Many young entrepreneurs assume small business loans are like personal loans, except that they are extended on behalf of a business. This is not true In fact, the structure of business loans is very different from that of personal loans. Most businesses require ongoing financial assistance, even after their business is profitable, to fulfill orders, pay suppliers, and grow. This means that permanent debt and credit arrangements must be put in place. Meeting these long-term financing needs early in a company’s life cycle can be a challenge.
Business Plans # 1 Matters
Personal loans are based on income and credit only. Very few other factors matter if a person is financially stable at the time they apply for a loan. Business loans have different considerations. A lender tries to know the relative chances of success of a company before distributing funds to a new entrepreneur. Lenders draw this information from a business plan.
A business plan is not just a description of what a business will do. It must detail how the company will perform its work, industry research completed, estimated service delivery costs, marketing estimates and even future financial modeling. Business owners who do not provide a detailed plan showing a successful model will rarely find enough funding to get on their feet.
Government assistance n ° 2 is available
The government, federal, state or local, does not distribute free money to any company. However, there are several options for government grants and even loan guarantees that can reduce the cost of financing a business. Subsidies tend to be more difficult to obtain because they have more specific requirements. Entrepreneurs can look for grants in your area by contacting the local Chamber of Commerce for information on small business grant programs.
The Small Business Administration guarantees loans to young entrepreneurs. Those seeking these loan guarantees will have to meet the basic credit requirements. They are then entitled to fixed and low interest rates on private loans, thanks to government support for the program. Look for SBA loans on the SBA website or by visiting your local SBA office.
# 3 Placing personal property as collateral is risky
Some private lenders, in particular, will ask a borrower to place a personal asset, such as a house or automobile, on the line to secure a commercial loan. If the company goes bankrupt, this asset will be seized, which will render the business owner without equity in his own home. The results can be detrimental.
Separate personal and professional assets to avoid systemic risk. A business owner can use a personal asset to take out a start-up loan. Then, when a company shows signs of profitability, its owner must replace his personal assets with an asset secured by a loan. In future, only business assets should be used when collateral is required. Once the business has created its own credit, its owner no longer needs to attach its name to loan applications or financing opportunities.