Are you looking to start or expand your business, but you don’t know how to finance it? If this is the case, then you are likely considering how to get a business loan. There are a few steps for you to take to succeed. Just picking out a lender usually isn’t enough. You must start the process of searching for the most suitable loan options. Being able to qualify for a loan isn’t that easy to do either. There are crucial requirements that you can’t ignore. Following the below advice will prepare you to meet your future lending partners.
How does a business loan work?
The purpose of a business loan is to provide direct support for new or growing companies. If you want to start from scratch or grow your business ventures, a loan could give you the needed funding. That depends on how well you are willing to answer a lender’s questions. You must make the best choice based on your needs when picking out the right loan. Consider the aspects of your company that need financing.
Having enough cash for working capital could be a great reason to want to take out a loan in the first place. These types of loans are not expensive and typically serve only for covering day-to-day expenses. Despite this, they are crucial. You can’t sustain a company’s work process without business capital.
You may not need global working capital but have specific expenses in which you want to invest the loan amount. Putting funds directly into equipment financing is just as important. The loan might have more than one purpose, and that’s understandable. There are ways you could distribute a loan to cover several points of financing.
How and when can you benefit from a business loan?
If you are working on getting your business off the ground, then getting a loan may not be an ideal solution. There is a lack of financing options for fresh business startups because of the more significant risks that come with the absence of business history. If this is the case for you, then your choices are not non-existent. There are some loan opportunities for small business startups that are six months or younger.
You are likely to have a significantly higher chance of getting a loan for an existing business. Lenders will examine your management history and the track record of the company you intend to purchase. In that sense, it takes a double effort on your part to convince them. You must prove to the lender that they’re giving you a loan to buy a business with excellent past performance. If they see and believe in your skills to develop it, long-term business financing could become a possibility. When you are trying to secure a loan to grow your business, time and experience are valued as bonuses.
Business Loan Options For You
Business Term Loans
Picking the right type of loan depends on your future financial plans. If you want to invest in an asset that will make you a significant amount of profit, look into business term loans. They are simple and allow you to pay them back monthly.
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Business Line of Credit
Another option is the business line of credit. It is a very adaptable way of financing, and it differs significantly from the basic business term loan. The main reason is that you don’t receive a fixed amount of funds, but you can draw from the credit line when needed.
Equipment Loans
On the contrary, an equipment loan is intended explicitly for buying expensive machinery. When a company must renew its material base, equipment financing is preferred. It could cover up to 100 percent of the price, and it’s relatively easy to obtain. It’s suitable for business owners who don’t have perfect credit scores. The equipment itself serves as collateral. Of course, as in any other loan procedure, you will have to provide your credit record and history. Generally, the equipment is the determining factor because it secures the loan. It could be a crucial aspect of the expansion of your company. Even if you don’t have stable revenue, you can still qualify for this type of funding.
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Banks and Credit Unions
You should always apply for loans that best suit your terms:
- Credit report (If you are suffering from bad credit, then check out some credit cards that can help you improve your score.)
- Expenses
- Reason for needing business financing
Banks
There is always the option to go to your bank and apply for a loan with them. Their interest rates tend to be quite low, and the loans they offer are usually of a higher amount. If that’s the case, take into consideration any offers you might get.
The financial crisis altered the ways you can get a business loan from a bank. Despite that, you might still have a good chance of securing a long-term financing deal. Some bank offerings allow you to pay back the loans in a comfortable time frame. The most important thing is to have a high or even perfect credit score.
Credit Unions
Credit unions are an alternative that offers desirable interest rates to their members. Unlike banks, they are non-profit and don’t pay taxes. When becoming an account holder, you become a member of that credit union. This position offers you more efficient customer service and a more straightforward procedure for obtaining a loan.
What are my alternatives?
Business Credit Cards
Business credit cards are a bit different from traditional lending. They are an excellent choice for small business owners. With them, you can easily keep track of your business-related expenses. The difference is that you get less capital than with a small business loan. Usually, it suits you more when financing your daily costs. On the other hand, you can replenish the line of credit, which you can’t do with a loan.
