From the Nolo Business & Human Resources Center
The Lowdown on Business Loans
If you're seeking a loan for your business, make sure
you understand the basics.
As you know, a loan is based on a simple idea: someone gives you money and
you promise to pay it back, usually with interest. Loans are so common that you
probably are familiar with the mechanics, but nevertheless it makes sense to
review the basics. The success or failure of your business can hinge on
borrowing money sensibly: you want to borrow enough that your company can reach
its potential but not so much that you have severe difficulty paying it
back.
 Start on a shoestring. It can be a mistake to pour
too much money into your business at the beginning. A fair number of small
businesses fail in the first year, so raising and spending a pile of money for
an untested business idea can lead to much grief -- especially if you’re
personally on the hook for borrowed funds. Consider starting as small and
cheaply as possible.
Types of Lenders
You have many options when looking a loan for your business. For small
ventures, friends and family members are sometimes willing to help. For
sophisticated or mid-sized businesses, banks, credit unions, and savings and
loans may be willing to lend you money. The U.S.
Small Business Administration (SBA) and many state and local governments have
loan programs to encourage the growth of small businesses. For an excellent
primer on loans and lenders, see
www.sba.gov/financing.
The Promissory Note
A lender will almost always want you to sign a written promissory note -- a
paper that says, in effect, "I promise to pay you $XXX plus interest of
XX%."
While a friend or relative may be willing to lend you money on a handshake,
this is a bad idea for both of you. It's always a better business practice to
put the loan in writing, and to state a specific interest rate and repayment
plan. Otherwise, you open the door to unfortunate misunderstandings that can
chill your relationship. Also, you want to have documentation of the loan's
terms in case the IRS decides to audit your business.
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