The Smart Business Owner’s Guide to Business Loans
People get loans every day - credit cards, mortgages, lines of credit. However, you may not consider how a business loan can affect your business positively or negatively. An appropriate business loan allows your company to reach its potential, but will not hamper growth with unmanageable terms.
Here are some concepts to understand before you apply for financing:
Promissory Note: This document says you will borrow money for a certain time at a certain interest rate. It may have penalties for late payments, such as a late fee or a heightened interest rate. Even if you are borrowing from friends/family, you should have a written note. It is important to run your business like a business in case of audits or attempting to get bank financing later. It also avoids misunderstandings that could ruin relationships.
Security Interest: Business loans often require collateral, or something the bank can seize if you don’t repay your loan. The collateral can be property (real estate or equipment), accounts receivable, rent payments or the business owner pledging his or her personal assets to satisfy the loan. The lender obtains a security interest by having you sign a security agreement, a personal guaranty, a deed of trust or a UCC financing statement. For more information on each of these, click HERE.
Personal Liability: If you sign a personal guaranty or a second mortgage to your residence to secure your business loan, you have personal liability for that loan, even if your business is organized as a corporation or LLC. Understand what you are getting into before you sign the documents.
If you need help negotiating or closing your business loan, especially if you are pledging real estate as collateral, please give me a call.