But regardless of why you want to borrow, borrowers must always convince the lender of the ability to repay the loan. Banks do not make grants, nor does the SBA's loan program. All loans made or guarantied by the SBA must be repaid, and no loan will be approved without the borrower showing an ability to repay. This is provided by suppliers when the company purchases an open account. It is a courtesy that businesses extend to one another and is granted on the company' s reputation without need for collateral.
Banks provide such loans because they are self-liquidating by generating sales dollars.
If the loan is secured, it is generally by inventory or accounts receivable. Short-term loans should be used in the profit producing areas of the firm and paid out of those operations, without the cash being absorbed by the business in other areas of equity, thereby reducing liquidity. These are generally greater than one year and are used for capital acquisitions, real property purchases or growth. Payments are usually monthly, quarterly, and occasionally semi-annually, and debts are paid from accumulated profits. Lines of Credit A pre-approved loan where collateral has been given and the business owner draws against this amount with individual notes.