Understanding the Basics of Business Lending

Are you a business owner looking to give your business a boost? Understanding the basics of business lending is a great place to start! Business lending is a form of financing that helps entrepreneurs acquire the capital they need to launch or scale their business(es). From bank loans and lines of credit to agricultural loans, there are a variety of loan products available to meet your unique needs. In this blog post, we’ll cover the fundamentals of business lending, so you can make an informed decision about the best option that helps you meet your goals. 

Essentially, business lending involves a lender or financial institution that provides capital to a borrower, typically with the expectation that the loan will be repaid with interest over a set period of time.  

Business loans can take many different forms, and the terms and conditions can vary widely depending on the type of lender and the nature of the business. Some loans may require collateral, such as property or inventory, while others may not. 

Regardless of the type of loan, the basic premise is the same: lenders provide funding to businesses, and businesses use the funds to invest in their operations. This could include purchasing inventory, hiring staff, buying equipment, or investing in marketing and advertising efforts.  

Business lending can be a crucial part of starting and growing a successful business, as it can provide the financial resources needed to take a venture from concept to reality. However, it's important to approach business lending with caution and carefully consider the terms and conditions of any loan agreement to ensure that it's the right fit for your business needs. 

When it comes to business lending, there are several types of loans that businesses can apply for, each with its own features and benefits. Here are some of the most common types of business loans: 

Term Loans: A term loan is a lump sum of money that a business borrows and repays over a set period of time. Term loans can be secured or unsecured and are used for a variety of business needs, including working capital, equipment purchases, expansion, and more. 

Commercial Real Estate Loans: A commercial real estate loan is similar to a mortgage in the sense that it is a loan used to purchase property or land that will be used to produce income. For example, offices, retail locations, hotels, apartments, etc. 

SBA Loans: Small Business Administration (SBA) loans are government-backed loans that provide low-cost financing to small businesses. SBA loans are available in a variety of types, including 7(a) loans, which can be used for general business purposes, and 504 loans, which are used for real estate and equipment purchases. 

Business Lines of Credit: A business line of credit is a revolving credit line that businesses can draw on as needed. Business lines of credit are typically used for short-term financing needs, such as covering payroll or inventory costs. They are a valuable financing option for businesses looking to manage cash flow and cover unexpected expenses. Additional benefits include: 

1. Flexibility: Unlike a traditional loan, a business line of credit offers more flexibility in how funds are used. A business can access the credit as needed, only paying interest on the funds that have been borrowed rather than the full credit limit. 

2. Cash Flow Management: A line of credit can be a great tool for managing cash flow. A business can use its approved credit line to cover unexpected expenses or fluctuations in revenue, ensuring that bills are paid on time and operations continue smoothly. 

3. Fast Access to Funds: Once approved for a line of credit, funds can be accessed quickly and easily. This can be particularly useful for businesses that may need to make time-sensitive purchases or investments. 

4. Potential Cost Savings: Depending on the lender and the terms of the line of credit, the interest rates may be lower than other types of financing, such as credit cards or merchant cash advances. 

When applying for a business loan, there are certain factors that lenders consider before approving or rejecting the loan application. These factors are important because they determine whether your business has the capacity to pay back the loan and whether lending you money is a good risk. 

1. Credit Score: Lenders will usually check your credit score to determine your creditworthiness. A good credit score means that you have a good history of paying off debts on time. A poor credit score, on the other hand, can lead to rejection of your business loan application. 

2. Business Plan: A good business plan can help you secure a loan. Lenders want to know what your business does, what it hopes to achieve, and how it plans to do so. A good business plan shows that you are organized, thoughtful, and serious about your business. 

3. Collateral: Collateral is something of value that you pledge as security for a loan. If you default on the loan, the lender can seize the collateral to recover their money. Collateral can include property, equipment, or inventory. The more valuable the collateral, the better your chances of securing a loan. 

4. Cash Flow: Lenders will want to see your business’s cash flow to ensure that you have the capacity to pay back the loan. Your cash flow is the amount of money that flows in and out of your business over a period of time. A healthy cash flow means that your business can generate enough revenue to pay off debts. 

5. Business Experience: Lenders want to see that you have experience running a business. If you’re a new business owner, you may be considered a higher risk compared to someone who has been in business for a long time. You can improve your chances of getting a loan by showing that you have relevant experience in the industry. 

When considering if a business loan or line of credit works for you and your business it's important to review all your available options and make sure you understand the benefits and limitations of each. By taking the time to research and discuss the various types of business loans with a local banker, you can make a more informed decision to help your business thrive.  

Interested in learning more? Get in touch with a local banker today!