When you’re just starting or are growing your business, you may need a bit of extra help on top of the money in your bank account. A business loan can provide the working capital needed to help you start your business, expand your operations, acquire new equipment or inventory, and more. There are various business loan types to choose from. It’s important to understand the pros and cons of each option, as well as the requirements to qualify for a loan.
How to Determine Your Business Loan Needs
Before you apply for a business loan, it’s important to take time for reflection to ensure a loan is the right choice and that you choose the right type of loan.
Assessing Your Financial Needs
First and foremost, it’s critical to understand why you need a loan and how much you need. This will inform the rest of your decisions.
For example, maybe you’re just starting your business and you estimate you’ll need about $50,000 in borrowed funds. On the other hand, maybe you’re an established business, but want to borrow $100,000 for new equipment rather than cashflow the purchase yourself.
No matter what your situation is, identify exactly how much money you’ll need and what you’ll use the money for. Not only will this ensure you’re taking the right steps, but it could even help you qualify for the loan.
Choosing the Right Type of Business Loan
There are multiple types of business loans to choose from, from installment term loans to lines of credit to invoice financing. The type of business loan that’s right for you depends on multiple factors, including the age and stage of your business, what you’re using the money for, your business’s financial health (and your own), and more.
There’s no one type of business loan that’s right for everyone. Set your financing goals and research your different loan options to find the one that’s best for your situation.
Common Business Loan Requirements
The qualifications to qualify for a business loan vary depending on the type of loan. However, there are a few basic requirements:
- Credit Score and Business Credit History: Your lender will likely look at both your business and personal credit report (at least that’s the case for small business owners). Lenders want to see a positive track record with borrowed funds, free of missed payments and defaulted loans.
- Annual Revenue and Cash Flow: You’ll likely be subject to a minimum revenue requirement. You’ll need to show adequate cash flow to repay the loan, similar to a lender looking at your debt-to-income ratio when you apply for a personal loan.
- Time in Business: Some lenders require that you be in business a certain amount of time — six months or a year, for example — before you can qualify for a loan. This is especially relevant if you’re just starting your business.
- Collateral and Personal Guarantees: Depending on your business finances and the loan type, you may be required to provide collateral or a personal guarantee for your loan. Collateral is an asset the lender can repossess if you default on the loan, while a personal guarantee is a promise that you’ll repay the loan personally if your business can’t.
Research and Compare Business Loan Lenders
There’s no shortage of lenders on the market to choose from. And, while it’s great to have choices, the sheer number of options can make it difficult to narrow them down. There are a few things to consider when choosing the right lender.
Comparing Interest Rates and Loan Terms
Two of the most important factors when you’re choosing your lender are the loan term and interest rate you’re offered.
Your loan term is the amount of time you have to repay the loan. The longer the term, the lower your monthly payments, but the more you’ll pay in interest in the long run. The interest rate is the cost of the borrowed funds. The higher the interest rate, the more expensive the loan, and vice versa.
Before taking out a loan, it’s worth applying with at least a handful of different lenders. You can get rate quotes from each lender, and then choose the best option.
Make sure that when you’re comparing interest rates, you also take into account other loan fees. One lender may have a slightly lower interest rate, but significantly higher fees that ultimately make it the more expensive choice.
Traditional Banks vs. Online Lenders vs. Government Programs
Business loans are available through traditional banks, online lenders, and government loan programs, such as the Small Business Administration. Here’s a general guide as to when you might consider each type of lender:
- When to Choose Banks: A traditional brick-and-mortar bank might be the right choice if you want to sit down with a loan officer in person or want a relationship with your lender. It may also be a good option if you want a larger loan amount. Traditional financial institutions often have stricter eligibility requirements, so you may need a good credit score or a longer business track record.
- When Online or Alternative Lenders are Best: An online lender is a great option if you want more flexibility when it comes to loan terms and eligibility requirements. You can also often get your money more quickly with an online loan. However, you may end up paying a higher interest rate, especially if you have less-than-ideal credit.
- When to Opt for SBA or Government Loans: A government loan, such as one from the SBA, may be a good idea if you need to borrow a very large amount, since loans are available in amounts of up to $5.5 million. However, you should expect strict eligibility requirements and a rigorous application process.
