Where to get a small business loan

Business loans are fundamentally very 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.

Below you will find information on the schedule for a small business loan to promissory notes and co-signers.

When to apply for a loan

Many new business owners make the mistake of borrowing too much too quickly instead of exploring other means of structuring their business or securing financing. While loans can be used at any time in the life of a business, it is always best if you can minimize the amount of loans you have to take out until your business cash flow and customer base is well established. If loan payments begin to come due before the business begins to produce enough income to cover them, this can put great pressure on the cash flow of the business.

Before you start signing the loan documents, consider a few alternatives:

  • Trade on a shoestring: Many businesses could run on a very low budget at first if they really wanted to. It may not sound glamorous, but consider whether you can run your business from a garage, vacant room, or almost entirely online.
  • Consider selling stocks: The other primary method of financing a business is to sell an equity stake in the business 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 lose some of your profits in the future.
  • Talk to family and friends: You will be surprised how willing your friends and family can be to support you. While technically still loans, you can generally get much more favorable terms from friends and family than you can get from a financial institution. Even if your loans are small, enough small loans from friends and family can really help make a difference, especially in the beginning. Be sure to properly document the loans of friends and family to avoid any confusion or misunderstanding with them in the future.

Where to Get a Loan

Business loans are a bit 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 also be able to help you with a business loan. These include banks, credit unions, and savings and loans.

In addition to the usual suspects, government entities such as the Small Business Association (SBA) may also offer you loans. Many states and large cities also have local organizations that are designed to stimulate business investment, so before you rush to the nearest bank, check what other options may be available to you. These specialized business organizations can often offer discounted interest rates on loans because they are subsidized by governments and other organizations.

The pay

Once you have decided who your lender will be, the basic financial instrument behind most loans is the promissory note. As its name implies, it is a document in which you promise to return a certain amount of money, the principal, at a certain interest rate for a certain period of time.

If you choose to borrow money from friends and family, don’t just shake hands or verbally promise to pay the money back. As a business owner, you must be well aware of how important it is to get things in writing. Putting loan terms in writing helps clear up any potential misunderstandings in the future and can prevent the destruction of an important relationship.

It is equally important to have it in writing in case you are audited by the Internal Revenue Service (IRS) at some point. Money from friends and family without an agreement may seem more like a gift to the IRS. Even if your friends and family tell you that they don’t need you to put it in writing, explain to them that it is important for financial record keeping and protecting yourself from the IRS.

Interest rates

Always shop around to get the best interest rate because higher interest rates can really hurt a business’s ability to keep up with its loans. In addition to finding the best possible interest rate, there are two other aspects of interest rates to look at as a business owner.

First, interest rates that are too high can violate state usury laws that limit the maximum interest rates allowed. Usage laws vary widely from state to state, so check your state’s laws to make sure you’re not taking an illegal loan if the interest rate seems too high.

Second, while really low interest rates sound great, be careful. The IRS may view a really low interest rate loan as an equity investment in the business rather than a loan, which would have serious tax and ownership consequences for your business.

Guarantees and personal liability

Many lenders will require that you put up some type of collateral for the loan. As a business owner, you may be able to use business assets as collateral (such as office equipment and real estate).

However, your business assets may not cover the loan. In that case, you may have to put up a personal guarantee, such as taking out a second mortgage or deed of trust on your home. Depending on how you have established your business, the lender may also sue you personally and take your personal assets to satisfy the loan.

Co-signers and guarantors

A lender may require a cosigner or guarantor on the loan. If you have a business partner co-sign the loan, he or she should already be aware of the risks, but if you are going to have friends or family co-sign the loan, make it very clear exactly what the risks are:

  • Spouses: If you are married, there is a good chance that a lender will require your spouse to sign the loan jointly. Make sure you and your spouse understand that it is not just your common property that may be at risk. Separate property from your spouse can also be achieved to satisfy debt, so be very clear with your spouse and make sure he or she is really comfortable with that possibility.
  • Limited Liability CompaniesAlthough limited liability companies generally protect business owners from personal liability, if you or other business owners jointly sign the loan, you are effectively exiting the protection of a limited liability company. All of your common and separate assets could be confiscated to satisfy the debt.

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