Applying for a business loan is a good way to get the money you need to grow your business if you’re a small business owner looking into your financing options. Loans let you buy things for your business, hire people to work on it, and cover everyday costs as you grow.
Getting a loan isn’t always easy and can take a long time, especially if you go with a traditional lender like a bank. In order for you to have a better understanding of what goes into applying for a business loan before you begin, we will discuss some of the procedures and requirements that are required for the majority of loan applications in this article.
Get your business ready for a loan Before applying for a loan, the first thing you should do is figure out exactly how you will use the money.
You will need to look for a loan option with a quick approval process and more flexible business credit if you need financing right away to cover immediate costs like rent or payroll.
If you don’t have any other assets yet, you might want to look for loans that use the purchase of your first piece of equipment as collateral if you want to invest a large sum in it. This step will assist you in building your case going forward because many lenders require you to detail how you will use the loan.
The current financial situation of your business is the next thing to examine. To get a complete picture of how the business is doing, make sure your personal and business finances are clearly separated. As part of the approval process, lenders will examine your past and anticipated sales, as well as your financial history.
Check your personal and business credit scores with reporting companies like Equifax, TransUnion, and Dun & Bradstreet. Reduce your current debt, including credit card and business card balances. Your credit score can be improved by using 20-30% of your credit. You can also quickly improve your credit score by ensuring that your suppliers are in good financial standing and paying off past-due accounts.
Your creditworthiness has an impact not only on whether or not you will be approved for the loan, but also on the annual percentage rate (APR) that you will pay for it. Your interest rates will be lower the better your credit.
Understanding the application procedure Before applying for a loan, you should consider the application procedure itself. Preparing an application and waiting for an approval may require more time and resources than you anticipated.
You might have to wait for a credit decision for loans from traditional banks and the Small Business Administration (SBA), which typically have the most complicated application processes. Advances from online moneylenders will quite often have applications you can finish in minutes to get a quick credit choice.
Applying for a bank loan Because the application process is so difficult, bank loans are not always the best option for small businesses. Businesses with a credit score of 750 or higher, a strong revenue history, and several years of operation can get the best APR from banks.
With a score between 700 and 749, you can still get bank loans, but you have to make a strong case for your business. Presenting a business plan and outlining how the funds will be used are components of the application process.
You must also provide information about your expenses, cash flow, sales, and sales projections to banks. They need to make sure that your cash flow can handle the loan’s regular payments.
How to apply for an SBA-backed loan Banks and community development financial institutions (CDFIs) offer SBA loans, such as the SBA 7(a) loan, CDC/504 loan, and microloans. These loans are subject to some SBA guidelines and requirements, but lenders also have their own eligibility requirements.
You will need to have a credit score of at least 680 in order to apply for an SBA loan, and you will need to provide extensive documentation such as the tax returns, profit and loss statements, loan application history, business licenses and registrations, and the resumes of your principal leadership.
Be aware that depending on the loan you apply for and the lender you choose, the SBA loan application process can take anywhere from 30 to 90 days. Applications can be processed more quickly by SBA Preferred Lenders, but applicants should anticipate waiting at least a month for approval. Having all of your documentation in order is the best way to speed up the approval process.
Getting a loan from an online lender There are many fintech platforms and online lenders that offer term loans, lines of credit, merchant cash advances, invoice factoring, and financing. When compared to applying for a loan from a conventional lender, the application process is significantly quicker and simpler with online platforms.
In the Fundbox application process, for instance, you must connect your business checking account and accounting software and respond to a few questions about your company.
A decision on your credit is made within three minutes, and funds can be deposited into your account within three business days.
The majority of online lenders, including Fundbox, require credit scores of at least 600. You will be responsible for paying a higher annual percentage rate (APR) because some providers of invoice financing and merchant cash advances will not even consider your credit history.
Evaluate the costs Last but not least, when comparing loan options, keep in mind that taking on debt will cost you money. Your annual percentage rate (APR), which includes additional fees like origination fees and ongoing service fees, is probably not reflected in advertised interest rates.
When deciding how much money you want, it will be helpful to know exactly how you will use your loan. It can save you money in the long run to select a loan amount that meets your requirements. Since many lenders charge prepayment fees, even if you don’t use the full amount of the loan, you have to keep making regular payments for the rest of your repayment term to avoid this penalty.
While secured loans necessitate collateral, this is not a direct cost to you. A UCC-1 or “blanket” lien, which uses all of your business’s assets as collateral, is typically used to secure loans for other purchases, while equipment loans and mortgages use the property itself as collateral. If your assets are repossessed, replacing them can be very expensive.
Personal assets are also used as collateral for some loans, such as SBA loans, which also require a personal guarantee. You won’t have to put up any collateral for unsecured loans, but the interest rates will be much higher.
