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The Basics of Business Loans

Once you submit your small business loans proposal to a lender, the lender will look at several factors to determine your eligibility.

What will a small business lender look for?

A lender of small business loans will examine your credit history to determine how likely you are to repay a loan and will expect the owner to invest in the opportunity as well. Many lenders require you to invest 20% equity in the business.
They will also want to know what types of personal assets you have that could be sold to pay the loan in the event you cannot repay through your business operations. Lenders often consider a home, truck or heavy equipment, stocks and bonds, certificates of deposit and account receivables as adequate collateral for small business loans.

Before lenders extend small business loans, they want to make sure that the owner has experience with the type of business they are conducting. It the owner has little or no experience as a business owner or as an employee with a similar company, they are not likely to offer a loan unless the owner intends on hiring managers with sufficient experience to run operations.

A small business loans lender wants to know how much cash flow your business can generate. The lender will look at your past / current financial statements to help determine how much cash flow your business generates, and if there is enough money left over after expenses to make payments on a small business loan. If you have been in business several years and consistently turn a profit, a small business loans lender is more likely to offer you financing. If you are an upstart or have little money left over after business expenses, you will have to present a persuasive business case that will convince a small business loans lender to extend you credit.

Eligibility for a business loan is determined by your personal credit history, your business history, and the great idea of your business. It is easy to get enthusiastic about a business idea and take out loans to immediately implement it, but you need to be sure that you will be able to pay off your business loans, which will still be owed whether your ideas are successful or not.

What are the warning signs that a business is about to default?

There are many warning signs that you are on the path to defaulting on your business loan. If you find yourself faced with these challenges, it is time to seek counseling and consider all of your options:

  • The overdraft is at the limit.
  • Payment agreements are not being met.
  • You have not filed taxes.
  • You are behind on payments.
  • Cash flow is tight.
  • The actual gross profit is unknown.
  • The bank is asking for personal guarantees and more security against your property.
  • You are paying penalties.

What happens if I default on my business loan?

If you find yourself defaulting on your business loan, remember that you have options available. You can negotiate and compromise with your lender, refinance at a lower rate and lower your payment and/or spread payments out over a longer term. You can also talk with a bankruptcy lawyer or a professional credit counselor who can explain the available options to you.

If you want to keep your business and your good financial status, above all, find a way to organize your business and get more involved in your finances. The only way to overcome debt in personal or business matters is to keep good faith on payments and seek solutions to any unforeseen challenges that might occur.

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* Debt Basics is not a lender or broker. We provide information and research on debt help and debt consolidation. Product and service offerings differ by state.