able to pay back a credit card—or several—will lead to a damaged credit score, which will cause problems getting approved for financing in the future.
Aside from that risk, managing the multiple credit cards required to launch a business can be a massive headache.
Peer-to-Peer lending, also known as p2p lending, is a relatively new form of financing that came about due to online innovation.
In p2p lending, a collective of investors gather online, receive proposals for financing, and decide whether they want to contribute money to the start up. Those contributions can be in the form of commercial loans or simple donations. They also range from a few dollars to tens (or hundreds) of thousands of dollars.
For example, a prospective borrower will submit their business plan or proposal for evaluation. Interested investors looking to see a return on their money will pool their contributions together and lend it to the borrower. This form of financing can be very attractive to prospective borrowers, especially if they have had difficulty finding approval through more conventional sources.
Ideally, entrepreneurs and prospective borrowers should investigate all of these options in their search for business loans. Launching a business can be both a difficult and exciting endeavor. Selecting the right lending source with the right policies and interest rate can really help a budding company find its footing on solid ground.