Every business needs funding to start and/or grow operations. Not everyone has access to capital for a start-up business, which is where business loans come in handy. Business loans are agreements made between banks or financial institutions and business owners. Simply put, a business loan is a type of loan that is specifically designed for business-related purposes.
The process begins when borrowers and lenders sign an agreement that details how much money will be borrowed and how borrowers will pay lenders back. If borrowers fail to repay the money, debt financing is used to produce capital for paying off the debt. In other words, the business’s assets act as collateral, and, if a company defaults on payments, lenders can take those assets as a form of repayment. A company that can’t pay its debts declares bankruptcy and they must liquidate (sell off or exchange) its assets.
Types of Business Loans
Term Loans
The most common kind of business loans are term loans. In this fairly simple arrangement, you borrow from a lender and repay at an agreed-upon time. "Term" refers to the length of time between when the loan is issued and when it’s repaid. Term loan lengths can be as short as one year and as long as 25 years. Usually, the lender considers the borrower's business and credit quality status when deciding on the term length.
SBA Loans
Small Business Administration loans are specifically intended for start-up businesses. So if you’re thinking about opening your own company, the SBA may be able to help.
Fixed-asset Loans
These loans designate a specific asset (anything from properties to stocks) as collateral. Meaning that if a borrower doesn’t repay the loan, that asset will be turned over to the lender. The upside for borrowers is that, with a specified asset as collateral, lenders don’t need to take company credit into consideration when deciding whether to make the loan.
Benefits of Business Loans
1. Lenders won't Dictate How You Use the Money
With a loan, you can borrow money without selling a part of your company's ownership to an investor in exchange for funds. Your lender doesn’t get to tell you how to use the money, though he or she might ask for your business plans to understand how the borrowed money might help you. This gives you the freedom to use the loan any way you see fit, as long as it’s invested in your business.
2. The Interest Rate is Usually Low
Business loans have a lower interest rate than personal loans, which is what makes them particularly attractive. The reason business loans have low-interest rates is because individual lenders don't ask for collateral, and credit typically is granted almost immediately. Personal lenders charge higher interest rates to compensate for the higher risk of giving you money.
3. You Can Easily Access the Funds
Looking for investors can be a tedious and time-consuming process, especially because investors usually prefer to finance established businesses. With start-up investors so few and far between, business loans are a smart alternative. And while profitability takes a little longer with a loan, as opposed to an investment, it's generally worth the wait.
Do you want to apply for business loans in North Carolina? The first step is finding the right bank in NC. F&M Bank in North Carolina can help your company get off to a great start. Contact us to learn more about our loan options.
*Subject to credit approval