Many new business owners make the mistake of taking out too many loans too quickly instead of exploring other means of structuring their business or securing financing. While loans can be used at any point during a business’s life, it’s always better if you can minimize the amount of loans you have to take out until your business’s cash flow and customer base is well established. If payments on the loan start coming due before the business begins producing sufficient revenue to cover them, it can put serious pressure on the business’ cash flow. Before you start signing loan documents, consider a few alternatives: You’d be surprised how willing friends and family might be to support you. While still technically loans, you can generally get much more favorable terms from friends and family than you can from a financial institution. Even if their loans are small, enough small loans from friends and family can really help make the difference, especially in the beginning. Make sure you adequately document loans from friends and family to avoid any confusion and misunderstandings with them down the road. Commercial loans are a little different than personal loans in terms of where you can get them. Of course all of the same financial institutions that would give you a personal loan will probably be able to help you with a business loan as well. These include banks, credit unions, and savings and loans. In addition to the usual suspects, government entities like the Small Business Association (SBA) may be able to offer you loans as well. Many states and larger cities also have local organizations that are designed to stimulate business investment, so before you run to the nearest bank, check to see what other options may be available to you. These specialized business organizations can often offer discounted rates on loans because they are subsidized by governments and other organizations. Once you’ve decided who your lender will be, the basic financial instrument behind most loans is the promissory note. As its name suggests, it is a document in which you promise to pay back a certain amount of money, the principal, at a certain interest rate over a set period of time. It’s equally important to have it in writing in case you get audited by the Internal Revenue Service (IRS) at some point. Money from friends and family without an agreement may seem more like a gift to the IRS. Even if your friends and family tell you they don’t need you to put it in writing, explain to them that it’s important for financial record-keeping and to protect you from the IRS. Always shop around to get the best rate because higher interest rates can really impair a business’s ability to keep current on its loans. In addition to finding the best rate possible, there are two other aspects of interest rates to watch as a business owner. First, interest rates that are too high may violate state usury laws that limit the maximum interest rates allowed. Usury laws vary greatly from state to state, so check your state’s laws to make sure that you’re not taking out an illegal loan if the interest rate seems quite high. Many lenders will require that you put up some sort of collateral for the loan. As a business owner, you may be able to use business assets as collateral (such as office equipment and property). Chances are good, however, that your business assets won’t cover the loan. In that case, you may have to put up personal collateral, such as taking out a second mortgage or deed of trust on your house. Depending on how you’ve set up your business, the lender may also be able to sue you personally and take your personal assets to satisfy the loan. A lender may require a cosigner or guarantor on the loan. If you have a business partner cosign the loan, he or she should already be aware of the risks, but if you are going to have friends or family cosign the loan, make it very clear exactly what the risks are: If you are married, there’s a good chance that a lender may require that your spouse cosign the loan. Make sure you and your spouse understand that it’s not just your jointly owned property that may be at risk. Your spouse’s separate property can also be reached to satisfy the debt, so be very clear with your spouse and make sure that he or she is really comfortable with that possibility. Although limited liability companies generally shield business owners from personal liability, if your or other business owners cosign the loan, you are effectively stepping outside of the protection of a limited liability company. All of your jointly held and separate property could be seized to satisfy the debt. Small Business Loan Attorney Free ConsultationWhen you need legal help with a small business loan, please call Ascent Law for your free consultation (801) 676-5506. We want to help you.
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About MeIn 2009 I was creating marketing channels for barbie dolls in Nigeria. Spent a weekend implementing dogmas in Naples, FL. Won several awards for writing about toy trucks in Mexico. Spent 2001-2007 analyzing deodorant in Pensacola, FL. Spent 2001-2004 researching heroin in Miami, FL. Enthusiastic about writing about clip-on ties in Naples, FL. Archives
June 2019
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