The basics of a business loan

Obtaining a business loan is a little different than obtaining a personal loan. For this reason you need to do a lot of extra work before applying for a loan. The biggest difference is that with a personal loan the bank has an asset they can claim if you default on your loan. With a business loan, the bank is investing in an idea and must trust that you can make it work. The risk factors of your idea are the main reason that banks are reluctant to lend to new or small businesses.

While a business loan still depends upon the same factors as a regular loan, there is one big difference, a business plan. The basic requirements are your personal credit, experience and education. The crux of the loan is the feasibility of your business as indicated by your business plan.

Your business plan will show a bank exactly what you intend to do with their money and how you will repay it. Your business plan should be able to answer any questions your bank may have about your business while proving your venture is a low risk to them. The typical questions that banks want answered are how much money do you need, what will every cent of it be used for, how will it be repaid and what will you do if you do not get the loan?

When it comes to the money details of your business plan you need to be as specific as possible. Of course an important part of being specific is being accurate. Your accuracy and the amount of the detail will help to show how much work you have invested in your ideas and thus may indicate a lower risk to the bank. Typical details to show include the amount of money to be used for new employees, marketing, equipment, tools and paying off business debts.

When explaining how your business intends to repay the loan you want to be careful about how you portray yourself. The loan should be a tool to help you achieve bigger and better profits, not to keep your business alive. Of course your financial projections should indicate the long-term profitability of your business and thus it’s ability to repay the loan while continuing to grow.

Trying to obtain a loan can be a long and difficult process. You must be confident and persevere regardless of how many times your are rejected. If you are rejected for a loan ask the lender why and work to correct the problem. Your confidence in your venture will ensure that you will get the loan that you need.