A Step-by-Step Guide on Getting a Loan for Your Business
Getting approved for a business loan is probably the hardest part of starting a venture. If your company hasn’t been around for years and has yet to become profitable, you may find yourself at odds with financing companies.
Business Loans: All You Need To Know
For a business to survive, it needs to get loans or capital to finance it. A business loan can help businesses stay afloat even when times are rough. Over the years, the eligibility criteria have grown to accommodate all types of businesses and while this can work in your favor, it doesn’t always.
Taking out a loan without adequate foresight, a thorough analysis of the pros and cons, and a good understanding of the risks involved open up your business and assets to potential risks that can result in business closure and bankruptcy.
How To Apply For A Business Loan: A Definitive Guide
Applying for a loan is a daunting task but because of its long-term benefits to businesses, it has somewhat become a necessary evil. Here’s a step-by-step guide on how to apply for a business loan and secure the funding your business needs.
Why Do You Need A Business Loan?
Let’s start from here. A thorough analysis of the reasons you need a business loan can help you look at options you may have missed before.
Starting a new business is not a good enough reason to apply for a business loan. Most lenders won’t hesitate to reject your application if your only reason for applying is you started a business.
Have concrete reasons. It could be anything from expanding your business and inventories to hiring employees and paying capital for a lucrative business opportunity.
Do You Qualify For A Business Loan?
Your eligibility for a business loan can determine whether or not you get the funding you need. You may meet all the criteria but if you don’t qualify, what good does it do your business?
These are 3 of the most important requirements for qualifying for a business loan:
- Time in business. Your business should have been operating for at least a year before applying for a business loan. However, the minimum period may be different if you’re applying for a bank loan.
- Credit score. The higher your credit score, the better your chances of qualifying for a business loan. Your credit score is an indication of how well you can pay off your debts over a given period.
- Annual Revenue. The annual revenue requirement differs from business to business. While some businesses may qualify for a business loan with an annual revenue of under $50,000, some businesses will need more to qualify.
What Type of Loan Do You Need?
Knowing the type of loan to apply for is critical. To understand the type of loan you need, you’ll have to take into account the type of loans available and which types of loans you qualify for.
These are some of your options:
- Business line of credit. A business line of credit allows you to take out loans only when you need them. They’re like a safety net, a backup for your inadequate cash flow. It’s popular with small businesses.
- Invoice financing. When you’re a business that depends on invoices, waiting for your customer to pay can take some time and may even halt your business activities. Invoice financing allows you to borrow a specific amount of money from your lender, which can be returned when a customer pays the invoice in full.
- Term Loans. Term loans are the most common type of business loan. A bank or another financing company will give you a specific amount of money at a specific rate of interest to be returned within a specific time period. Term loans require collateral, making them one of the hardest types of loans to qualify for.
- Short-term loans. Short-term loans charge an annual percentage rate or APR based on your credit card history. These may range anywhere between 10% to 80%. Businesses taking out short-term loans are expected to pay a percentage of it back weekly or monthly. Funding is a pretty fast process when it comes to short-term loans.
- Equipment Loans. As the name suggests, equipment loans can be used to purchase equipment. The total cost is paid by the finance company. You will have to pay a part of the total cost and the interest fee in monthly installments until you pay the loan in full.
Find A Lender
Finding a lender is like finding a needle in a haystack, especially when you’re looking for a small amount to borrow. After all, they do have to go through the same procedure for all types of loans.
Most lenders, if given the option, will choose lenders who need to borrow large amounts of money instead of small businesses that only need a jumpstart.
When borrowing small sums, you have other options. You can:
- Find a microlender that doesn’t charge hefty interest fees.
- Borrow from a community bank.
- Find lenders through peer-to-peer lending platforms.
Gather Your Documents
Now that we’ve covered all the bases, you need to get your loan application documents in place.
You may need:
- Documents that contain business and personal information like credit reports
- Balance sheets
- Tax returns, profit and loss statements
- Business licenses, etc.
The Takeaway: Do You Really Need a Business Loan?
As a company, you may need immediate financing from a business loan from time to time. However, it’s possible to avoid the whole business loan process and the liabilities that come with it through introspection and taking into account various factors. You may find yourself not needing a business loan after all.
There’s a lot of risks involved with all types of loans so make sure you’re entering this territory with adequate knowledge of the pros and cons.