Business Loans Explained
Borrowing money for your company is a big step for most entrepreneurs. Yet it’s almost a certainty you will face it at least once as a business owner. Especially in the startup phase, most entrepreneurs need to invest heavily. Of course, you start with your savings, but when that finishes at one point, you have to borrow money somewhere, and where do you get business credit?
When you want to borrow money to start a company, it is most likely you would go to your local bank and ask for a business loan. Most of the time, this is the easiest and cheapest solution when it’s possible. Even with all the new ways of financing, the bank stays the most economical solution for most entrepreneurs and the most popular, especially with little credits up to a few thousand dollars. The most common forms of business loans are revolving credits where businesses can be in minus for one to ten thousand dollars. Another popular option is the business credit card, which can be paid off in terms (extended grace period). Sometimes a personal loan is a new solution.
For beginning entrepreneurs, its way more difficult to get a loan from the bank. The problem here is that banks want to see certainty and prefer to finance more significant amounts. Think about a million-dollar or more, where they can have some real estate property as collateral. Luckily there are some financers where you can borrow smaller amounts without collateral. Some of the financers might even borrow your money based on a business plan only. With most starting entrepreneurs, however, even the annual figures aren’t enough.
Borrowing money online
Nowadays, it’s straightforward to borrow money online for your company. Although there are many online loan providers out there, most of them operate in the same way. They perform credit checks based on your company’s data. This way, they know quite a lot about the financial situation of your company, and by using all kinds of algorithms, they can decide whether to grant you a business loan or not. This complete risk analysis process can be done within a few hours, which makes applying for a business loan online a straightforward process.
How much money can I borrow for my business?
Most entrepreneurs are very keen to know how much money they can borrow for their company. There are multiple answers to this question. Most banks look mainly at solvability (own capital). How much you can borrow from your bank for your business is very limited in most cases, unless you use it to purchase stuff that creates value like expensive machinery, a new company building or other fixed assets. Other financers mostly look at liquidity (working capital). Most of the time, they are a bit more flexible compared to Highstreet banks.
How much money you can borrow for your business is thus very dependent on the financer, and sometimes there are alternatives. If you just started or if your company is in a slightly wrong position, you cannot borrow money to easily. But luckily, things, like factoring (pre-financing debtors) or finding an investor, are still possible.
What are the costs of business loans?
Like we said before, the bank is the cheapest but also the strictest solution. If you’re looking for other financers, the costs of business loans can significantly vary. Online loan providers like to automate things, and with collateral, that is a difficult thing to do, plus it takes a while. That’s why they work without insurance in most cases, but you do see this risk calculated within their interest percentages.
They are getting business loan costs between 6 and 9% most of the time plus additional fees like closing commission and administration costs. The actual prices, however, are dependent on your financers and company ratios. Especially on smaller business loans, these closing commissions can relatively be quite high compared to more significant investments.
Getting a business loan through crowdfunding
Borrowing money by crowdfunding becomes more and more popular with companies that not only need capital but also want to see how popular their business is getting amongst the people. Within crowdfunding, there’s a difference between equity crowdfunding and crowdlending. Especially for the latter, there are countless crowdfunding initiatives, so just be sure to choose a platform that suits your company the best. In general, crowdfunding is the most interesting for projects that have a high brand ability and don’t need too much money.
Borrowing money from investors
An alternative is to find an investor that sees a bright future in your business. The investor can be either a company or a high net worth individual. A bank mostly looks at the background of a company or collateral; an investor instead looks at the whole picture.
Investors can be found in all different shapes and sizes. There are informal investors, also called business angels. These are rich (ex) entrepreneurs or board members who want to invest a bit of their private capital. On the internet, there are several venture capital organizations that you can approach.
Another form is called private equity. These investors have a lot of similarities with stock or share investors. Most of the time, these are big companies that invest their money in stocks and want to invest in non-stock unlisted companies as well. Some entrepreneurs borrow money from friends, family, and other external people. This group is also being called: Friend, Family, Fools (FFF). When they invest money in your company, the tax authorities see this as venture capital. This so-called venture capital investing comes with many tax benefits for the investors.