Small business loans are meant for the financing of small businesses in the United States. Small business funding refers to the means through which an aspiring or already existing business owner gets money to initiate a new business, buy an existing business or inject money into an already existing business to finance future or existing business activity. The most popular small business funding options are secured and unsecured loans. A secured loan is one that requires the borrower to place collateral, such as a house or a car, against the loan. The amount of collateral depends on the value of the collateral. Collateral is often used to ensure repayment by the borrower.
Unsecured small business loans work without collateral. They are typically obtained for starting or expanding a small business. These are popular types of unsecured small business loans because no collateral is required. However, there are a number of disadvantages to unsecured small business loans, including high interest rates, longer repayment periods and stricter loan criteria.
One way of securing small business loans is to get a cosigner who is an immediate relative of the business owner himself. In other words, a person who is related to the borrower is usually required to sign on the agreement. This helps the lenders in tracking down and collecting payment if the borrower defaults. The lenders use this system to secure their interest in the financing and in the cash flow of the business.
Another alternative for small business loans is to use financing programs typically offered by commercial banks. Program activities include credit checks and collateral evaluation for the loans. Program offerings are available from a variety of lenders and can range from high interest rates to lengthy term contracts with fixed payments. The selection of the right program will depend on the needs of the business.
Borrowers need to be aware of financial covenants that may affect the ability to take advantage of a financing opportunity. Some of these agreements prohibit the business from using a specific asset to repay its debt in the event that the debtor goes out of business or decides to sell the business. In other cases, financial covenants may restrict or limit the ability to borrow from other sources to fund the business’s expenses. The right lender understands each of these scenarios and will work with the borrower to find the right option.
Poor credit history may also prevent a business from borrowing money under loan terms. Lenders look at a borrower’s credit history as a reflection of the borrower’s dependability. If a borrower has bad credit, the lenders will be less willing to lend money, since they will view the borrower as high-risk. To counter this, some lenders require a co-signer who is a higher-credit risk. In some cases, the co-signer can take on the entire responsibility of repayment if the borrower goes bankrupt.
Business owners often try to avoid these types of fees by seeking small business loan co-signers without first knowing their credit ratings. However, even those borrowers who have good credit can encounter problems if they do not choose the right lender. When choosing a lender for their business loans, business owners should shop around to get the best deal. A borrower should ask about the lender’s fees and interest rates as well as the terms of the loan. Businesses can learn more about small business loans by registering for a free loan guidebook.