Starting any business can be expensive, as the business owner has to invest money in equipment and services before he or she can approach customers. While some people use their funds for starting their business, in many cases they require money from other sources for their business.
In some cases, they may approach their relatives and friends for a loan for starting their business, while in other cases, the business owners may approach a bank or other lender for a business loan so that they have the necessary funds required for day to day operation of the business.
Loans for a New Business
Since there is a risk of a default for any loan, most lenders will ask for collateral while giving the business loan, especially if the business is new and does not have any relationship with the bank or lender.
The lender will also ask for details of the business, the business plan, revenues, profits to check if the business is able to repay the loan. As the risk of lending to business is higher compared to personal loans, as many businesses shut down, the interest rate for a business loan will usually higher compared to other loans, especially loans to salaried people.
Loans for Business Growth
Though some lenders will give loans to new businesses, a majority of the business loans for any lender are for established businesses. There are many businesses, where a large amount of money has to be invested for purchasing manufacturing equipment, raw materials or stock for trading.
The business owners may not have sufficient money in their bank account to purchase the asset or stock, so they will often approach their bank or another lender to get a suitable loan so that they can make the necessary purchases and pay for the expenses required to keep their business running or help it grow.
Loan Terms and Conditions
It is usually easier for a business owner to get a loan approved from the bank where he has an account, especially if the business is doing well. The terms and conditions for business loans, including interest rate, duration of the loan, repayment terms and other factors, will depend to some extent on how creditworthy the business is, whether the lender believes that the business will repay the loan on time.
If the business is unable to repay the loan, or there is a delay in the repayment of the loan, it can be very expensive for the lender, as they have to write off the loan amount, reducing the profit of the lender.
Calculating Loan Amount and Repayment
Before applying for a loan, the business should plan in detail how they intend to use the loan amount and also how they are planning to repay the loan amount within a specified period. As the interest rate charged for the loan will usually be higher than other loans, it is important to estimate the amount required as loan accurately, and a larger loan could adversely affect the profitability of a business.
The business should also be able to accurately estimate the revenues and profits in future so that it is able to repay the loan in time, making a provision for unfavorable business conditions. To get the best deal for the loan, the owner should check the loan offers from multiple lenders before taking a decision.