No matter what phase of growth your business is in, there will come a time when extra cash will come in handy. This article breaks down the process and lending standards into manageable steps so you can learn how to apply for a business loan like an expert. In this article, we will give you an in-depth guide on how to get a business loan.
From understanding qualifications to shopping for lenders and learning about application processes, this guide covers everything that new entrepreneurs need as they work toward making their dream happen.
8 Easy Steps To Get A Business Loan
To know how to get a business loan, follow these essential steps.
1. Determine why you need a business loan
When trying to understand how to get a business loan, the two questions you should ask yourself (and that every lender will ask you) are: Why do I need this money? How much money do I need?
Some small businesses, for example, might have one overarching reason like working capital, or they might have a different specific goal in mind.
For instance, one person may be getting off the ground and need funding to purchase equipment; on the other hand, some want to refinance current debt and borrow additional funds for working capital. In any case, we must remember that these lines can sometimes blur.
2. Determine what lenders look for
Knowing how lenders will evaluate your application is essential before you apply and understand how to get a business loan. They consider many factors, including revenue or cash flow and time in business, when judging an application and personal credit scores, and the company’s credit score. (This especially applies to traditional lenders such as banks or credit unions.)
Time in Business
If a lender refuses, they will want to see you have two years of successfully servicing debt and running a business before lending. The idea-stage startups are the ones who most often can’t qualify for term loans or lines of credit with lenders, but one alternative might be using an online lender that requires just one year in business.
Business trade credit from suppliers is underused as well – it’s worth considering if you don’t have any other options.
Credit scores are an integral part of evaluating a business’s creditworthiness. They consider both the company’s and the individual owner’s credit history. It is the lenders’ responsibility to determine whether you’re likely to make payments on time based on what you’ve done in the past.
Understanding your credit score before applying for financing can be critical in determining options when looking for small business loans.
If a lender wants to assess your ability to repay a loan, they will look at what cash flow is and how likely you’ll be able to make payments. Lenders want the current sales, expenses, and future reporting of small business loans.
They might even ask for unpaid invoices or an explanation of your money situation two years from now. Many lenders today require at least three months worth of the bank.
While most loans require collateral, some lenders will offer unsecured loans. It means you can borrow money without making any specific assets or property available as collateral.
While these personal loans are rare and only offered to the lender’s best customers, an unsecured loan may be subject to UCC lien requirements if requested by the lender for additional security.
You are more likely to get a loan if you already bank with a significant lender. We saw this during the first round of the Paycheck Protection Program as many banks approved their current customer’s loans before considering one from an unfamiliar small business. Consider where you have existing, well-built relationships when choosing lenders like credit unions, which offer favorable terms for their members.
3. Determine the type of loan you need
Lenders will ask why you want a small-business loan. Your answer should fall into one of these categories and determine which type of business loan is right for you:
SBA loans are obtainable in amounts from less than $50,000 up to $5 million. They offer low rates and favorable repayment terms and a shorter loan process time if you’re using the SBA Disaster Loan (including Economic Injury Disaster Loans or EIDL). All other types of loans are made by participating lenders.
A bank line of credit is a popular option for many business owners, significantly when the loan amount varies and repayment terms range from one to twenty years. It may take a few weeks, but you’ll be approved if all the documents are correct.
Microlenders are lenders that provide small loans to underserved entrepreneurs. They often work with new businesses and those who have had trouble meeting the eligibility requirements for a loan from other sources.
Loans given by microlenders may also be less stringent in credit scores; rates are comparable to business credit cards instead of large bank loans.
Business Cash Advance
Funding is usually based on the applicant’s monthly or annual revenue with a business cash advance. The amount can range from $5000-500,000 and more. Even applicants with less than perfect credit may qualify if they meet the minimum requirements for sales or transactions (usually averaging over $10,000 each month).
Non-Bank Online Loan
In comparison to banks, online lenders have a quick response time and can fund loans quickly. Many businesses in need of short-term or medium-term funding are the first choice.
As long as you’re willing to pay a higher APR (interest rate) and can provide proof of your creditworthiness with revenues, you may be eligible for an approved loan between $25000-$500000 that is available within 24 hours.
Cash Flow Loan
The base of cash flow loans is cash flow, so there may be a soft credit check. These lenders want to ensure you have the money to service debt with these loans. Get approved for up to $100,000 with some companies that charge an APR of at least 25% and 90%.
Business Credit Cards
A business credit card is one of the best ways for a newer business to access money from lenders. Pay an industry-standard rate between 25% and 0%; it has no establishment fee and an introductory interest rate (typically low) that rate may change at any time.
