EFG Business Loans: A business loan and how it can help your company.

Business Loans

What are Business Loans?

A business loan is funding given to business by a bank, an individual(s), or an organization usually to be repaid by a certain date with a certain amount of interest. The amount of a loan, the amount of interest, the repayment date, the qualification of the loan recipient to merit the loan, the credit analysis, and the number of lenders used to achieve the desired loan amount are all variable. 

IMPORTANT DEFINITION
Credit Analysis: An analysis of a business's records and financial affairs to determine it's creditworthiness.

The Amount of Business Loans
A business might seek to borrow money for many reasons which may include, but is not limited to: making up a shortfall in operating capital, expanding an existing business to another location, developing an area or new idea within an existing business, or creating an entirely new business. Each need has its own set of variables and prioritization of those costs. For example if you are developing a new location and wish to transfer your top manager to lead the effort you may need to factor in additional money for his/her living expenses or a relocation package; whereas if you wish to develop a new idea or product you might need to allocate funds toward patent attorney fees. In both cases, significant costs arise from elements that are oftentimes outside of a project manager’s field of vision, but are significant to a loan officer’s risk analysis and payback schedule.  In order to determine the correct loan amount to take you will need to assign a cost to every operational, financial, or developmental aspect within the business plan.

The Amount of Interest Assessed on a Business Loan
Lenders will assess interest on a loan based upon the prime rate set by the Federal Reserve Bank, the recipient’s credit history, the presence of collateral, the political climate, and the venture’s risk. Alternatively the Cost-Plus Loan pricing model is employed which uses four factors in determining the interest rate: the funding cost incurred by the bank to raise funds to lend, whether such funds are obtained through customer deposits or through various money markets; the operating costs of servicing the loan, which include application and payment processing, and the bank’s wages, salaries and occupancy expense (overhead); a risk premium to compensate the bank for the degree of risk involved with the loan request; and a profit margin that provides the bank with an adequate return on its capital.

IMPORTANT DEFINITION
Overhead: The cost of doing business unrelated to production or sale of goods or services.  Office rent, for instance, is an overhead expense.  It remains unchanged no matter how much a company sells.



Repayment Date for a Business Loan
Determining a business loan’s repayment schedule will hinge primarily upon for what the loan is being used. If the loan will be used to acquire land, plant or equipment of a tangible nature then the repayment schedule can be based against the borrower’s needs balanced with the lender’s needs. Usually the repayment schedule will consist of equal total payments per time period (amortization); equal principal payments per time period; or equal payments over a specified time period with a balloon payment due at the end to repay the balance. When the business loan is unsecured or to be used for operating capital, a new venture, or expansion, the repayment schedule will be shorter and have less flexibility due to the higher inherent risk.

Qualifying for a Business Loan
Neat documentation, data which both justifies issuing the loan and demonstrates comfortable loan repayment, a thorough business plan with attached contingency plans presented with enthusiasm and confidence together with a good personal and/or company credit report will all significantly improve your chances of securing the loan. No area in your presentation can be found to be lacking if you reasonably expect this loan officer or institution to give you their money. Disorganized application paperwork with missing information can delay processing and remove the loan officer’s attention from your plan. Also, you must assume that the loan officer knows nothing about your particular field

IMPORTANT DEFINITION
Collateral: Something of value (land, a home, a car, etc.) that is pledged as security to ensure the payment of a debt.  Collateral is promised to a lender until a loan is repaid.  If theborrower defaults, the lender has the right by law, to seize the collateral.

of business. You must create the business plan and data sheets in a manner that is easily understood by the layman loan officer while still demonstrating that the loan amount is justified and will be repaid. It is important to remember that loaning money is the bank’s raison de et – it cannot survive without making loans, but it will not lend in a situation where the risk is too great, and that includes lending money to sloppy or careless individuals with poorly thought-out plans, unless, of course, the loan is sufficiently collateralized.

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