How Is a Bank Loan Structured?

Significance

• When you are operating a business, it is possible that the current assets the business holds in cash will not be enough to cover expenses. When this occurs, a business will need to get a bank loan. The bank will loan the business money based on the creditworthiness of the business, along with the bank's analysis of the business' ability to repay the loan. These factors will influence the type of loan a business can receive, and how it is structured.
  
  

Features

• Bank loans have several components. The first involves the bank analyzing the creditworthiness of the business applying for the loan. This will be done through a credit check of the business and an analysis of its financial stability. The bank will pay out a lump sum to the business, or create a line of credit the business can use to withdraw money as necessary. This lump sum or line of credit will be accompanied by a timetable stating when payments must be made, along with any penalties involved if the company does not make the payments on time.
  
  

Benefits

• Banks will offer specific benefits to entice businesses into taking out a loan. The bank can offer the ability to reduce the interest rate on the loan after a specified period of time, if the company makes all of its payments on time. Banks also can structure a loan so that a certain period at the beginning of the loan is considered to be "same as cash." This means that, if the business pays back the entire loan within that time period, no interest is charged on the loan itself. The business only owes the amount borrowed, along with any administrative fees the bank charged in originating the loan.
  
  

Considerations

• As a business, if you feel that interest rates are going to drop in the near future, you will want to inquire about a loan with a fluctuating interest rate that is tied to the federal interest rate. When the federal interest rate drops, it will result in the interest rate of your loan dropping as well. Be careful when applying for this type of business loan, though, because increases in the federal interest rate will increase the amount of interest you pay on your loan.
  
  When determining the interest rate of the loan, find out if there will be a penalty for paying off your loan in a short amount of time. Banks will rely on the interest of a loan as income for the bank, and paying it off quickly reduces the length of time over which they can continue to collect interest. Due to this fact, some banks will add a premium onto your last payment if you pay off the loan quickly. As a business, you can negotiate the amount of this premium with the bank when your loan is first determined.
  
  

Size

• The size of a loan the bank will offer your business is dependent on several factors. These include the ability of your company to repay the loan, the financial history of your company and the bank's overall analysis of the business sector your company falls into. When applying for a bank loan as a company, bring copies of your last three to five annual financial statements. If the company is a new business, bring your business plan, along with documentation of current and future expenses the company has agreed upon for services like rent, supplies and labor. The bank will consider all of these documents and cash-flow items when deciding what loan structure is best for both you and them.