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Invoice Financing
Invoice financing is another service that offers immediate cash flow for your accounts receivable until you receive funds from your customers. The amount of the invoice is the collateral in this case. It makes it easier to qualify for it.
A merchant cash advance is also a quite accessible loan option. It is also the most expensive one in the long term. It requires you to pay back an annual percentage rate, which equals the cost of the loan itself. That could start a never-ending cycle in which you are never able to pay back the initial sum of cash. Some tips for better debt management can be found here.
What to Know Before You Apply
Here are the most common things you need to consider before submitting a loan application:
The Importance of Your Credit Score
Credit score rules vary significantly from one lender to another. There is always a minimum credit score that determines whether or not you are considered trustworthy enough to repay the loan to the lender. Always keep in mind that proper credit is a significant advantage when getting the loan you desire.
There isn’t a concrete minimum number for credit scores across all institutions. It’s preferable to aim for a score above 600 for a better chance of getting your loan application approved. Before submitting for a small business loan, you should prepare your credit report. You can quickly check that task off your list with the help of credit bureaus. Once done, you will know what type of credit you have. More importantly, you can now start looking for a suitable loan program, based on your credit score.
Business Credit Score
The business credit score is another item that comes into consideration for small business lenders. Businesses have a credit history, and it indicates how financially reliable their owners are. The score is usually calculated on a scale of one to 100 and shows how diligently you have been paying your loans back. It could also include other factors, like credit utilization ratio, credit history, company size, and public records. If you have a score above 75-80, you have good credit. The closer your result is to 100, the lower the risk for the lenders. It means you can make your payments on time.
Both credit scores can affect the loan amount, the interest rate, and the repayment terms. For example, having bad credit means in most cases that you must pay a higher interest rate when taking out a loan. You are also more likely to obtain a business credit card when you have an excellent credit score.
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Proving That You Are Reliable
Being able to pay back the loan in time must be coordinated with the specific loan payment conditions. Lenders differ in terms of their repayment terms. Try to only apply for loans that offer you enough time to collect the needed cash flow. It varies and could be each month, bimonthly or in some cases even more frequently. You must look at your business expenses and figure out when is the best time to set aside cash to pay. Lending partners must know that, no matter what, you will have the money at your disposal.
To guarantee that you can do so, you must present the financial statements for your business, along with your personal and business tax returns. The amount of cash you will repay each month is part of your expenses. Their full amount should be less than the amount of your income. Lenders will be more likely to trust business owners who ensure they have stable revenue. The best use for a loan is to direct it towards funding activities that stimulate growth in your business.
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Calculate Your Monthly Expenses
Before signing an agreement, make sure to calculate your monthly payments and fees. Fees can include application fees, origination fees, and others depending on the loan term. There are business calculators like this one here to help you decide what type of loan is best suited to your financial situation. This way, you can calculate your desired amount to match manageable monthly payments. It’s the most practical step in securing a long-term investment. You want to ensure you can repay the money because defaulting on a loan can come with severe consequences.
What do I need before I apply?
Before applying for a loan, there are pieces of documentation that you should have ready. Only then will you be able to submit for a loan. If you are looking at a couple of different offers, pay attention to their specific requirements. In most cases, you will need:
- Business and personal tax returns
- Business legal documents
- Business and personal bank statements
- Financial statements
You might want to get a financial consultant or speak to someone experienced before finalizing the procedure. If you don’t have someone nearby, you can always find online counseling for businesses. They will give you practical tips on increasing your eligibility chances. After that, you can make an appointment at the financial institution where you will be applying. Have your entire business plan and documents ready, and prepare for your presentation.
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Next Steps
Borrowing money should be beneficial for strengthening your ventures. It shouldn’t be an added weight of responsibility which you aren’t able to repay. Growth is always the desired result.
Despite the possibility of growth, the need for a loan should always be carefully considered. Accumulating more debt is not the goal. You want to give your business a boost in finance and not hinder it with debt.
There is also a chance for rejection, which can harm your credit score.
These factors should not put you off from a loan. Any concerns can be cleared up once you have checked the terms of your prospective loan.
What are some of the issues that arise when you think about applying for a loan? Please feel free to share in the comment section below.