Equipment financing is a loan you accept to purchase equipment or other tools for your business. It doesn’t need a down payment, which helps you preserve capital and maintain cash flow. If the loan defaults on it, the equipment becomes collateral, meaning they will repossess what was purchased with the loan amount.
It is considered relatively complex (not to pay), as in most cases, people have already spent all their money buying more stuff for the business. Loan terms run from two to 10 years, and amounts can go anywhere from $100,000 – $2 million.
Invoice factoring is when your firm sells its invoices to a factoring firm for cash. It helps you maintain cash flow for your business, as the factor gets paid once customers have settled their balance on an invoice. Invoice financing often costs more than other sources of funding.
However, it can help avoid shortfalls in cash if managed correctly by implementing policies like payment reminders or credit limits (though these limit communication and control from clients).
For instance, you can’t decide how the invoice firm collects payments from your customer’s account, which may cause delays with expected costs due dates.
To know more about how to get a business loan read the article carefully.
4. Calculate how much debt you can afford
How to get a business loan? The next step is figuring out how much debt you can afford. Unfortunately, the amount of capital you want for your company might not always match the amount you can afford. If this is true and you take on too much debt financing, it will be tough to get out from under, which could hurt your business instead of helping it.
On the other hand, if you don’t take any loans and find yourself missing opportunities, your company will suffer.
You can also use a business loan calculator. This calculator will help you figure out how much debt you can afford to take on before having a loan offer.
The best part? You can experiment with the size of your loan and see what monthly payment changes by that, as well as calculate profit and loss statements for your business. A cushion is necessary if any other expenses are involved because those need to be covered too!
5. Decide how you want to collateralize the loan
Secured loans require business collateral, such as property or equipment that the lender can seize if you fail to repay the loan. It is risky, but it may also raise your borrowing limits and get you a lower interest rate.
You may have to provide a personal guarantee on unsecured loans. It means someone will be personally paying back your debt if your company cannot pay up, with all sorts of personal possessions like houses and cars becoming a fair game in matters of nonpayment.
6. Gather all your documents
The process here is to determine what type of financing you are looking for and gather the necessary documents.
Overall, the specific documentation required and the process you’ll need to follow will differ based on the lender – almost every loan type has some similar information. It’s also essential to note that it may become more complicated or easier to qualify for a given interest rate depending on how much documentation is submitted.
Banks tend not to approve those without appropriate qualifications as quickly as other institutions.If you want to learn how to get a business loan, you must carefully read all the documents required to raise a loan.
Here is a complete list of documents that you need to get a business loan:
- Business and personal tax returns.
- Business and personal bank statements.
- Business financial statements.
- Business legal documents (e.g., articles of incorporation, commercial lease, franchise agreement).
- Business plan.
The documents required for a business loan differ from lender to lender.
7. Choose a lender
Now that you know what qualifications you’ll require to bring to the table and which loan product is best for your needs, it’s time to pick a lender. Not all lenders provide all of the assistance mentioned, so make sure you consider only those who offer the type of financing desired: those most likely to accept your loan application based on creditworthiness.
Direct lenders make loans without an intermediary and usually include banks, credit unions, and online lenders.
Lending marketplaces make it easier to find a lender by matching your qualifications with the best choices for financing needs and credit situations. These options exist online, making applications quick compared to more traditional lending scenarios.
P2P lending is when you lend from one individual to another individual. This type of lending may be a good option for someone turned down by a traditional lender, but it may also not work out in some cases.
Some P2P lenders are business owners, and others might want to help their community grow; either way, the give-and-take process can prove successful if both parties feel confident with what they’re offering and what they expect back in return.
8. Apply for a Loan
You’re almost there! After figuring out most of the questions about how to get a business loan and what type of loan and lender is right for you, it’s time to apply. First, compare two or three similar options based on the terms and APR –
Remember that APR includes all loan fees and the interest rate, so it’s an accurate way to understand the total cost of a business loan for one year. Of all those loans you qualify for (and can afford), choose the lowest-APR option available, then sign up with your gathered documents.
Do not forget that credit bureaus do not differentiate between personal or business inquiries– if there are any negatives on your personal credit history, it could affect your small business loan application. Go with a reliable option with minimal risks before submitting anything else.
Learning how to get a business loan isn’t always easy. However, if you take the time and effort necessary for your personal and financials, getting a well-priced business loan increases substantially.
With that in mind, once you complete with preparation, it’s important to compare loans from lenders to make sure you’re getting the best deal available from these services.