One of the biggest challenges of running a successful business is keeping daily operations running smoothly. However, when your company runs into cashflow issues, it can prove to be even more challenging to overcome. This is especially true for SMEs that have been badly affected by and are still recovering from economic ramifications of the COVID-19 pandemic.
This is where business loans will come in handy.
What is a business loan?
A business loan is taken out using leverage, allowing you to have additional capital by using your existing assets.
Any amount borrowed to be used as capital for starting or growing a business can be considered a business loan. It can be a loan for commercial property as part of a business expansion – it makes sense to take out a loan if you want to buy a new space, extra machinery, or additional inventory to grow your enterprise.
It can also be used to pay your employees’ salaries and commissions if your company is facing cashflow issues. Similarly, you can also use a business loan to fund the purchase of supplies for new projects.
What are the types of business loans?
You need to understand the different loans you can get for your business to be able to make the right decisions in the long run.
Invoice financing – this is when you borrow money against the amounts you are to collect from customers. This type of loan can help you solve issues with delinquent customers who have not paid for a long time.
Business term loan – this is a secured loan offered usually by banks. It’s a lump sum amount that a borrower needs to pay back within the repayment schedule. It can also have an adjustable or fixed interest rate.
Unsecured business term loan – just like any unsecured loan, a borrower can loan an amount based on their ability to pay the debt in the near future. A lender takes a borrower’s creditworthiness and capability into account before deciding on the amount to grant.
Merchant cash advance – it is a loan from a bank or private lender after reviewing different data points, including how much a borrower receives through online payment gateways. The financing firm grants a borrower money as an advance of capital and purchases a portion of the company’s daily debit and credit card sales.
Venture debt financing – it is a form of private equity that investors grant to small businesses that show long-term growth potential. It doesn’t always have to be in the form of money, but it can be other resources instead.
Business line of credit – this type of loan provides SMEs with access to money that can be drawn when needed. It can be a fixed amount of money or a revolving credit line if the borrower pays the balance in full.
What do lenders look at?
Character – borrower’s personal history, background, characteristics of company directors and major shareholders, guarantors, etc.
Capacity – lenders will look into your potential to make repayments on time. Lenders will check your cash flow, past loan repayment history, and other contingent sources.
Capital – lenders want to know how much capital you used to establish your company so they can gauge whether your enterprise is well capitalised or not, which will tell them about your ability to repay the loan.
Collateral – refers to any asset that the lenders can seize and sell in case you default on your loan.
Conditions – lenders usually check the economic conditions of the SME, including its relevance to competitors and any relevant social, economic, or political factors.
Credit score – based on your credit history, gauging your creditworthiness, total debt level, number of bank accounts, etc. You need to have a good credit score from 1000 to 2000 to assure lenders that you will be duly paid.
Just like taking out other types of loans such as a home equity loan in Singapore, you must fulfil a lot of criteria to be able to take out a business loan, including submitting various documents to prove your credit history and creditworthiness. Therefore, finding a trustworthy financing company to help you every step of the way is important.
At OxProp Capital, we have a strong history for finance-related services and activities. With the most unique and innovative financing solutions, you can rest assured that your needs will be taken care of.