Well, many of us, including myself, become a bit scared and insecure when hearing about loans and banks. This mainly has occurred following the uptake of the financial crisis which has been widely felt throughout the globe and which left most banks with a difficult test period to pass. Its immediate result was the loss of trust from existing and potential borrowers who became skeptical when it came to banks.

In this blog I will try to explain, in simple words, what a loan is (generally speaking), what exactly a business loan stands for and how anybody can improve their chances of getting approved for one.

Moving forward, when seeking to acquire a loan for an emerging business its terms will depend on a number of factors, including your credit score, the lender’s risk and how the loan will be outstanding An advice, before applying for any business loan, try and boost your credits. In practice this means make payments on time, spend well under your credit limit and keep credit accounts open.

In addition, banks often require collateral before they agree to lend. Now, what is a collateral? It is perceived as a security in the form of an asset or property offered against a loan, should it not be repaid under the pre-agreed conditions. Some examples of collateral include: own contribution, accounts receivable, equipment, inventory, house, car etc. As a result, since banks like to be guaranteed, the amount one will lend depends on the value of your assets. So, if you don’t own anything that the bank views as valuable, take a step back and re-think your strategy in order to avoid having trouble securing a loan.

Having said that, there are two types of business loans; secured and unsecured.

Secured business loans are given when the borrower can offer some form of collateral to the lender (in case any trouble occurs on the agreed payments). Due to the fact that the loan is “secured” by your promise of collateral, interest rates on secure loans are typically lower than other loans. They are also easier to obtain because they pose a smaller risk to the lender. If you decide to apply for a secured business loan, be sure that anything you pledge as collateral is something you are willing to lose should you default on the agreed payments.

Unsecured business loans are given without any kind of security from the borrower. They are made strictly on the basis of your credit rating and other methods the lender uses to determine creditworthiness. Because these loans are unsecured, they inherently carry a greater risk to the lender. Therefore, they usually have a higher interest rate than secured loans and are more difficult to obtain. The unsecured business loan works best for established business borrowers with excellent credit history. They are not ideal for start-up funds or if you have a less-than-stellar credit rating.

Preparation is the key to improve your chances of getting a loan for your business. Many people, and especially business owners, believe that they can just walk into a bank, fill out an application and get approved for a loan!! Well, this might have been the case before the financial crisis, but now the procedure has slightly changed. Before applying for a loan, have financial statements or projections and personal as well as business credit reports, if you are an established business. I would also advise you to have at arms’ reach all relevant legal documents, including contracts and any licenses and permits needed to operate. Be well organized, as it will save you and the bank a lot of time, which is greatly appreciated.

Equipped with this knowledge, you can go to your lender prepared to get the best loan for your business!

 Don’t miss the next blog on ‘Searching for the optimal business loans? Here is a list with the types usually offered!’

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