Business loans are commonly sought during
the start-up and growth phases of a business. They are also
often applied towards the purchase of additional inventory,
motor vehicles, equipment, tools, property as well as cash
flow improvement. Certain business loans may even be used
to finance trade operations, including importation, exportation
and domestic trading.
When applying for a business loan, the business owner should
provide potential lenders with information about the loan
amount, its purpose and term length. It is also important
to specify whether the amount will be needed upfront or at
call and if any assets (e.g., residential property) will be
offered to secure it. If an at call loan is sought, its desired
overdraft limit (i.e., line of credit) should be noted and
explained. All of this information is typically provided in
a detailed business plan and proposal.
An upfront loan will usually need to be repaid at regular
intervals and with interest. The longer the loan's term, the
more interest the business owner will pay. Conversely, an
at call loan has no fixed term, allowing the business owner
to repay the borrowed amount (with interest) when he or she
is capable of doing so.
Loans with high overdraft limits may also incur high interest
or credit advance fees. Loans might also carry application,
setup, exit, service and early termination fees. Lenders can
sometimes insert clauses that require repayment of the entire
loan at any time. Likewise, some loans are provided at a variable
interest rate, exposing the business owner to the risk of
paying more interest over the loan term.
Lenders ask many questions and assess several factors before
approving a business loan. Business cash flow is particularly
important, since this is the money that is left over after
expenses are paid off and can be directly applied to loan
repayment. Other outstanding business loans and debts are
also noted. Finally, the level and type of security offered
is weighed, since lenders have the legal right to seize the
security in case the loan cannot be repaid.
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