What is a business loan?
Similar to a loan for private individuals, a business loan is usually an installment loan, but it serves to finance the business. You can use the commercial loan for your business start-up, project financing and growth financing as well as to compensate for ongoing bottlenecks. Commercial buildings, machinery and office equipment as well as open salaries can be covered. See http://www.airrahe-ultralights.com/payday-loans-people-bad-credit-guaranteed/ for details
Depending on what you want to take out a business loan for and how high the loan amount should be, there are different options:
If you are in the process of becoming self-employed or working as a freelancer, a start-up loan can make sense. Since this is often a commercial financing without equity, the bank will require collateral because it takes a considerable risk. However, there are various support programs for the business start-up loan that will help you here.
Current account credit
The current account credit is comparable to the overdraft facility of your current account. You agree a credit line with the bank that only applies if you overdraw your business account. Since the amount of credit granted for the overdraft facility between $ 5,000 and $ 10,000 is rather low, the probability that the bank will grant it is very high. This business loan is useful if you regularly have to buffer small amounts and know that the overdrawn amount will quickly go back to the account.
Banks grant installment loans not only privately, but also in the business area: they receive the loan amount from the bank and pay it back on the agreed terms and over the predetermined term. The loan amount for commercial loans can go into the six-figure range.
The working capital loan serves the liquidity of your company and usually has short terms of up to 1 year. The investment loan serves to finance a company’s long-term growth and therefore has a term of between 4 and 15 years.
Real estate loan
Real estate loans are tailored to the construction and purchase of office and business premises and usually have slightly more favorable terms than other business loans.
Who is a business loan for?
A business loan is available for corporations as well as for self-employed sole traders and freelancers. For the self-employed and freelancers, a commercial loan is even the better option than a private installment loan, because you can deduct the interest on the business loan from the tax.
Depending on the type of company, the bank will require more or less collateral: While the risk of default is foreseeable for a company with several employees, sole traders and freelancers have more trouble servicing credit rates in the event of illness. The risk for the bank is correspondingly high and this can be paid for through higher interest rates or other collateral.
How do I get a business loan?
As with any loan application, you will need to provide the bank with some mandatory documents and information so that it can decide whether and on what terms you can get a business loan.
The credit terms, such as the loan amount or the interest on the business loan, therefore depend very much on how high your equity is and what collateral you can offer the bank for the default.
Requirements for a commercial loan
In addition to the classic requirements that apply to every loan, the banks ask for additional data beforehand to determine your creditworthiness. Read here what requirements you have to meet for a commercial loan.
- Creditworthiness: As with any loan, the bank checks your creditworthiness beforehand, which is traditionally done through Credit Bureau. You can also obtain a self-assessment in advance to ensure that statute-barred data and prepaid loans have been deleted. In this way, you prevent bad surprises in the application process.
- Business documents: Based on the annual financial statements and tax assessments of the past 2-3 years, you can demonstrate how your company is currently financially. The bank can use this to read how high the risk of default is.
- Financial plan: In order for the bank to assess the risk of your investment project, it is mandatory to submit a financial plan. In it, you detail what you want to use the loan for and how this investment is to advance your business.
- Business plan: If you are a business founder, you cannot of course provide business information retrospectively. In this case, a detailed business plan is necessary to show that your business idea is promising and that you can repay the loan accordingly.
- Default guarantee: The bank will often ask you for a default guarantee, especially if you have little collateral and little equity. The bank thus secures itself in the event that you can no longer service the loan. You can either find a private individual with the necessary means or contact a so-called guarantee bank, which will help you out if necessary in the face of your house or direct bank.
Comparing providers is worthwhile with a business loan
You usually get a consumer loan from a branch or direct bank. With business loans, however, there are other ways to get a loan. We have listed for you which conditions apply to the individual providers and what you should pay attention to:
- House bank: At your house bank you receive individual advice and an offer tailored to your needs. If your business account is also running here, you will quickly receive an initial assessment of whether a loan application can be accepted.