Step-by-Step Guide to the Business Loan Application Process
Are you getting ready to apply for your business loan? Here’s a step-by-step guide of the application and approval process:
- Preparing Your Application Materials: To apply for a loan, you’ll need to share your business financials, including bank statements, profit and loss statements, and information about your existing business assets and liabilities. Depending on the loan, you may also need to provide your personal financial information.
- Submitting Your Application: Once you have your materials and documents, it’s time to submit your application. Many lenders allow you to apply for your loan online. However, if you’re applying with a local bank or credit union, you may be required to apply in person and meet with a loan officer.
- Working with a Loan Officer: Once you’ve applied, a loan officer will review your application. Depending on the loan and the information in your application, they may ask you to provide additional information or documents to assess your eligibility.Â
- Reviewing the Loan Agreement: If your application is accepted, the lender will send you a loan agreement, which lays out all the terms. The agreement will dictate the loan amount, term, interest rate, fees, and more. You should review it carefully so you understand what you’re agreeing to.
- Receiving and Utilizing Funds: Once your loan is approved and you sign the loan agreement, you’ll receive your loan funds. Depending on the purpose of the loan, you may use them right away for a large purchase or simply deposit them into your business bank account to provide working capital for your business.
Tips for a Successful Business Loan Application
When you’re preparing to apply for your business loan, there are a few things you can do to stand out to lenders and improve your chances of being approved.
Building a Strong Business Profile
The stronger your business, the more likely lenders will be to lend you money. When reviewing loan applications, lenders like to see businesses with strong cash flow and a proven track record of success. If your business revenue and credit history show that you can be trusted to repay your loan, you’ll have a better chance of getting approved.
Improving Your Credit Score
Lenders will consider your business credit history when you apply for a loan, but they’ll also likely check your credit. Many small business loans require a personal credit check for the borrower. Additionally, you may be required to provide a personal guarantee, stating you’ll repay the loan if your business can’t — this also requires strong credit. If your credit is on the lower side, consider spending some time improving it before applying for your loan.
Creating Realistic Financial Projections
If you’re applying for a business loan, you should be certain you’ll be able to repay it. Before submitting your application, run some realistic financial projections for your future revenue and expenses. Based on that projected cash flow, will you be able to repay the loan? It’s better to be conservative with your projections. After all, it’s better to have more money than you planned than to find out you don’t have enough to pay off the loan.
Alternatives to Traditional Business Loans
If you can’t qualify for a traditional business loan — or perhaps you just don’t want to — then there are some alternative lending products to consider.
Merchant Cash Advances
A merchant cash advance (MCA) is not a loan but a funding agreement that’s secured by your business’s future revenue. Once you are given the money, your MCA provider will collect frequent payments (often daily) based on your business revenue. The cost of the money is known as the factor rate, which works similarly to an interest rate on a traditional loan.
While MCAs sometimes sound appealing, they have some major risks. They often have high fees and take important cash flow away from your business. For these reasons, they can result in a cycle of debt that can be difficult to get out of and often end up with serious challenges to the businesses cash flow resulting in the need for an MCA debt attorney for the business and business owner.
SBA Loans
An SBA loan is one that’s backed by the U.S. Small Business Administration. A key benefit of SBA loans is that they’re available to businesses that can’t qualify for traditional business loans. They also offer high loan amounts, competitive rates and fees, and financial counseling and education. However, they require having decent credit and that you first have exhausted other financing options.
Peer-to-Peer Lending
Peer-to-peer (P2P) business lending is a form of social lending, meaning you’re borrowing money from individual investors instead of banks and other traditional lenders. P2P lending platforms connect parties who want to borrow money with those who want to lend.
P2P lending has some key benefits, including less strict borrower qualifications than traditional bank loans. If you have less-than-ideal credit, this could be an option for you. However, you may also pay higher interest rates.
Conclusion
Outside financing can help you take your business to the next level by giving you the capital you need to expand your operations, hire more employees, purchase new equipment, and more. It’s important to think critically to choose the right type of business loan for your situation. Additionally, borrowing money comes with some risks, so it’s critical to consider all possible implications and ensure your business is in a position to repay the loan.
If you’re struggling with your business loan, especially if you’re facing a lawsuit or other collection efforts, you may want to consult a business debt relief attorney for help. Tayne Law helps individuals and businesses with their debt, advising them on their options and providing legal representation. To learn more, call us for a free phone consultation at (866) 890-7337 or fill out our short contact form. Your information is never sold or shared. All conversations are confidential.
