The big question that a lender wants answered is: What can you offer in collateral for the loan?
In general an established business can put up accounts receivable (the money a businessperson is likely to generate over the course of a financial year), property, or equipment as collateral. In addition, lenders also look at the credit history of the borrower and/or the business.
For a small business, that is a sole proprietorship, or partnership, and is not yet 'established' (and unable to put up collateral), the responsibility to repay the loan will fall on the owners, who will likely be asked to provide a personal guarantee.
It is therefore very important that before signing such a guarantee, you carefully determine what the loan is for, how it will benefit the business (from the perspective of increased profits), and how you could repay the principal if you had to.
Photograph: Arun Patil
Also see: The magical power of compounding
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