Business loans are fundamentally pretty similar to personal loans with a few small caveats. How a business structures its debt and manages its cash flow can be the difference between a successful business and one that ultimately fails.
By: Hitesh Khan/
Many new business owners make the mistake of taking out too many loans too quickly instead of exploring other means of structuring their business or securing financing. While business loans can be used at any point during a business’s life, it’s always better if you can minimise the amount of loans you have to take out until your business’s cash flow and customer base is well established.
If payments on the business loans you took becomes due before the business begins producing sufficient revenue to cover them, it can put serious pressure on the business’ cash flow.
So, before you start signing documents on business loans, consider several alternatives, and operate on a shoestring budget.
Many businesses could be run on a shoestring budget in the beginning if they really wanted to. It may not sound glamorous, but consider whether you can run your business from your home or almost entirely online.
The other primary method of financing a business is to sell an equity stake in the company for a sum of money. That money does not have to be paid back and is essentially an investment like any other. The obvious catch with selling a portion of your company for cash is that you will lose some control as well as forfeit some of your profits down the road.
Talk to family and friends before you take business loans. You would be surprised how willing friends and family might be to support you. While still technically loans, you can generally get much more favorable terms from friends and family than you can from a financial institution.
Even if their loans are small, enough small loans from friends and family can really help make the difference, especially in the beginning. Make sure you adequately document loans from friends and family to avoid any confusion and misunderstandings with them down the road.
Remember that business loans are a little different than personal loans in terms of where you can get them.
Of course all of the same financial institutions that would give you a personal loan will probably be able to help you with business loans as well. These include banks, co-operatives, and other financial institutions. In addition to the usual suspects, some established money-lending businesses may be able to offer you loans as well. So, before you run to the nearest bank, check to see what other options may be available to you.
Sometimes, specialised business organisations can often offer discounted rates on loans because they are subsidized by governments and other organizations. Always shop around to get the best rate because higher interest rates can really impair a business’s ability to keep current on its loans.
Be mindful that many lenders will require that you put up some sort of collateral for the loan. As a business owner, you may be able to use business assets as collateral (such as office equipment and property). A lender may also require a cosigner or guarantor on the loan. If you have a business partner cosign the loan, he or she should already be aware of the risks, but if you are going to have friends or family cosign the loan, make it very clear exactly what the risks are.
A personal guarantee is an unsecured promise from an individual to make loan payments when a small business is not able to do so. “Unsecured” means it is a promise that is not backed up by a specific asset, such as real estate, in which case, the asset would be considered collateral.
A personal guarantee is an added assurance that you are serious about your business – and most importantly – serious about repaying the loan.
One big reason why a personal guarantee is needed is because most lenders are bankers and are in the business of accepting deposits. They use those deposits to make small business and other loans, and, as a result, they are responsible for protecting the interests of their depositors.
In essence, personal guarantee is a way to go after your personal assets, commonly your personal residence, through the legal system. Without personal guarantee, there is not much a lender can do if your business defaults on a loan and is unable to repay it.
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