Banks are the largest small business lenders, and probably the first place that comes to mind when you think about borrowing. They offer some of the cheapest loans, but they can be hard to qualify for: 72% of small business owners are turned down. Banks require a strong personal and/or business credit score, a personal guarantee, payment guarantee, and financial standing. Applying can also require a lot of time and effort — completing the process can take anywhere from one to three months.
Traditional Bank Loans: Credit Constraints
Before taking out a traditional bank loan, it is important to understand any credit restrictions associated with the loan and the payment guarantee required to obtain it. Credit restrictions (Covenants) are clauses in loan contracts that may oblige or limit the borrower from using the money for certain things, or require you to adhere to certain business conduct requirements. The level of restriction or the number of requirements is based primarily on the borrower's risk, as determined by personal or business credit scores, payment histories, and overall business finances.
Credit restrictions protect the lender, ensuring that the loan is repaid regardless of the company's circumstances. A full understanding of any credit restrictions attached to a loan can help prevent you from violating any credit restrictions and facing the serious consequences that may result. For example, using your loan for anything outside of its stated terms, even in business emergencies, may be a breach of the loan agreement, such as taking out new loans or accepting funds without the bank's permission.
The consequences of violating the bank's credit restrictions may include the bank demanding the bank note, removing your line of credit, and/or requiring you to pay the full amount within a shorter period of time (sometimes as short as 30 days). ). A bank may try to seize your business and even your personal assets to receive payment on a loan (since personal guarantees are often included in the terms of the loan).
Before signing your contract:
- Read your loan agreement carefully
- Ask for clarification of anything you don't understand
- Consult with a trusted advisor such as your attorney or your certified public accountant (CPA).
- Confirm that it will be realistic to adhere to any credit restrictions
- Make sure you know that you are signing a personal guarantee
- Ask the appropriate questions about your loan agreement
Characteristics:
- Fixed and very low interest rates
- Predictable monthly payments
- Helps establish business credit
- Establish a relationship with a professional bank agent
- Available for many uses
Things to consider:
- extensive procedure
- Longer processing time
- Requires solid credit
- Usually requires payment guarantee
