How to Secure a Business Loan in 5 Steps? A business loan can give you the money to grow your business, manage daily costs, and buy equipment or inventory. If you haven’t applied for a business loan before, you may be unsure about where to start or what documents you need.
Explore this straightforward guide that takes you through five simple steps to assess your choices and get your business loan application ready.
- Determine Your Funding Purpose: There are different types of small business loans, each suited for specific needs. Identify why you need financing to choose the right loan. Common scenarios include buying equipment, borrowing a small amount, starting a business, covering day-to-day operations, or having flexible borrowing options.
- Evaluate Eligibility Criteria: Lenders consider factors like credit score, collateral or personal guarantee, time in business, and annual revenue. Check your eligibility by reviewing these criteria. Keep in mind that different lenders may have varying requirements.
- Compare Lending Options: Explore various lenders, including online lenders, traditional banks, and microlenders. Online lenders often offer faster approval but may have higher interest rates. Traditional banks may have lower rates but stricter eligibility. Microlenders are not-for-profit organizations with more lenient requirements.
- Gather Required Documents: Prepare the necessary documents such as personal and business tax returns, business licenses, bank statements, and a business plan. Contact the lender to confirm the specific documents they require.
- Submit Your Application: Apply for the small business loan online or in person, depending on the chosen lender. Provide essential information, including your name, business details, loan amount, purpose, and relevant financial information. Once submitted, await the lender’s decision.
Choosing the Right Business Loan
Selecting the best business loan involves comparing various factors to find the most suitable option for your needs. Here are key considerations when evaluating different loans:
- Annual Percentage Rate (APR):
The APR reflects the annual cost of a loan, encompassing interest and fees. By comparing APRs, you can gauge which business loans are more or less affordable.
Lenders may impose upfront fees for processing loan applications. Projecting and incorporating these fees into your analysis helps in comparing overall costs.
- Repayment Terms:
Business loan terms range from one to 25 years. Opting for a longer term reduces monthly payments but increases overall interest paid. Choose a term aligned with your goals and manageable installment payments.
- Funding Speed:
While major banks may offer competitive rates, their application processes can be lengthy. If fast funding is crucial, online lenders might provide quicker solutions.
Getting a Business Loan from Banks:
Securing a business loan from a bank involves a varied process depending on the financial institution. Some major banks offer online applications, while others require in-person visits.
To initiate the application, you may need to provide details such as your business name, establishment date, gross annual revenue, and the annual household income of all owners. Traditional banks often have stringent eligibility criteria, necessitating a robust credit history and financial standing.
Types of Business Loans:
Consider different loan types based on your business requirements:
- SBA Loans:
Guaranteed by the Small Business Administration, SBA loans include various options like 7(a) loans, 504 loans, CAPlines, and Microloans. These loans often feature lower interest rates and down payments but may require an established business.
- Term Loans:
Traditional installment loans offered by banks, credit unions, and online lenders. Available up to $500,000, with APRs starting around 9%, term loans are versatile for most business-related expenses.
- Lines of Credit:
A flexible financing option allowing businesses to draw funds as needed. Ideal for managing ongoing cash flow challenges, with APRs typically ranging from 10% to 99%.
- Invoice Factoring and Financing:
Involves selling outstanding invoices to a factoring company at a discount, providing quick cash for unpaid invoices. APRs for invoice factoring generally range between 10% and 79%.
- Merchant Cash Advance:
Provides quick cash by advancing a portion of future sales. Repayment is based on a percentage of daily or weekly sales, suitable for businesses with high sales volume. APRs vary but can be between 10% and 99%.
- Equipment Financing:
Funds the purchase of equipment or machinery, with the acquired assets securing the loan. Terms can extend up to 25 years, and limits may reach up to $1 million, covering expenses from office furniture to manufacturing equipment.