The Basics of The Business Loan

basics of business loan

At some point, especially if you own an SME, you will need (or might have needed) a little bit of financial help with your business. Whether it's for operational costs during a slow month or for systems, people, and facilities to help your business expand; you will need money. Best case scenario: it's money you don't necessarily want to put forward at the time being. Worst case scenario: it's money you don't have. So how do you go on with these capital necessities when funding gets a bit tight? One way to go about it is by getting a business loan.  

What You Need to Know Before Getting A Business Loan

Like any other loan, a business loan is a sum of money that a lending entity (whether from the government, a financing company, or a bank) loans you that you need to pay for on agreed terms with the lender. The only difference between this and a personal loan is that it's specifically designed for businesses instead of individuals. But before you jump right into it, there are a few things you need to figure out:

  1. What do you need the loan for?
  2. How much money do you need to borrow?
  3. Do you have collateral to support the loan?
  4. How long do you need to pay back the loan?
  5. How quickly do you need the loan?
  6. Do you understand the costs and payment structure of a business loan?
  7. Do you need a guarantor or an angel investor?
  8. Are you willing to give an angel investor equity in your business?

  Answering these questions will help you figure out if you can actually afford a business loan and what time of loan you should make. If you're still not sure, here are a few examples of what you would encounter in finding the right type of loan for you:  

Secured Business Loan VS Unsecured Business Loan

A secured business loan, just like a secured personal loan, is a loan that's guaranteed by a borrower's asset (collateral). With a secured loan, how much you can borrow from a lender is typically dependent on your collateral. This is because your loan will normally be a percentage of your asset's value. This is why the processing of secured loans are longer and require more paperwork. An unsecured business loan, on the other hand, does not need to be guaranteed by an asset. With an unsecured loan, lenders typically allow you to borrow a higher amount and the processing faster and doesn't require as many documents. So you have a loan to which you don't need to guarantee with an asset, with a faster process, and a higher loan amount: sounds great, right? Well, you have to remember that interest rates here will be higher, repayment terms will not be flexible at all, and (if you're not careful in reading the fine print) they may go after your personal assets should your business default. Secured business loans will definitely have a little more flexibility.  

Term Loan VS Line Of Credit

So your business loan can either come in the form of a term loan or a line of credit. On one hand, term loans come in a lump sum, that you need to repay monthly at a fixed interest rate. They're better for big purchases that your business needs like real estate, equipment, refinancing existing debt, or purchasing assets. Line of Credit, on the other hand, works much like a credit card. You're given access to a specific amount, which is significantly less than what you'd get with a term loan, which you can keep borrowing and repaying as many times as you need to. If you have working capital needs, you're better off with a line of credit than a term loan because it provides more flexibility and convenient access to money. More importantly, it feels more like a post-paid service than an actual loan. Some people believe that you need to make money first before you borrow money, while others believe that you just need a little push in finance to make your business flourish. Either way, it's always good to know where your business stands financially and what your options are in terms of funding. Good luck!