If you're looking for a business loan, be sure you know the essentials.
A loan, as you may know, is based on a simple concept: someone lends you money in exchange for your commitment to repay it, generally with interest. Because loans are so prevalent, you're undoubtedly acquainted with how they work, but it's still a good idea to brush up on the basics. Borrowing money wisely can make or break your business: you want to borrow enough to help your firm reach its full potential, but not so much that you have trouble repaying it
Putting too much money into your business in the start might be a mistake. Because many small businesses fail within their first year, raising and spending a large sum of money on an unproven company plan can cause a lot of trouble — especially if you're personally liable for borrowed cash. Consider beginning small and on a shoestring budget.
Types of Lenders
When it comes to getting a loan for your business, you have a lot of alternatives. Friends and family members are occasionally willing to assist with modest projects. Banks, credit unions, and savings and loans may be ready to lend money to smart or mid-sized firms. See Small Business Loans: Getting the Lender's Approval for advice on securing a loan from one of these institutions. Many state and local governments, as well as the US Small Business Administration (SBA), provide financing programs to help small firms develop. See www.sba.gov/financialassistance for a great primer on loans and lenders.
The Promissory Note
A lender will almost always want you to sign a written promissory note, which essentially states, "I commit to pay you $XXX plus X% interest."
While a friend or family may be ready to lend you money on the condition that you sign a handshake agreement, this is a poor idea for both of you. It's usually a good idea to put the loan in writing and specify a precise interest rate and payback schedule. Otherwise, you risk unintentional misunderstandings that might suffocate your relationship. In case the IRS decides to audit your firm, you'll also want to have evidence of the loan's conditions.
State usury laws make it unlawful for lenders to charge unreasonably high interest rates on loans. As a general rule, a lender can charge you interest of up to 10% per year without breaking the usury law. However, usury regulations vary greatly from state to state, and various restrictions apply to commercial and private lenders, so if you're worried, you should examine your state's law. In your state's statutes, look for interest or usury.
If your company takes a loan from a shareholder (including yourself), be sure the interest rate is not excessively low; the IRS prefers commercially acceptable loans. Otherwise, the IRS may classify the loan as a capital investment by the shareholder, and the loan repayments as dividend payments.
If you don't make your loan payments, many lenders may ask you to put up valuable property (referred to as "security" or "collateral") that they can sell to recoup their losses. A lender may, for example, ask for a security interest or lien on your business's equipment, inventory, or accounts receivable, or a second mortgage or deed of trust on your home.
A lender has the authority to sue you individually (whether your business is a sole proprietorship or general partnership) or sue your business organization if you don't make good on your repayment obligation, depending on how your firm is formed (if your business is organized as a corporation or a limited liability company). If you are sued personally, the lender may be able to seize your personal assets to repay the loan. If your business entity is sued, the lender has the right to seize the assets of the company.
Cosigners, Guarantors, and Personal Guarantees
Someone may be required to cosign or guarantee the loan by the lender. If you don't make your payments, the lender will have two individuals to collect from instead of one. If you ask friends or family members to cosign or guarantee a promissory note, be sure they realize that they are putting their own assets at risk if you don't return the debt.
If you've set up your company as a limited liability entity (LLC or corporation), the lender will almost certainly require you, the business owner, to personally guarantee the loan or put your personal assets as collateral. (Lenders are more comfortable if business owners have a personal stake in repaying the money because small firms have such a high failure rate.) Be mindful that personally guaranteeing or cosigning your company's debt voids your limited liability status. If you default on the loan, your individual property, as well as half or all of any property you jointly own with a spouse (depending on which state you live in), might be confiscated.
Finally, if you're married, the lender may want you to cosign the promissory note with your spouse. If your spouse cosigns the loan, not only is your jointly held property at danger, but any assets that your spouse holds independently, such as a house or a bank account, are also at risk. Furthermore, if your spouse works, his or her wages will be garnished if the lender sues and obtains a judgment against both of you.
Yoel Molina, Esq. (AKA “Mo”)
Feel free to join our WhatsApp group if you want to know more about his and more!
Yoel “Mo” Molina, I am a lifelong resident of Miami, Fl. I am a graduate of Miami Senior High, Class of 1992, Georgia Institute of Technology, B.S. 1997 and University of Maine School of Law, J.D. 2001. I have been practicing law in Miami Since 2001. I am a former training prosecutor in the Miami-Dade State Attorney’s Office. I have experience in jury trials, appeals, and administrative hearings. I have appeared before judges across the State. My experience ranges from civil litigation matters, collection matters, foreclosure, business and corporate, contracts, real estate, leases and employment matters..
"Mr. Molina has always been there for us with timely, reliable and competent advice. He is an important and valuable part of our team." Corporate Client Eric Delgado, President of American International Export, Inc., a worldwide importer and exporter of brand name appliance parts.
"Yoel has been responsive and attentive to our company’s best interests and needs. He has been a valuable resource to our company. Any company that enlists his services would be in good hands-- including our own clients.” Corporate Client Gibran Flynn - Co-Owner and Founder of Eleva Solutions, Inc., the South Florida leader of outsourced HR, Staffing, Training, and Loss Prevention.
"My name is Anastasia Yecke Gude and I am the owner of Healing Hands Therapeutic Massage LLC. In the process of my company’s growth and expansion, I suddenly found myself a few weeks ago in need of a 1099 contractor agreement, and I needed it ASAP. As in, the very next day! I contacted the Law Office of Yoel Molina and his assistant put me in touch with Mo. I sent him what I had drafted up and he replied within a few hours with suggested revisions and clarifications, as well as a few insights I had not even considered. I was thoroughly impressed by the quality of work he provided, especially considering the time crunch I put him in (sorry, Mo!). I definitely recommend his services to anyone in need of a good contract attorney, and I will be calling him again for future work…hopefully in less of a rush next time!"