- Direct and branch banks: You will get the fastest processing from a direct bank, but very high credit inquiries in the six- or seven-digit range are only accepted by branch banks.
- Promotional loans from Across Lender: The Across Lender (AL) is the federal promotional bank. It is mainly known for its real estate support, but also provides business loans in various programs for start-ups. However, please note that the loans are mostly earmarked and are therefore not suitable for rescheduling. You can apply for a promotional loan through your house bank.
- State microcredit: The state microcredit fund Germany only finances companies. You can apply for a microcredit through the microfinance institute responsible for your state. The maximum loan volume is $ 25,000.
- Private providers and crowdlending: online you will also find various offers for personal loans and P2P loans. Depending on the offer, less collateral and no Credit Bureau information is required here, but both interest and fees for a loan are particularly high.
What collateral does the lender require for a business loan?
In principle, the lender always requests collateral if there is a risk that you could be in arrears. Classic credit collateral for a commercial loan is real estate, financial assets, machinery, vehicles and business equipment. Please note, however, that freelancers and self-employed entrepreneurs can also use private funds such as reserves or life insurance as security. You shouldn’t risk this lightly.
What should I look for in a business loan?
When choosing a suitable business loan, it is of course important to have a cheap, effective annual interest rate. But you can also save money with other contract details. In the following overview we have listed what details you should pay attention to when it comes to commercial loans.
- Fixed rate mortgage: The so-called fixed rate mortgage is common for business loans. This means that the bank guarantees you a fixed interest rate for a certain period of time. This makes the costs easy for you to calculate. However, make sure that the effective interest rate is also shown for the fixed interest rate, so that you can see the costs incurred at a glance.
- Special repayments: Make sure that special repayments are possible. As a self-employed person or freelancer, your income will fluctuate from month to month. In high-income months, you can simply use a surplus to repay the loan and thus shorten the contract term.
- Repayment pause: The other way around, it can of course also happen that they run into bottlenecks on a monthly basis. Then a contractually agreed payment claim can be useful.
- Free repayment : It is also possible to agree up to 2 years free repayment in the contract. During this period you only have to pay the interest monthly. This means that you only start repaying later, which can be a relief, especially when starting a new company.
- Redemption: Let us assure you by contract that you can also redeem your loan early. Then you have the option, in the case of above-average income, to pay off your debts faster than planned – this will save you money. In most cases, the bank will ask for prepayment penalty, a fee for the interest it misses. However, this may only be between 0.5 and 1% of the outstanding loan amount. So you can also reschedule the business loan afterwards, when the interest rate falls and you find a loan with more favorable terms.
- Repayment schedule: The repayment schedule determines the frequency and method according to which you have to repay the loan. With the annuity principle, the rate remains the same over the entire term of the contract, with the repayment loan, the monthly charge is continuously reduced.
Do I get a business loan without Credit Bureau query?
No. Banks are legally obliged to check your creditworthiness and, for example, to make a Credit Bureau request. If the banks’ creditworthiness and collateral are insufficient, there is the option of using third parties to obtain a business loan without Credit Bureau query.
Business credit thanks to a guarantee
If you lack collateral to apply for a regular business loan, you can consider a surety. The so-called default guarantee is a special feature of commercial loans. You can have this done by a liquid private individual who will pay your installments if you cannot pay.
However, there is also a guarantee bank in every federal state that steps in if necessary. However, please note that these banks never take over the entire loan amount, only up to 80%. Your house bank can refer you to the responsible guarantee bank and help you fill out the application.
Private providers and crowdlending
Private providers and online portals for crowdlending are an option here. However, keep in mind that these lenders are willing to pay for the high risk they take: high interest rates and fees are commonplace here.
Are you interested in alternatives to business loans? On our corporate finance topic page, we explain all the options for business finance.