What Is a Finance Agreement?

A finance agreement is a contract between a borrower and a lender or a financial institution and a business. It is a legal document that sets out how a lender will finance a project or a business plan. Several businesses need start-up money to begin operating. For that reason, a financing contract is necessary to guarantee that a business plan will push through. Some financial institutions allow borrowers to settle their loans using the money they gain from their new businesses. For example, a lending company may release a loan bond to a business owner who wants to build an amusement park. The owner can then use the profit they generate from tickets to pay back the loan.


The Different Types of Business Loans

According to the Small Business Administration, there are about 550,000 small businesses that opens every month in the United States, and more than half of the people in the U.S. are owners or workers of small businesses. If you are looking for funds to start your own business, you can ask for financial assistance from banks, private lenders, or even your credit card. They will guide you to decide what type of loan is appropriate for your business. Nevertheless, it is important to have a basic idea of what the different types of loans are so you’ll easily come to terms with your lender. So, here are the different types of business loans.

Line of credit. This type of loan is usually used by small businesses. It is a loan that prepares a company for emergency cases such as negative cash flow. Most often, the borrowed money is used to buy inventory and is used as payment for the operation costs of a business. Note that the money in a line of credit cannot be used for real estate or equipment. Moreover, it has a low-interest rate since it is not a high-risk arrangement, and payments are usually given monthly.Letter of credit. A credit letter is a letter banks use for international transactions. This letter guarantees a supplying company from another country of the payment it will receive from an entrepreneur. Banks usually base their service fees on the size percentage of credit letters. Typically, credit letters are given within two working days. There are four different classifications of letters of credit—commercial, revolving, confirmed, and traveler’s. In a supplier-entrepreneur relationship, the use of a confirmed letter of credit is common.Installment. A borrower can pay a lender monthly with an installment loan. The payment covers both the principal amount and the interest rate. This type of loan can meet all sorts of needs for a business. A borrower will get the full loan once he/she signs a contract. The interest rate is quantified from the starting date to the final payment day. If an entrepreneur decides to pre-pay a loan, the lender will simply adjust the rate of interest without asking for a penalty fee. Also, if monthly payments are not applicable, it can be on quarterly, bi-annually, or an annual basis instead.Interim. Also known as a bridge loan, an interim loan secures financing for a company by providing cash flow to a business that is currently going through stalled flow. This type of loan is only short-term and demands high interest. Also, the loan comes with collateral, which can be a property or inventory. For example, an interim loan can help a property owner begin business operations while waiting for his/her lot to sell.Balloon. A balloon loan is a loan without amortization. For that reason, a borrower has to pay a balloon fee at the end of the agreement to fully pay for the remaining debt. Also, it is a short-term loan that demands a lower interest rate. Nevertheless, there is still a risk that it may change to a higher rate. The payment arrangement of a balloon loan is different from a conventional loan. At the end of the agreement, the borrower will have to pay for the full interest of his/her loan at once, which means he/she has only paid for the principal amount during the whole term.Unsecured. Loans can either be secured or unsecured. When a lender is convinced that a borrower has a good credit history, he/she may be willing to offer a company an unsecured loan. This type of loan doesn’t need collateral as a guarantee for payment. For new businesses, they are less likely to qualify for this type of loan because it is risky.Secured. A secured loan is simply the opposite of an unsecured loan. It requires collateral but normally has a lower rate of interest compared to an unsecured loan. The collateral must have more value than the money a borrower receives, whether it be property or inventory.

How To Apply for a Small Business Loan

Applying for a business loan agreement is easier when you prepare beforehand. Follow the steps below so you will get the money you need to start with your business.

Step 1: Establish Your Credit Score

A credit score can range from 300 to 850, the higher your score is, the better. Lenders base your ability to pay by assessing your credit score. Also, most lenders base your credit on the FICO score. The FICO score depends on factors such as the latest credit inquiries, present credits, credit duration, debts, and payment history. Therefore, you must pay your bills on time to establish your credit score. However, be aware of incorrect credit reports, which may also affect your score. You should know what your exact credit score is based on the factors influencing it.

Step 2: Know the Requirements of a Loan

You must meet a lender’s requirements before you apply for credit. This is to increase your chances of actually getting a loan. Usually, borrowers have to meet the lender’s criteria concerning annual revenue, credit scores, and business years. If you want to apply for a loan in the Small Business Administration of the United States, you will also have to meet their criteria. Moreover, your business shouldn’t be part of SBA’s unqualified list. This list includes real estate, banks, and insurance companies.

Step 3: Prepare the Necessary Documents

Financial institutions and conventional lenders usually ask for legal and financial files during application. These documents may include income tax returns, financial statements, a valid I.D., business licenses, business leases, and articles of incorporation. Completing these requirements may take some time, but if you need money for your business, that will not be an issue for you. If you want fast money, you can apply for a loan from online lenders instead.

Step 4: Create a Reliable Business Plan

Before lenders approve your loan, they will need to know how you are going to use the money. If you plan to put up a business, then normally a lender will ask for a reliable business plan. The scheme should display that you will have an ongoing cash flow to pay for your expenses and debts. Your business plan must have a company description, service or product description, operating team, industry survey, operating plan, marketing strategies, and SWOT analysis. With a reliable business plan at hand, a lender will most likely approve your application.

Step 5: Offer Collateral

A collateral is a valuable asset that a lender has the right to own if you can’t repay your loan. Most often, to apply for a business loan, you must provide collateral. Collateral can be an inventory, equipment, or real estate. Aside from that, a lender may ask for a personal guarantee, which can be more than 20% of your business.


Can I still apply for a loan even if I don’t have collateral?

Yes. Collaterals do increase your chances of getting a loan, yet not having doesn’t mean that you are no longer qualified. There are loans below $50,000 that do not demand collateral, but if you need a big amount of money for a business, you will need collateral. Also, if your collateral is weak, a lender may ask for a co-signer to justify the loan. Established businesses with good cash flow may apply for a loan without collateral.

Do I need experience in the industry to qualify for a loan?

Experience is a big indicator that your business will succeed. A lender will want to assist an owner who has enough experience in the business industry to guarantee success. Note that some loans based on credit do not necessarily require experience. If you have a prospect manager who has more than two years of experience, you may be qualified to apply for business credit.

Can I still apply for a loan even if I have a history of bankruptcy?

Lenders will take note if you have been responsible financially after filing bankruptcy. Your history of bankruptcy should be three years ago before you apply for a loan. Moreover, you must not have any history of late payments or other bad records on your account since your declaration of bankruptcy.

Do I need a final location for my business before applying for a loan?

New businesses must at least know their operating location before applying for a loan because it is a factor that affects the beginning costs and remodeling costs for the site. You can try talking to a landlady and convince her to reserve the area for you. Once you do, you can include the site in your business plan and calculate the possible expenses needed to operate on that site. Also, you have to request for a Letter of Intent from the landlady indicating that the area is available for you.

How long will it take to get the funds?

This mainly depends on the type of loan you are applying for. Some loans may take longer to approve than others. It also depends on the situation and your needs as of the moment. You can ask your lender directly to know what type of loan fits your current needs, and you can also ask when you will get the fund.

If you want to put up a business, but your funds are not enough to let it operate, then apply for a loan. You may have a lot of plans going on inside your head, but the thought of money is troubling you. The good news is, you can easily apply for a loan to support you. Just make sure your plans are feasible so your lender will trust you and sign a finance contract with you.