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Business Financing Facts You Should Know

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Published: 31Aug2009
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If you're a business owner planning to apply for a start up loan or additional funds, you should learn as much as you can about how loans work before searching for a possible lender. In this article, let's discuss some basic facts that you need to know about business financing.

Different Types of Business Loans

One of the first things you'll probably check on is the rate of interest. Lenders offer two kinds of interest- fixed and variable. Fixed-rate business loans are ideal because you can calculate exactly the amount of payment you need to submit each month. A fixed rate interest does not change from the moment you signed up for the loan until your loan term is completed.

On the opposite, business loans with variable or adjustable interest can change at any time within your loan's term. Typically, the interest is based on the Prime Rate which means it can either drop or increase, depending on the market. Most variable rate loans start up low which is why entrepreneurs prefer them over fixed-rate loans. Nevertheless, a fixed interest rate protects you from the possibility of inflation.

Business loans can also be categorized as secured or unsecured. Secured loans are obtained by submitting to your lender a personal property or a business asset as collateral for your loan. Because the loan is guaranteed by collateral, lenders can afford to offer lower interest and longer repayment terms.

With regards to unsecured loans, they pose a higher risk to the lender and there comes with high interest rates and fees. Some business owners do not have a property to submit or don't want to risk their property at all so they opt for unsecured financing. The disadvantage is that this type of loan can be very expensive and is offered only for limited amounts.

Business Loans and Your Credit Score

If you haven't yet established a separate credit for your business, your personal credit history will be used instead. When you apply for a business loan, prospective lenders would check on your credit report to determine whether or not you qualify for the loan the offer. Having a good or excellent credit is a definite advantage because it gives you a stronger negotiating power to ask for lower interest and better terms.

Meanwhile, a low credit score instantly makes you a high risk borrower in the eyes of creditors. Lenders often impose higher rates and limited credit for business owners with poor credit history to make up for the risk. Thus, if you plan to apply for business financing, it is a good idea to check on your credit report first before submitting your loan application.

If you find that you're credit isn't impressive enough, work on building up your credit first even if it means delaying your plans for a few more months. Not only does a high credit score guarantee quick approval, it also gives you the chance to enjoy the best deal offers from lenders.

Irish Taylor is a business loan consultant with Startup Business Loans and has been providing consumers and business owners with startup business financing since 1992. For years she has helped people with credit and loan problems especially pertaining to start up business financing, SBA loans and business loans.

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