How To Get a Business Loan 101

The Borrowing Cause

The first thing you need to understand is why you need a loan. This may seem obvious at first glance but at times can be difficult to understand. The lender will call this the “borrowing cause.”  You may need to purchase more inventory to support sales growth, or maybe you need a new piece of equipment to be more efficient. Sometimes a vendor or supplier will change their trade terms requiring you to pay cash on demand (COD). If you had a rough 2009 like most business owners, you may be looking for money to help with the losses you took last year. There are many reasons why you might need a loan and it is very important to understand the specific borrowing cause.

The borrowing cause will help you determine whether you need the money temporarily or permanently. This is important because commercial loan officers will give you a different type of loan depending on whether your needs are temporary or permanent. Lenders who do not understand the difference in which loan best matches your needs can actually hurt your business by giving you money the wrong way (a scary thought).

Temporary loans are paid back by liquidating inventory, selling equipment and other non-current assets or by depreciation. A good rule of thumb is to think of temporary loans being less than 12 months. (Do not use temporary loans to finance permanent needs.)  Permanent loans are paid back by profits turning to cash or refinancing the debt.

Once you and the lender understand the reason why your business needs a loan and the specific borrowing cause, it becomes clear how long you will need the loan and how you will pay it back. The lender will then provide you a line of credit, term loan or permanent capital loan with terms and conditions that match your businesses needs.

Now you know more details about why you need the loan than most business owners. Knowing these details will impress and help your lender. The lender will be more confident that you know your business because of the details. This will begin the relationship of trust.

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