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Business Loans: The Life and Blood of Businesses

Definition
Business loans are those which are given to individuals and firms to be used solely for the operation and sustenance of their business. It is similar to a person’s simple loan wherein he borrows money from another, but its purpose is limited to business purposes.

With the continuous boom in the economy of every country, established businessmen and young entrepreneurs have grabbed the opportunity to expand their businesses and start their own venture, respectively. Business loans help them build a good financial foundation so that the expenses incurred and the additional assets purchased will be funded without liquidating or selling its current assets. In this way, businesses will earn and expand without simultaneously losing what they already have.
 

 

Nature of Business Loans

Business loans are solely for business purposes. These include the following:
a. Payment of salaries and wages of workers
b. Purchase of capital assets to be used in the course of the business’ trade or commerce
c. Purchase of ordinary assets to be used as inventory
d. Payment of expenses incurred in the normal course of trade
e. Payment of debts and liabilities incurred, particularly those which are already due and demandable.

Before business loans are granted, both parties enter into an agreement wherein the loan will be used solely for business purposes. This limitation is important because acquiring them is extremely risky. Firms who grant these loans assume that they will be paid within a short period of time because income will soon be generated by the business, or receivables will soon be converted into cash. As such, the risk associated with these loans is that firms can demand payment as soon as possible, and if the debtor fails to pay, he will be subject to penalties and interests, and he may even be subjected to a collection suit for breach of agreement.

Types

Business loans are classified into two main types:

1. Short term, high interest
These loans are the most common type that is availed by many. The loans are short term and charged with high interest because firms want the debtor to pay as soon as possible. Large amounts of money are expected to be shelled out in this type of loan because its purpose is to answer for business-related costs and acquisitions. And because businesses generate income during its operations, it is expected that it will pay its loans as soon as cash is available.

2. Long term, high interest
If businessmen and young entrepreneurs cannot afford to pay the loans within a short period of time, they can still avail these loans and pay it within a long period of time, for instance, within five years. This period is given because not all businesses can generate cash as fast as the others.

Advice On Acquisition

Because of the nature and available types currently out in the financial market, a businessman or a young entrepreneur must put in mind the following when availing business loans.

1. Avoid mixing personal and business expenses and funds

It is a rule in business that properties of the owner and the business must always be kept separate. As such, a person must not combine his money with that obtained from business loans. This is not only because of the rule, but also because of his tendency to think that the money also forms part of his personal funds.

A financing firm usually checks the current financial condition of a business before it grants these loans. After finding out that indeed it needs financial assistance, it will give an amount which, by its assessment, is sufficient enough for the sustenance of the business. If the owner insists on a larger amount, the firm will require him to explain why he needs such amount. Because of this system, if business funds are combined with personal funds, he may mistakenly spend some of the former for his personal needs. Consequently, it may be possible that he will not have enough cash to sustain his business.
 

 
2. Do not estimate amounts

A person must not estimate the amount of his obligations. He must allocate the exact amount needed to pay debts or to purchase assets. This is possible because every business have its own books of accounts where every transaction and cash flow is recorded. Estimating amounts may bring the owner to experience cash insufficiency because he may have placed more cash on other obligations. Because the amounts given on these loans are exact, he must know how much to put in each of his obligations.

3. Pay the loan as soon as possible
As soon as possible, the owner must pay the loan when his resources permit him to do so. This is because the loan is oftentimes charged with a high rate of interest. If the owner fails to pay it as soon as possible, or if he opts to wait for a longer time before he pays, interest charges will accrue, and it will be more difficult for him to pay the loan.

This is where most of the borrowers suffer, because failing to pay the loan may cost them not only their money, but also their business and their credit standing. Even if they are able to pay the loan, their credit standing may prevent them from obtaining loans from other financing firms.

Business loans are the life and blood of an establishment. They are funds borrowed from a firm which seeks to assist businesses. As such, their use must strictly be confined for operating and sustaining the business.