There are a lot of different views out there about borrowing money for your small business. Some people think you should not borrow money at all for your small business as a hard and fast rule. Then there are some people out there who might be against borrowing large sums of money, but for their small business, a business credit card that can be paid off once a month is acceptable. But for many small businesses, if you're looking to grow your small business into a bigger small business, your small business is going to need an infusion of capital, and one of the ways to get that infusion of capital is a commercial loan. Commercial loans are very common, and in some ways, easy to obtain. In fact, I used to work for a law firm where I saw small businesses default on their commercial loans on a regular basis. This is something that can be prevented if you understand what you're getting into before you sign the loan documents. In today's Freedom Friday blog and email newsletter, I want to answer the question, “Why Should My Small Business Borrow Money?”
The only reason why your small business should borrow money is because you are at a point in the growth of your small business where you need additional capital in order to successfully grow your small business and take it to the next level. You should NOT borrow money if your small business's finances are out of order. Make sure your finances are in order, and then consider getting a commercial loan. Here are five (5) tips regarding the commercial loan process:
1. Getting a Commercial Loan Takes a Long Time
The first tip for getting a commercial loan is that the process takes a long time. Unlike consumer loans, which take little time to close, you should expect the commercial loan process to take several months. There are some loans available out there which might take less time to complete, because while they are a business loan, it is being offered as a consumer-styled business loan. These are the exception to an actual, negotiable, commercial loan through a reputable financial institution like a bank or a credit union. But, due to the amount of money being borrowed and the risks associated with commercial debt, banks and credit unions need to be selective about providing loans to small businesses.
2. You Need to Be Transparent About Yourself and Your Small Business
The second tip for getting a commercial loan is that you must be ready to be transparent and provide a ton of information about yourself as an individual and your small business. The lender will most likely require you to produce detailed financial statements, a list of assets and equipment (these may be identified as collateral to secure certain types of loans), copies of tax returns, copies of contracts and leases, proof of insurance, and more. You just need to be ready to provide whatever documentation is requested by the bank or credit union that you're working with.
3. You Need to Be Ready to Personally Guarantee the Loan
The third tip for getting a commercial loan is that you need to be ready to personally guarantee the loan. A personal guaranty is a statement that you agree to be personally responsible to repay the loan for your small business. Basically if something happens to the small business, and for whatever reason it goes out of business, you as an individual are going to still be responsible for this debt, even if you dissolve your LLC or corporation, and the business entity goes away. This is going to be required because most small businesses don't have enough assets or credit history of their own to avoid a personal guaranty of the small business owner. No one wants to sign a personal guaranty because if your small business fails, you're still going to be responsible to repay the loan to the bank. However, personal guaranties are routine in commercial loans and most banks and credit unions won't do a commercial loan without them.
4. Everything is Negotiable
The fourth tip for getting a commercial loan is that everything is negotiable. Well, kind of. A commercial loan transaction is a contractual relationship between two parties. There is a high volume of paperwork that must be executed in order to close a commercial loan. Most of it is boilerplate language drafted to afford the greater benefit to the bank or credit union making the loan to your small business as the borrower. However, each situation is unique, and there may be provisions buried somewhere that don't accurately reflect the intent of the parties. You should read each document carefully and ask for changes, if necessary. Better yet, hire an attorney to review your loan documents to protect your interests.
5. Nothing is Negotiable
The fifth tip for getting a commercial loan is that nothing is negotiable. Well, kind of. If you do ask for any changes, your bank or credit union is probably going to say no to them. The bank or credit union almost always has a better bargaining position than you do. You need them, but they don't necessarily need your business as a borrower. Yes, a bank or a credit union is in the business of making commercial loans, but the lender will want the language in each loan document to be the same from one loan to another. This consistency will simply their internal process of enforcing loans when a borrower defaults. For these reasons, banks and credit unions won't usually customize a commercial loan.
At Liberty Legal Solutions, LLC, we provide commercial loan documents review for a flat legal fee. For more information about this service, send a brief email to me at [email protected].
If you are interested in starting a small business anywhere in Oklahoma, or you need legal help building, protecting, or defending your small business or other assets, please contact me at [email protected] to schedule a FREE strategy session.
For more information about Liberty Legal Solutions, LLC, please visit our website at http://www.libertylegalok.com/