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While owning a business offers rewards, the job is not easy. Entrepreneurship has its problems, and a critical—and sometimes fatal—one for small businesses can be the lack of access to the financial resources to keep the dream going.

The first and most common reason why businesses borrow is to purchase assets. A loan to acquire assets could be for buying short-term, or current, assets—such as inventory—and would be repaid once the new inventory is converted into cash as it is sold to customers. Or the funds could be for the addition of long-term, or fixed, assets, such as equipment.

The second reason is to replace other types of credit. For example, if your business is already up and running, it may be time to take out a bank loan to repay any borrowed money. Or you may wish to use the funds to pay suppliers more promptly to get a discount on the price of the merchandise.

The third reason is to replace equity. If you wish to buy a partner's share in your business but you don't have the cash to do it, you may consider borrowing.

Common Loan Features
• Loans are long term or short term.
• Interest rates vary depending on the term, type, size and risk of the loan.
• Repayment may be a lump sum or on a monthly or quarterly schedule.
• Payments may be delayed until the funds help your business generate cash flow.
• The loan may be committed, meaning the bank agrees to lend to you under certain terms as you need funds without requiring you to re-apply each time.
• Some loans require that you maintain compensating balance levels in a deposit account.

Loan Agreements/Common Loan Restrictions
Be aware that a lender will expect you to agree to certain performance standards and restrictions in order to ensure that your business can repay the loan. These restrictions, known as covenants, representations and warranties, commonly include the following.
• Maintenance of accurate records and financial statements.
• Limits on total debt.
• Restrictions on dividends or other payments to owners and/or investors.
• Restrictions on additional capital expenditures.
• Restrictions on sale of fixed assets.
• Performance standards on financial ratios.
• Current tax and insurance payments.

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