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 http://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.