Business Loan Fundamentals: Why Borrowing Money for Your Business Could Give Your Bottom Line a Boost
Bridgett Kidd is an experienced financial professional who serves as Member One’s Vice President of Business Services and Business Lending. Her financial education series offers tips for making smart decisions when it comes to managing your small business.
Being a business owner means making tough decisions, which could result in a loss or gain to your bottom line. Understanding the timing, need and terms of a loan is crucial to ensure you’re not taking on more than your business can handle. I’m here to offer insights on what a business loan is and how it can impact your company for the better.
Q: What is a business loan and how is it different from a personal loan?
BK: A business loan is a debt that a company borrows from a lender to gain financial assistance for their business or expand opportunities. Just like any other loan, this debt must be repaid according to the loan’s terms and conditions. A business loan is similar to a personal loan in that it’s an incurred debt, but the differences lie in how they’re used and obtained.
Q: How do I know when it’s the right time to take out a loan for my business?
BK: Obtaining a loan for your business might be just what your company needs to give it a boost and help it grow. Ideally, you have an established budget for your business. If you find yourself borrowing money from your personal finances to cover business expenses, it’s time to consider a business loan to cover these costs. A good lender will review your business’s entire financial picture and work with you to determine a loan amount and terms that you qualify for and that meets your financial needs. As with any major financial decision, shop around for the best rates and terms and a lender that you’re comfortable working with. Your local bank or credit union is a great place to start.
Q: Are there any limitations on what I can use a business loan for?
BK: There are specific purposes for business loans, and it’s important to come prepared to discuss your financial needs with a lender. Be ready to explain the loan amount you’re seeking, how you plan to use the money and who are the borrowers and signers. Typically, business loan options include commercial use like real estate (apartment complexes or office buildings, for example), lines of credit (which you can draw from as needed) and investment properties. Other purposes include funding equipment, vehicles or construction as well. A business credit card is another type of borrowing, which can be a smart way to cover everyday business expenses.
Q: What paperwork do I need to apply for a business loan?
BK: Each lender may require different documents to apply for a business loan. In general, you may need a business debt schedule that shows what liabilities your business has at the time of the application, business tax returns, business financials (balance sheet and income statement), a personal financial statement to be completed by all business owners, and personal tax returns. The business lending team at your local financial institution can help explain these documents in more detail and instruct you on how to obtain them.
Q: What are the benefits of a business loan?
BK: One of the major benefits of a business loan is the ability to keep your personal and business finances separate. This could improve your business cash flow. A business loan also allows your company the opportunity to build its own credit, which will help establish the business further and open the doors for more financing options.
Watch out for Bridgett Kidd’s column in the next edition of ColorsVA for more useful financial tips for small businesses.
Tags: Finance
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