Taking out a business loan is often a necessary step to help a company grow and thrive, particularly when the business needs more than the profits allow for reinvestment. Though small businesses often need a loan, understanding the potential restrictions that might apply is a vital step in avoiding complications and accidentally misusing the funds.
Restrictions for Applying:
A business loan often has very specific qualification guidelines that a company must follow before proceeds are available. The restrictions set on obtaining a business loan are the first place businesses much consider beforehand because it can make the difference between eligibility and disqualification.
Specific restrictions on applying for the loan vary by the lender, state laws and the type of business loan. Though the qualification restrictions can vary, most lenders require some liquid assets that are easily sold, a good personal credit history, a strong business credit rating, collateral to put up against the loan and a maximum loan amount. In some cases, small businesses might also need to put personal properties up for collateral if the company does not have enough collateral.
Restrictions on Usage:
Beyond the restrictions for applying to obtain a business loan, companies must pay attention to the usage restrictions. Many lenders have tight usage restrictions to prevent poor money management by the company and to ensure the proceeds are used for the optimal growth of the business.
In many cases, usage restrictions prevent business owners from giving the funds to associates unless it is payment for work and it will not allow company owners to refinance other loans from a Small Business Investment Company. The restrictions also dictate that the business owner cannot put any of the funds into items, services or properties that will not benefit the company. This helps prevent unnecessary spending.
The restrictions on loans are generally related to common sense. The company is required to use the money to help the business grow and should not put the funds into unnecessary items, personal goods or services that ultimately just waste money. These restrictions help keep expenditures down while still helping the company thrive.