There are many situations that arise where a business might require an infusion of capital in order to take advantage of a business opportunity or simply just to meet payroll. It is not uncommon for businesses to frequently borrow money and repay it as needed when these situations arise, but successful businesses make sure that when they borrow money, it is done sensibly.
There are many different types of lenders that cater to the business community and there are different types of business loans specifically designed to help a business make it through a challenging financial time.
Depending on the size and type of business, there are different avenues a company can pursue to acquire needed funding. Small businesses such as sole proprietorships and even small partnerships can often take advantage of friends and family members who might be willing to lend funds to help them meet immediate financial challenges. Larger businesses often turn to banks or other lending institutions to acquire needed capital as well as the Small Business Administration and other government loan and grant programs for businesses.
Regardless of the type of loan or the institution or individual that is loaning the money, the lender will nearly always want some form of security or collateral if there is not sufficient credit history to substantiate the amount of money being lent. At a minimum, lenders will require all responsible parties to sign a promissory note that guarantees a promise of repayment. The promissory note will detail all of the legal aspects of the loan including the interest rate and repayment schedule and will act as legal documentation to support the requirements of the IRS.
If there is insufficient credit history lenders might require security or collateral prior to loaning money. Depending on the size of the business and the business structure, some lenders might require a second mortgage on a home or property or an interest in the assets of the business until the loan is repaid.
Certain business structures such as a sole proprietorship or a partnership leave the individual open to personal liability should the business fail and the loan can't be repaid.
If the business is a corporation or limited liability company, lenders can sue the business entity itself for failure to repay a loan.
Regardless of the size or structure of the business, appropriate considerations must be made prior to deciding to take out a business loan. Many businesses fail within the first five years so attempting to borrow a large sum of money for an untested business can create financial problems that a business might not ever recover from. If this happens, the individual might be personally liable for repayment of the business loan, so great care should be taken to hold off borrowing money for the business unless it is absolutely necessary.