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October 18, 2019

Do You Need a Loan?

If you’ve ever watched Shark Tank, you know the incredible impact an influx of cash can have on a new (or even established) company. Any entrepreneur knows that you have to spend money to make money. It’s one of the oldest and most basic principles of owning a business and scaling it. But it’s a vicious cycle.

Financially speaking, small business owners have to start somewhere, but if they don’t have the capital on hand, it’s hard to get off the ground. That’s when pursuing a business loan might be the best option.

For companies who require a lot of inventory or extensive production, loans can provide the extra push that takes them to the next level.

Keep reading to learn the basics of a loan and if this is the right move for your small business.

Terms to Know for a Small Business Loan Agreement

Before we explore what a loan looks like, let’s start with these foundational terms that you’ll likely face in the loan process.

Borrower

A borrower is typically the entrepreneur or group of business partners seeking additional money for their company. They guarantee to pay back the lender in a specified time frame.

Lender

Lenders are individuals or organizations that provide funds with the expectation to be paid back in a timely manner.

Principal

The amount of cash provided from the lender to the borrower.

Interest

As an exchange for borrowing money ahead of time, the lender pays a percentage of the cash borrowed in addition to the lump sum provided. Interest is calculated based on the principal and time that passes for the borrower to pay back the lender. APR, or the annual interest rate, is communicated as a percentage and is the amount of interest the lender charges the borrower.

Collateral

An asset or property that the borrower offers to the lender as a guarantee to pay back the funds. Lenders can obtain the collateral in its entirety if the borrower fails to pay back their loan.

What is a Small Business Loan?

Initiated by a borrower, a lump sum of money is requested and granted from a lender. The terms, uses, and agreements can vary, but the borrower is required to repay the lender, in addition to interest, in a pre-determined amount of time.

Whether you’re borrowing money from a venture capitalist, a bank, or a friend, you have created a small business loan in which you must pay back.

How Do I Secure a Small Business Loan?

Depending on the lender, how you’ll use the cash, and type of loan you take out, the application process will vary. However, it’s likely that you’ll face three credentials when it comes to qualifying for a loan: your personal credit score, how long your company has been in business, and its annual revenue.

Most lenders recognize that businesses are likely to fail in their first year, so try to reach the one to two-year mark before seeking a loan. The length of time you’re in business can greatly improve the amount of funds you secure.

What Can I Spend My Loan On?

If you’ve been awarded a loan, you may already have an idea in your mind why you need the money. There are a variety of things you can spend the cash on, but your lender will want to know ahead of time.

Here are the most common items business owners use the additional cash for:

  • Securing physical land or property to build on
  • Purchasing store-front or office basics like furniture, fixtures, machinery, and equipment
  • Covering construction costs
  • Helping build a new business or during an acquisition
  • Assisting in scaling the company
  • Meeting current operational needs of the business

When establishing your terms and agreement, your lender will tell you what you can and cannot spend money on. For example, the Small Business Administration provides four different kinds of loans in which you can only use the cash for specific purchases. More specifically, the SBA’s Real Estate and Equipment Loan can only be spent on major assets like real estate or equipment. It cannot be used for any working capital or inventory.

Establish ahead of time how your loan will be spent and promise to abide by that agreement, or you could face fees and legal ramifications.

If you’re in the market for a small business loan, it’s likely that your looking to scale the company. Hopefully, as your company grows, so will your influx of leads. That means you’re going to be spending a lot of time on the phone managing these leads, in addition to supporting existing customers. One of the best ways to handle all of these calls is with a virtual phone number app like Ninja Number. It’s the virtual assistant and receptionist that you don’t have to hire. Contact us today to begin your free, one-week trial.

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