If you own or operate a business, it will likely be necessary to, at some point, apply for a business loan to cover short-term costs and resolve any cash flow challenges you may have. In fact, borrowing effectively can represent the difference between a business’s success or failure, especially if your company is young.
The U.S. Small Business Administration (SBA) operates an often-used loan program that essentially covers much of the risk for lenders issuing loans to small businesses. This program aims to help businesses continue to grow when other funding options are not available. Whether or not you go through the SBA, you may seek a loan from a bank, a savings and loan or a credit union.
When it comes to interest, there are laws in place to prevent lenders from charging excessive rates to business owners—something known as a usury law. Most lenders will avoid charging more than 10% interest to remain safely under this amount. Right now, interest rates are quite low, at just one over prime, but are expected to climb upward soon.
Another issue to consider, especially if a shareholder of your corporation is issuing a loan to the business entity, is to ensure that the interest rate is not too low. If it is, the Internal Revenue Service could consider it not commercially reasonable, instead viewing it as a capital investment from the shareholder. If this happens, the IRS could tax the loan repayments as dividends to the shareholder, something that would likely take both your organization and the lender by surprise.
Collateral and Co-signers
In addition, most lenders will require that you offer some sort of collateral, known as “security interests,” that they would be able to sell off in the event you are unable to pay back the loan in the future. If this does happen and you cannot make good on the loan, the bank may choose to sue the business or you personally. By suing you as an individual, the lender could possibly take your personal property and assets to make up for the missed payments.
Finally, it might be necessary for you to find a co-signer to your loan if your credit history prevents you from taking it out on your own. In this situation, the bank is looking for another individual from which it could potentially collect money or assets if the loan goes into default. If you need to ask a friend or family member to serve as a co-signer, be sure that person knows the risks involved.
To learn more about your options when it comes to business loans, consider speaking with a skilled corporate law attorney based in the U.S. Virgin Islands.
Nash Davis is Chair of the Real Estate & Financial Services Practice Group at BoltNagi PC, a full service business law firm on St. Thomas, U.S. Virgin Islands.