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Small Business Loans: Arrange the Necessary Capital For Your Business
Starting and running a small business is not easy. Among the other things that an entrepreneur has to deal with, is the capital that a business will require for setting up. Owners of small businesses find it very hard to find the required finance, especially when they are just starting out, as they have absolutely no reputation or standing in the market that will encourage lenders to consider them as potential borrowers.
What about risk?
There are, however, lenders who are willing to take the risk of giving small business loans because of the higher rates of interest that they are able to charge. They are also careful to limit the amounts of money that they loan to the small business and thus spread out their risks. These loans can be short-term loans that can solve immediate cash flow problems and require to be repaid within a year.
As the business establishes itself, lenders may also consider giving loans for expansion and other expenses for periods of up to three years. Once a small business has built itself a reputation for the business and an ability to repay, lenders may even feel comfortable in extending long-term loans of up to seven years. These can be of great help when it comes to expanding the business.
Lenders of small business loans will require a fair amount of documentation before they assess the risks and agree to extend the required loans. You have to start with proof of ownership, contracts from customers, letters of reference, and credit references, among others. You will have to also give your tax returns, financial statements, incorporation of the company and even a credit report of the owner. If you are just starting a small business, you will need to also give a proper business plan that identifies the market, its demand, technical competence of the stakeholders, projections for sales and receipts, and establish that the business is viable in the current economic situation. Small businesses can also obtain loans from venture capital lenders, who are especially interested in lending to businesses that have a sound technological base and where market trends point to likely success for the business.
Lenders are more comfortable if the small business owner for a startup has invested his own funds, as this then already creates a form of equity in the business that can act as collateral. They are also more comfortable lending to small businesses that can put up some collateral of a value more than the loan amount, or get the loans cosigned by people who have a proven financial standing.
Repayment of these small business loans can be flexible, and this allows them to make the repayments as per the income generated by the business. Some lenders may not agree to such terms, but then the business taking out the loan has to make sure that they have the capacity to repay the loan as per the schedule.
As a matter of fact, the capacity to repay is the primary criteria that lenders have to meet, and every borrower must also make his own assessment of his ability to return the loan. This is better done on the conservative side.
It can always be helpful if you take out such small business loans through brokers as they will have extensive knowledge about lenders, their terms, and know those who are specialized in lending money to the type of business you are in. The charges that these brokers earn are relatively small, and you can even find some brokers who will take their commissions from the lenders and not from the borrowers. However, this cost to the lender will be covered in the fees, charges and other interest of the loan which you finally take. Lenders expect brokers to conduct due diligence and bring them customers who have a sound business plan, creditworthiness and a definite ability to repay the borrowed amounts.
Ready to boost your business
Establishing credit terms with suppliers is another way that a small business can arrange for the necessary finance to run a business. This can only come after the business has established its credibility, ability to stay in the market and contend with the competition.
Once a business is established, there are other avenues to arrange the required finance by invoice financing and other means. You can also find lenders who will extend small sums of money with almost no paperwork and speedy disbursement of the loans. However, these lenders will charge high interest rates and have stringent repayment schedules.
Small business loans are an ideal means of financing for both small and medium-sized businesses as they are easy to obtain and allow for flexible repayment schedules. The business owner needs to balance this against costs and the likely impact on profitability.