How Do Business Loans Work?
A business loan can be quite complicated or simple depending on the type of loan you decide to take out. Nonetheless, all business loans have at least a few things in common. Here’s a quick rundown on business loans and what you can expect if you are looking to obtain one.
First Things First – Finding a Lender
Many types of lenders offer business loans. If you have good credit, you can go directly to your bank and discuss different options if you need a business loan. However, if you have less-than-average or below-average credit, your options are slightly limited. You might check with your credit union as these institutions are a little more lenient in terms of credit, and you can also look into lenders providing merchant advances, which are essentially loans based on your business history and sales rather than your credit score. Before you get started, obtain your credit score and determine where to go from there.
Whether you choose to accept money from a bank, a credit union, or even an online lender, you will always have to agree to a contract that dictates the terms of the loan and how you will repay it. Unless you are well-versed in reading the terms associated with loans, you may want to ask your company’s lawyer to look it over for potential loopholes and inconsistencies. Then, if you agree with all of the terms – including those for repayment – you simply sign the contract and receive your money.
Fees and Interest
Most traditional loans come with fees and interest, but the Canadian government offers some protection here. Lenders can only charge you so much interest within the confines of the law, but even then, sometimes these rates are incredibly high. For example, if you borrow $100,000, you may have to pay up to $10,000 in interest over the course of a year. On the other hand, if you put up some collateral, you may be able to reduce that interest rate. Other lenders charge flat fees that they add to the amount of the loan; you can take care of these as you make your monthly payments.
When most people think of business loans, they think of walking into a bank, providing their information, and waiting for a credit check to complete. If you want to avoid this hassle – or if you have imperfect credit – consider a merchant advance. This type of loan has nothing to do with your credit score, and interest and fees in the traditional sense do not exist. Rather, you can borrow a set amount of money for a fixed period of time and repay it with your daily sales. These lenders look at the amount of time you’ve been in business and the amount of credit card sales you make each month in order to qualify you for the loans.
Business loans work just like any other type of loan. You provide your information, and a group of underwriters or loan officers determine whether or not you qualify (and how much you qualify for) based on the information you provide. It is up to you to choose the right lender and the right loan type for your unique needs.
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