Small Businesses – The Most Common Type Of Funding Provided By Banks

While we all have experience with the financial world related to personal situations, business finance is often looked at as some alien thing. It really isn’t, although there are distinct differences. In this article, we take a look at the most common type of loan given by banks to businesses.

Terms loans are the most common type of loans that are awarded by a bank. A term loan, as the name implies, is the lending of a certain sum of money that will need to be paid back in a certain term or certain time frame. Generally, a term loan will last from 1-7 years. Some term loans can however last a long longer, even 20 years.

Terms loans are amortized. Amortization is nothing but the process of calculating principal and interest amounts into fixed monthly payments that will be paid off over a certain time frame. They are commonly referred to as installments or EMI’s which stands for Equated Monthly Installments.

Banks have pretty strict guidelines that they follow before awarding a term loan to a business. Typically, a bank will look into various factors such as credit history, character and experience in running a business before they decide to approve a loan to individuals seeking funds for his small business. Loan applications for more than $100,000 will require a very thorough application process where the applicant will have to submit detailed financial statements for a few years.

A bank will analyze the financial strength of the company to see if it is has enough working capital and cash flow to repay the loan. Working capital is nothing but current assets minus the current liabilities. In other words, the bank will want to make sure that your financial statements reflect good levels of working capital that will allow you to run your business smoothly. They will also be interested in cash flow as it will tell them about the liquidity of your business. Good cash flow will mean that a company will be able to make payments on the loan easily.

Typically, a bank will charge a 1% fee on a loan amount like $25,000. The terms you get on the loan will depend on the market conditions and also on the various factors of your business as mentioned above. One thing a business owner will need to know about availing term loans is that a bank can indirectly influence their finances after they grant a loan. For example, a bank will put down a condition that certain expenses like payroll should not exceed an agreed upon figure. You might need to expand suddenly and you will find these conditions restricting your business operations as you cannot hire more people and increase your payroll.

The world of business finance is different than personal finance, but not massively so. The term loan is not all that different from a car loan if you think about it. Of course, you can’t ride a term loan!

Thomas Ajava provides commercial apartment loan funding to borrowers through CommercialApartmentLoan.com.