How can I finance my business with loans?

Financing your company with loans, as opposed to obtaining investors, is a good idea when you are more confident that your business will ultimately be a success. This is because once you have paid off all of your loans, you will be able to keep any ongoing business profits. With equity investment, your investors are co- owners of the company and are entitled to an ongoing share of the profits. Of course, with a loan you are shouldering all of the risk, whereas having investors allows you spread the risk around a little.

To finance your company with a loan, you can certainly take out a private loan from friends or families or another business. However, if your business needs more money then this can get you, you should go to a commercial lender, like a bank. Depending on your circumstances, the lender may ask for security on the loan, to help lessen the risk on their end (that is, the risk that you will not be able to repay the loan and will end up defaulting). This security may be an additional mortgage placed on your house, or a lien placed on property such as your car (assuming you own your car) or equipment and inventory of the new business. You should obviously be careful in this situation, because you are personally guaranteeing your loan, which means that you are putting that security on the line and you are also risking your other assets if the loan amount is high.

Once you have been approved for a loan, you will generally have to sign a promissory note (you certainly will with a bank or other commercial lending institute) which is simply a document providing the details of your loan. The promissory note generally says how much money you are borrowing, how much money you agree to pay back (the borrowed amount plus some interest percentage of that amount) and includes details on how you will make your payments (what the time frame is, whether they will be weekly, monthly, etc. and how much the payments will be for). With regard to the specific way in which loans are repaid, there are generally several options which you can discuss with your lender, determining which one makes the most sense in light of your business plan.