A business loan may help you develop your operations, pay for day-to-day expenditures, and buy equipment or inventory. If you’ve never applied for a business loan before, you may be confused where to start or what paperwork you’ll need.
In five simple stages, this article will lead you through the process of reviewing your alternatives and preparing your business loan application.
1. Determine the reason for your financial need.
A small company loan may take several forms. Choosing the correct kind of loan begins with determining why you need funding. Here are some examples of typical situations:
Purchase new gear. Equipment loans are available from a select group of lenders. This loan is intended to assist you in purchasing company equipment, such as machinery or office furnishings. The equipment is collateral for the loan, so if you don’t pay it back, the lender may confiscate it.
Take out a short-term loan. Consider asking for a microloan if you just need to borrow a modest amount of money. The Microloan program of the US Small Business Administration (SBA) permits qualifying applicants to borrow up to $50,000. There are other non-profit groups like Kiva and the Women’s Microfinance Initiative that provide microloans.
Create your own company. It might be difficult to locate a lender that would provide you a starting loan for a new company since most lenders have minimum experience criteria. You may need to apply for a microloan or a company credit card if you’re just getting started. Because business credit cards are based on your personal credit score, you may find it simpler to qualify for them than other forms of company loans.
The cost of running the business on a daily basis. A working capital loan, which is a short-term loan intended to fund everyday expenditures like rent and wages, might assist you in dealing with short-term cash flow issues.
Borrow cash when you need it. A company line of credit may be a suitable alternative if you don’t know exactly how much money you’ll need. You may withdraw cash up to a set amount to meet business expenditures once a lender gives you a line of credit, and you just pay interest on the amount borrowed.
2. Find out whether you’re eligible
Although business loan criteria vary, lenders are likely to evaluate the following four factors when considering your small company loan application:
Score on credit A lender will examine your personal and business credit ratings when you apply for a business loan. They aid the lender in determining your ability to repay the loan. The better your credit score, the more likely you are to get approved for a loan and receive a cheap interest rate.
Personal guarantee and/or collateral. Some lenders may ask you to put up collateral, which is anything of value that the lender can confiscate if you fail on the loan. Some lenders may additionally want a personal guarantee, which means you must put up personal assets as collateral for the loan, such as your money, property, or other important things.
In the workplace, time is money. A conventional bank will normally demand a company to have been in existence for at least two years, but an internet lender would usually just require one year. Don’t be disheartened if you’ve just been in business for a year. Some internet lenders may accept competent candidates with just six months of experience.
yearly income Your yearly sales totals are also important. Before you apply, find out what the conditions are from a lender and check whether you satisfy them.
3. Evaluate Business Loans
Small business loans are available from a variety of sources. The three most frequent sorts of lenders are listed below.
Lenders that work online
Term loans, merchant cash advances, lines of credit, and microloans are among the lending options available to small company owners from online lenders. According to a 2019 Small Business Credit Survey conducted by the Federal Reserve, internet lenders had better loan acceptance rates than conventional banks in 2019—80 percent vs 74 percent, respectively.
One reason for this is because, in comparison to conventional banks, internet lenders generally have less restrictions. As a consequence, if you have less-than-perfect credit, you could find it simpler to be accepted for a business loan via an online lender. Furthermore, internet lenders often have a far quicker turn-around time—some may even provide cash the same business day.
The fact that an internet lender generally charges higher interest rates than a regular bank is a key disadvantage of taking out a business loan with them.
What Will You Be Charged for an Average Business Loan?
Banks with a History
Many of the same sorts of business loans are available via traditional banks as they are through internet lenders. The major benefit of applying for a small business loan via a bank rather than an internet lender or microlender is that banks usually provide cheaper rates to well-qualified candidates.
A downside of asking for a business loan via a bank is that the qualifying standards are frequently more strict. Without a co-signer—someone who agrees to repay the loan if you fail to fulfill your payment obligations—if you have a negative personal credit score (a FICO score less than 580), you will likely have a hard time qualifying.
Long wait times were the most frustrating factor for applicants in a 2019 SBCS poll, so traditional banks may not be the greatest choice if you require immediate access to money. SBA loans obtained via a bank, for example, might take anything from a few weeks to several months to complete.
Microlenders are primarily non-profit organizations that give microloans of up to $50,000 to qualifying applicants, with the goal of providing funding to entrepreneurs who do not qualify for standard business loans. The qualifying conditions for microlenders are frequently less severe.
Microlender Kiva, for example, does not demand a minimum credit score. Instead, it considers candidates’ “social capital” when making decisions. Before your loan request gets public on Kiva’s website, you must first persuade a particular number of individuals to give you money via their platform.
Calculate Your Payments With This Business Loan Calculator
4. Collect the necessary paperwork
Gather the appropriate documentation after you’ve figured out your loan alternatives. These are the kinds of things a lender will probably ask for:
Tax returns, both personal and corporate
Permits for business
Bank statements (personal and commercial)
Statements of Profit and Loss
Statements of income
Lease agreement for a structure
Contact the lender before applying if you’re unclear what papers are required.
5. Fill up and submit an application
Your small company loan application must be submitted as the last step. This may be done online or in person, depending on the lender you’ve chosen to deal with.
A lender could request the following information:
Name of the firm
Loan amount desired for
Object of the loan
Annual revenue of the company
You’ll have to wait for an approval decision after submitting your application. If your loan is authorized, you will get a loan agreement to sign before receiving money or a line of credit from which you may draw.