What are Business Loans?
Today, banks are loyal to their customers and try to offer potential borrowers the largest possible number of loan offers. Business loans are very popular. If you try hard, you can find a very good offer.
Making and repaying a loan usually does not cause difficulties for a person, but business borrowing programs have their own peculiarities and often require loan insurance. The borrower will be able to spend the funds received on business loans for: updating fixed assets, for replenishing working capital, for acquiring intangible assets, for diversifying production, etc.
Business loans allow you to open a business and establish its work, or expand your existing business, conquer new markets. Business loans can be issued both to individuals and to entire companies. Each such loan has its own characteristics, and therefore we will talk about each of them below.
Types of business loans for Ltd and an individual entrepreneur
Credit organizations offer legal entities a whole line of business lending products, and each bank has its own programs with certain conditions and even bonuses. However, the types of loans in all banks remain the same. We will consider various loan products to give a more complete picture of each of them.
Overdraft is one of the most popular types of lending. The bank reserves a certain amount on an organization’s bank account and a client can spend it on urgent needs: for example, to purchase raw materials or new goods. Usually, the overdraft amount is equal to the monthly turnover of the company and the company cannot exceed it. Using an overdraft, the company makes payments even in the absence of its own funds, while a negative balance is displayed on the current account. As soon as money belonging directly to the company is credited to the account, a certain amount of them will be written off to cover the overdraft. For using such a loan, the bank will charge a commission and take quite high interest. The maturity usually does not exceed 30 days. Overdraft is convenient to use if there is a need for emergency lending for a short period.
Working capital loan
This type of loan is designed to replenish the working capital necessary for everyday operations – especially when expanding a business, financing the production cycle, with a seasonal increase in sales, etc. In most cases, this is a short-term loan for up to 12 months. There are several varieties of this loan:
for emergency needs, issued to finance an emergency one-time increase in the company’s need for working capital, caused by the receipt of a large order, the conclusion of a profitable transaction for the company, or other circumstances;
for several years to cover the long-term lack of financial resources of the company – most often such a loan is issued to open a new business.
The varieties of a loan to finance working capital also includes:
Line of credit
This is a kind of agreement between the borrowing company and the credit institution on the loan amount, which the company can use on certain conditions and for a certain period of time. At the same time, once the credit line is approved, there is no need to coordinate the company’s expenses with the bank – you can apply for funds at any time. Often this type of lending is used to cover receivables or seasonal influences.
This type of lending allows you to get quite large amounts, sometimes equal to the semi-annual turnover of the business, at a fairly low interest rate. But obtaining a credit line is quite difficult; you need to provide the bank with appropriate guarantees. Most often, banks open credit lines to their regular and trusted customers with a current account and a large number of assets.
In this case, the bank gives out financial resources for development and capital investments in the business. To obtain an investment loan, it is necessary not only to prove your solvency but also to provide a detailed business plan proving that investments will significantly increase the debtor’s income after a certain period of time.
A legal entity may need this type of loan if it acquires commercial real estate, for example, to expand production or open a new outlet. The funds are issued for the purchase of non-residential real estate, which performs the function of collateral after the acquisition. If the company stops paying the loan, the bank puts the property up for auction as payment for the debt.
Uncovered bank guarantee
It is a tool to provide the company with obligations to its counterparties. If the terms of the contract are not fulfilled, the guarantor bank pays the specified amount from the reserved funds to the beneficiary, and implements pre-taken collateral to cover its own losses. Details of the sale of collateral and other details of the transaction are discussed by the bank and the borrower at the stage of concluding the contract. A feature of the unsecured guarantee is that the guarantee in this case can be formed not from cash but from any property of the borrower – equipment, real estate, vehicles, unsold products.
If it becomes necessary to purchase new equipment, the company can get a special business loan. A feature of such lending is that the funds received cannot be spent on other purposes. To get a loan, the borrower must provide complete data on the proposed purchase – justification of the need, data on the supplier, the average price on the market and so on. Equipment purchased on credit becomes collateral for the loan, and if the client is unable to pay the loan, it is sold.
Auto loan funds should be spent on the purchase of vehicles or special equipment for use in the economic activities of the company. Acquired vehicles are usually used as collateral for a loan.
The refinancing program involves the receipt of funds for the full or partial repayment of loans taken from other banks. Typically, a new loan is issued on more favorable terms for the company – the bank extends a loan term or sets a low interest rate. In addition, the company gets the opportunity to increase the loan amount, change the lending currency and combine several loan agreements into one. Refinancing can be internal when the contract is concluded with the bank that gave you a loan, or external – with the participation of another financial institution and the full re-registration procedure.
Stages of getting a business loan
To get a loan for business development, it is necessary to go through several stages:
Stage 1. Open an account. If you already know what type of loan you need, then the study of loan offers should begin with the bank in which the current account is already open. As a rule, banks are much more loyal to their customers and may well offer favorable loan conditions. If there is no bank account, then you must open it.
Stage 2. Fill an application. Almost all banks accept preliminary applications online on their official website. When submitting an application, it is recommended to indicate the most detailed and reliable data about the company since they will be checked very carefully, and any attempt to provide false information will be detected in any case. In this case, the loan will not be issued, and the company will be blacklisted. The time for considering a loan application in different banks and in each case may be different.
Stage 3. Collect documentation. Each bank has its own list of necessary documents for getting a business loan. In the basic version, it looks like this:
- application form indicating the amount of the loan and the needs for which the loan is taken;
- documents on state registration of LLC or IE;
- certificate of registration with the tax office;
- balance sheet and statements of income and expenses for a certain period;
- licenses and permits to conduct this or that activity (if necessary);
- extract from the current account of the company;
- documents for collateral.
The more complete the list of documents submitted, the higher the chances of getting a loan.
Stage 4. Await approval. At this stage, the bank analyzes the submitted documents and conducts a financial and economic analysis of the company’s activities, and a decision is made based on the results of the analysis.
Step 5. Get acquainted with the conditions. Based on the client’s resume, the bank’s credit committee decides on the advisability of lending to the company. At this stage, the bank establishes the terms of the loan product – the amount, term of the contract, grace period, down payment, interest rate, security requirements – and brings them to the attention of the borrower.
Stage 6. Sign documents. At this stage, a loan agreement is concluded. Experts recommend carefully studying the draft document, paying attention to the size of the total interest rate, payment schedule, the procedure for calculating fines, and conditions for early repayment. If some clauses of the contract do not suit the client, then he or she has the right to demand to change or remove them. All contracts are made taking into account the circumstances of the transaction and individual conditions. After agreeing all the details of the contract, it is signed by both parties.
Stage 7. Receive cash. In most cases, money is transferred to the client’s bank account, cash withdrawals are very rare. After getting money, the client can use it for the indicated purposes.
Since getting a business loan is a serious issue which determines the welfare and sometimes the existence of the entire company, first of all it is necessary to approach the choice of a creditor bank with the premier responsibility. In reputable banks with a long history of work in the Russian market, a number of loan products for business have been developed that really help its formation and development.
Category: Online Loans
Tags: Business, credit, financial, loans