Small business financing refers to the conventional means by which a current or aspiring business owner obtains cash to launch a new business, buy an already established business or raise funds for future business activity. A Small business is a type of company that has not earned more than a specific amount of dollars per year. On the other hand, a micro-business is one having sales not exceeding a particular amount per quarter. In a nutshell, a business loan is a type of financing facility that offers low-interest loans for business purposes. You must have a good credit history and a viable business plan backed by proper documentation and figures to get small business loans.
If a business owner intends to raise a small business loan, he needs to submit various documents to show that he has a strong potential of earning profits:
- He should have a business plan that presents a well-planned financial forecast.
- He should have sufficient information about his past financial performance to prove that he can meet financial obligations in the future.
- He should have enough cash on hand to be able to pay all loan instalments.
The loan amount will be used to purchase various assets used to run the business.
Commercial paper-based financing, equity financing, venture capital, angel investors and personal savings are common sources of funding offered in the business loan market. Several lenders specialize in providing such financing programs to small businesses. The best financing programs are provided with lower interest rates as well as flexible terms. These programs may require you to place your property as collateral, but this option also offers substantial benefits. The benefits of secured financing include:
– Capitalization. A secured small business loan is available at a lower interest rate than an unsecured small business loan. This is primarily because the lender faces less risk in offering this financing option to the borrower. Since collateral is put up, the lender is assured that the borrower will honor the debt. The lender’s assurance that the borrower will keep the loan also has positive effects on the lender’s credit score.
– Flexible Date. Most lenders provide collateral for the small business loan by allowing the borrower to obtain the funding when the business is still starting operations. This allows the lender to exercise more caution in assessing the borrowers’ ability to pay the loan. This flexibility is especially helpful if the business is starting and requires larger funds for its operations. Since these loans are granted based on future income, the lenders are assured that their funds will be released when needed.
– Cash Flow. Most small business loans require at least six months’ worth of cash flow before they can be released. This requirement makes it difficult for businesses to obtain the financing they need during the immediate term. This constraint forces most small business owners to seek out alternative funding at the time of renewal. This could be through securing additional credit, borrowing from friends or family, or seeking out an unsecured line of credit from a bank. While each option has advantages and disadvantages, the best option available to entrepreneurs is cash flow financing.
The requirement that borrowers provide collateral for the small business loan gives lenders an additional tool to assess the risk of lending money. This assessment gives lenders an indication of how likely the cash flow would be if the business did not continue to operate. This information is valuable to both lenders and borrowers since lenders require collateral for small business loans. If the company fails to repay the loan in the allotted time frame, the lenders will receive demand. However, if the business operates continuously, the borrowers will incur interest and late payment charges that could damage their credit history.
Unlike conventional small business loans, borrowers do not need to submit any collateral to secure the funding they need for start-up, expansion, and operations. There are several reasons why traditional lenders require collateral to provide financing. Traditional lenders do this because they know that there is a higher risk for them if they do not pay the loan back. Some conventional lenders may require the borrower to provide collateral to receive a traditional business loan from a major financial institution such as a bank. On the other hand, some unsecured business loans do not require collateral to receive funding.