Secured and Unsecured Loans

What is a business loan

Obtaining finance is vital to start a new business or to make an existing business grow. But, if you’re a fresh starter, don’t expect to walk into a bank and just get your application approved. They usually give money to ventures with previous activity. Ideally, you should have personal savings as a primary source of funding.

Financing a business through a business loan can be a formidable task. The process of applying for a business loan is more difficult and elaborate, compared to the standard procedures, such as obtaining a 10 000 dollar personal loan, for example. This is due to the fact that business loans contain a greater risk element as compared to other loans. For this reason, lenders will be more cautious when evaluating business loan applications.

There are two types of business financing: secured and unsecured loans. The main ingredient for secured business loans is the collateral. This type of loan will require an asset as collateral and greatly add to the business loan application.
Unsecured business loans are loans without collateral. They are usually difficult to find and have only small financing capabilities.

How to secure a business loan

If you possess assets that you wish to use as business loan collateral, you can apply for a secured business loan. The details of these assets should be provided to the lender. If the business owner defaults on his repayments, the collateral can be sold in order to recover debt.

Lenders will evaluate their applicants based on the information these are providing. Furthermore, they will judge the viability and profitability of the business requiring finance. That is why a business loan application must be accompanied by a loan proposal, with the intention of creating a positive impression.

The loan proposal should begin with an executive summary. Here you will provide short descriptions about your business: the type of venture, the industry, the purpose and usage of the money requested, the proposed repayment conditions as well as the intended loan period. After this introduction, you will proceed with more information about your company: the nature of the activity, the location, the company history, the products/services you provide, key factors that differentiate the company or the product(s), the general growth and trend of the industry, competitive information, growth potential and target customers.

Other details that could help your application are: the marketing strategy, detailed information about your product(s), historical information and future growth plans for the company. You should also mention if you plan to incorporate product or service extensions in the future, with the corespondent descriptions.

Next you will have to present the credentials and experience of each member of the management team. You must convince the lender that the company is managed by individuals who are responsible and capable. Managed by the wrong people, the business could get into financial problems and would fail to cover the debt.

To evaluate the performance of your business, the lender will require the historical records. New companies do not have these records yet, so the financial records of the owners will be used as a basis of evaluation.. Income tax returns forms are also required by lenders.

If the loan is applied for an existing company in active operations, company financial statements, including profit and loss accounts, balance sheets and the net worth reconciliation record should be included in the loan proposal. All of this information should be the latest and less than 90 days old. A listing of accounts receivables and other short term and long term debt should be attached. In case of a new business, a pro-forma balance sheet and profit and loss account need to be provided. Not only that, but a cash flow projection for the upcoming year is required to indicate the possibility of recovering the debt. This means that projected revenue, profits, costs incurred and expenditure should be listed out with definite explanations provided as well as a list of assumptions.

Finally, you need to add a few documents normally required for the secured business loan application: the article of incorporation, lease agreements, partnership agreements, license, references, etc. As every lender has different expectations in terms of documentation, information and attachments, you should check with the individual lender on their specific expectations with the loan proposal.

This entry was posted on Saturday, June 26th, 2010 at 12:44 pm and is filed under Secured loans. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.