What is a business loan?

A business loan is specifically taken out to fund your business. They are normally available to be paid back over a period of between 1 and 15 years. In order to decide whether to get a loan, you should take a careful look at your business's investment needs. Then you should look at your cash position. Your decision about how to fund whatever you wish to invest in should depend on your cash position but also on your business position.

Why is this? Because when you take out a loan, you are preserving your cash position, which means that your liquidity is also preserved. You will find it a lot more difficult to get a business loan on favourable conditions if you are in dire need of cash. This is because your interest rate and amount you can be loaned will depend on your ability to pay your loan back. If your cash position is precarious, then you'll find that your interest rate is higher as the lender would feel that they are taking more risk. Should your cash position be strong, then you'll get better loan conditions.

Some people think that if they are in an adverse personal credit position, they can get a loan through their business. But many lenders will look at your personal credit history as part of your decision whether to give you a business loan. This will particularly be the case should you be a sole trader or a member of a partnership. Should you have a bad credit history, with maybe a bankruptcy or a late payment or two, then you should write a letter explaining the circumstances that brought you to your credit position and, presuming they have changed, how they have, and include it with your application. Don't cover up your problems under any circumstances, because if you are found out, then you're extremely likely to be shown the door by the lender. So be honest, and hope that honesty lessens the impact of the black marks held against you.

In order to improve your chances of getting a loan, you need to show the lender why you will be reliable with your loan repayments. If you have accounts, show the lender your earnings history, and if possible a realistic assessment of your future earnings potential. It will also help you if you have personally invested in your own business. This will show the lender that your interest will be aligned with theirs, and you are both sharing the risks in your business.

Should you be a sole trader, you will be responsible and liable for the repayments. In a partnership, all partners will be jointly responsible. Finally, if you are a company, the directors are likely to be liable.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

© AskFinancially.com 2008

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