Most entrepreneurs need to take out a loan to finance their business. Usually, business owners borrow money from a financial institution and are expected to pay it back with interest. That means regardless of the success or failure of your business, you have to pay that money interest back to the lender.
If you get financing through investors, then you have no obligations to pay them back. Investors simply share in the profits of the business if it succeeds, and lose money if the business fails.
Although investors can be great, the benefit of using a loan is that you are wholly the owner of the business. As an owner, you get to keep any money you make that is not used to pay back the loan. When an investor gives you money, she is buying a part of your business. This means that you must share your profits and somewhat tailor your policies and practices to her expectations.
There are a couple factors you should consider when you are looking for a loan for your business:
· Interest - State usury laws generally require that the interest rates on these kinds of loans be capped at a fair price. Usually it is around 10%, so that no one can charge huge interest rates on a loan.
· Security - You will have to provide security, in the form of an asset. A security interest could be your business's equipment, inventory, or even the deed to your home.
You may need a cosigner or guarantor to sign for the loan as well. This is generally someone who has as good, if not better credit, than you. By making a person a cosigner or guarantor, you are making them also personally liable for the loan repayments. Due to this liability, make sure you inform your cosigner of the consequences. The purpose of this is so that the lender has two people to collect from, instead of one if the loan is not repaid in time and in full.
Yes. The loan process can be complex, especially since the laws vary so much from state to state. An experienced business attorney can help guide you through the loan application process. An attorney can also give you legal advice if you get into any other financial trouble along the way.