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Business Loans

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Business Loans

Business Loan is a very common and well-used method in companies to expand their business. Such type of finance comes from a bank or other lending institutions. Based on the agreement, the bank is trusting a borrower to repay the loan plus interest at the exact date.

There are many types of business credit programs. Each one has its own fees, interest rates, terms and conditions, and regulations. Fees include the amount borrowed plus interest and other charges. Some fees are required such as interest rates, some are optional such as credit insurance, and some are based on specific events such as late payment fees.

The process looks like this. First of all, the company owner makes the application on loan in the bank. Then, the specified person, who is responsible for business crediting, will analyze the company’s financial needs and determines exactly what kind of business financing is suitable for that exact moment. The credit analysts determine that a borrower can repay their financial obligations by reviewing the borrower’s financial and credit history. The main credit approval demanding from lenders for businesses are :

Collateral
 		 Secured loans can be secured by a collateral to reduce the risk associated with lending. If the borrower defaults on repayment, the bank seizes the house, sells it and uses it to pay back the debt. That is why an unsecured debt is considered a riskier investment than a secured one. Secured Loans are typically available at lower interest rates. 

The value of the collateral must meet or exceed the amount being loaned.
Credit Rating Credit rating mostly shows the credit payment history of the potential borrower. By analyzing credit rating and score, financial analyst values owners’ attitude to credits, the responsibility and respect of debt obligations.
Financial stability of Business A credit analyst gathers and analyzes financial data including the payment history, P/L analysis, balance, and cash flow sheets. The data are used to recommend approval or denial of a loan or credit.

Also, credit analyst interprets financial statements and use ratios when analyzing.

Business loans, by their purpose, can be divided into two main parts:

Working capital loans Fixed asset loans

Loans with standard/individual repayment schedules

Loans with standard/individual repayment schedules

Credit Line

 Loans with grace periods

Business overdraft

  
Short-term business loan  

Also, some banks have such services such as Credit Limit for businesses.

 The bank will determine the maximum amount of credit for the company based on business solvency.

 A credit limit allows the company to draw up a strategic plan for business development and enjoy credit resources approved by the bank.

Business Loans

Business Loan Types 

In practice, we meet many types of business loans. It is very important to correctly determine the company’s financial needs to know which type of financing will be the most suitable for that exact moment. I want to discuss four mostly demanded business loan types.  

1. Loans with Standard/Individual Repayments Schedules

Loans with standard repayment schedules are repaid in equal monthly installments. Most companies prefer such type of loan because installment includes interest and principal too, so after each payment, the principal gets less.

Very often a company’s income is connected to some season – it is very common in agricultural business, seaside hotels and etc.  In such a case, it is very important to feel safe and comfortable about loan payments, so the bank can offer an individual loan repayment schedule tailored to the business.

Business loans can be used for the following purposes:

Working capital
  • increase stock
  • expand the range of goods
  • settle liabilities to suppliers, etc.
Fixed assets
  • purchase/repair machinery and equipment, etc.
Real estate
  • purchase/build business premises
  •  purchase land
Other business needs
  • investments in business development and sustainability

 

2. Credit Line

The credit line is a very good resource to solve the short-term liquidity problem. It is often used to finance working capital or some monthly expenses such as salary costs, tax cost, cost of goods, etc. In case of using the credit line, the company pays only interest accrued on loan as a monthly payment. For the time of maturity of the credit line, the company is paying the whole principal and then re-using it when it is needed.

3. Short-term Business Loan

It is recommended that you use a short-term business loan to perform one-time transactions/investments or to finance a new business direction.

The principal of the loan and the accrued interest is to be repaid in a single lump sum upon maturity. It is also possible to repay the loan capital and current accrued interest before the scheduled term without any commission fee.

4. Business Overdraft

Business overdrafts are the best means to improve short-term business liquidity. They enable you to:

  • effectively manage a company’s funds,
  • effectively cope with unexpected expenses and payments,
  • only pay the interest accrued on the amount withdrawn.

Mostly, the amount of the business overdraft is counted by the company’s bank current account turnovers and it determines some exact percentage of it. 

As a conclusion, a business loan is a financial source that has always been one of the key points for the company’s development. The main point is to evaluate which kind of resource the company needs and what will be lower costs for it.

Business Loans

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