If you are a startup owner, it’s most likely you want to know more about how to get a business loan. When you have a business, you know that having extra funds (or capital) is always appreciated and handy. The extra fund can be extremely crucial for the growth of your business; whether it is to fund a new branch, you want to add more supplies, or you want to renew the lease of your business establishment. For whatever reason you have, it’s always helpful to have the added money.
However, getting a loan may not be as easy as you think. Although you can always turn to financial institutions, they have their own requirements, regulations, and also limitations. Knowing how to get a business loan (along with its requirements and the things to prevent) can get you off a good start. So, what are the initial steps you need to take?
Evaluate the Loan Type
Before knowing further about how to get a business loan, you should know other types of loans. Although many business owners prefer financing through credit unions and traditional banks, there are other business financing methods that can help you off the ground. The most common loan types are:
- (Business) lines of credit. With this type of loan, a lender is able to extend the funds to a particular amount, allowing the business owner to access the funds on as-needed basis. The interest will only apply to the portion of the credit line taken from month to month. Moreover, this type of loan enables the borrower to access the funds, repeatedly, after they have made payments during the drawing period.
- Online term loan. The term loan is typically provided (and issued) by traditional and online lenders. It usually involves the bank where they would extend (a lump sum) of cash which being set within the set interest rate and repaid within a set time period. The APR (Annual Percentage Rates) on this loan typically starts at 9% with maximum limit reaching between $250,000 and $500,000.
- SBA microloan. This loan type is usually available and offered to (eligible) business owners to $50,000. It is generally offered to startups owned by women, minorities, and within disadvantaged areas. The repayment terms can be quite long; up to 6 years with interest rates varying between 8% and 13%. It depends on the lender, really.
- SBA 7(a) loan. This program is usually offered through US SBA (Small Business Administration), with extended loan reaching 5% to the (eligible) applicants. The funds can be useful for equipment purchases, business expansion expenses, working capital, and others. The interest rate varies between 2.25% and 4.75%, with a base rate.
- Asset based financing. This is a type of secured business loan that allows owners to borrow money against their valuable assets, such as real estate, accounts receivable, equipment, machinery, and inventory. For lenders, this loan type is less risky, which leads to the terms more competitive than other loan types. However, it also means that you will have to deal with repossession (of the collateral) if you default.
Check Your Credit Scores
Another step in how to get a business loan is to check your credit scores – both your personal and also business scores. Why does it matter? Well, lenders like to take a look and evaluate their applicants’ score so they can determine the risks they bear. Applicants having higher credit score show their dedications in making the payments on time; thus, the higher score. That’s why the possibility of these high scores to get the loan would be bigger. On the other hand, applications having slower score basically display their ‘risk’ in paying up their debt on time. It can be because of their difficult condition (which causes them to have problems during the repayment) or it’s possible that they aren’t the discipline types of borrowers.
Business credit scores are usually applicable (or available) after the business has been set for at least 6 months, although it can also apply for a year after the operation. If you just have the business, it’s highly likely that you don’t have business credit score just yet. If this is the case, then the loans would be personally guaranteed. It means that the borrowers would (legally) agree to repay the loan with their own personal funds in the event the business fails to do so. This is also another reason why the lenders would look at the owner’s personal score.
Your chances of getting the loan would be bigger if both of your scores are high. You need to get ready for the application process. It would be better if you can request for your business (credit) score reports’ copies and also check your personal score before sending out the application. If you come prepared, you would be ready for the possible obstacles thrown your way.
Prepare the Required Documents
Preparing the right documents is the next step in how to get a business loan process. You need to remember that every lender would implement different regulations and rules, commonly when it comes to documentation. However, there are some documents that are regularly asked by the lenders, especially if they want to verify and also assess the business existence and the identity of the applicants. For instance, it’s common for lenders to ask for tax returns for 2 years, minimum, along with financial records, such as credit card sales, accounts receivable, bank statements, and also outstanding invoices going up to 4 months back.
If you want to improve your chances of getting your application approved, it’s possible to draft a comprehensive and complete business plan. It would be even better if you can lay it out in a detailed manner. The business plan may not be mandatory, but it can provide extra (and supplemental) information to the lenders that your business is safe and financially stable. The lender wants to know about your ability to repay your loan, based on the expense projections and future revenue. It’s also possible for them to request your business registrations and licenses (the copies) along with the banking info for the direct deposit. If you are able to provide all of these requirements, your chances of being approved can be bigger, especially if you are able to show positive track records related to the business.
There are possibilities of getting loans through different ways or lenders. Now it’s your time to perform the research diligently. You need to compare lenders, matching up with your own preferences and business needs. When you learn about how to get a business loan properly, you need to consider these factors:
- The reputation of the lenders. As it was mentioned before, perform the research thoroughly. When a lender may look good (on paper), you still need to perform another thorough search, especially from online reviews. Evaluating the reputation among borrowers (currently and past) is crucial because they are the ones that have the experience to interact with the lender. If you join a community, reach out to those who have the experience of interaction. You don’t want to deal with red flags, especially related to financial services or customer service.
- Annual percentage rates. The APR for business loans is generally around 9%, but it is possibly a bit higher for new businesses or startups. If the applicants are qualified, the APR may be lower. If you want to learn more about APRs, or you want to determine the offered (and available) APRs, it’s best to contact the customer support or check the official website of the lender. You should be able to get clearer ideas from there.
- Fees (and other costs). The lenders tend to charge the so-called origination fees, which may range between 3% and 5% from the total amount of the loan. It is designed that way to cover the cost for verifying application info and paperwork handling. In general, lenders may charge prepayment penalties (it is for borrowers who pay their loans off early) or late payment fees (for borrowers who are late in their due date). Keep in mind that these fees may increase the overall borrowing costs. But it is also possible that some lenders may eliminate them. Depending on your preferences, you should choose the one that fits your financial requirements. However, be advised for those who eliminate such costs. Do they do it for the sake of remaining competitive or do they have a certain catch? For instance, they eliminate the cost for prepayment or late payment, but they may charge you with higher interest or such thing alike. You should check.
Process the Application
One of the most important steps in how to get a business loan is to really know your lender. You should know its reputation, the overall processing, and everything else in details. When you have narrowed down your option to a particular lender, you should know its details: the application process, the documentation needed, and others. The process of underwriting and application can be different from one lender to another, so you may want to learn more about whether you can apply by phone, online, or visit a certain branch. When you have submitted your application, a representative from the lender would contact you. Then your interaction should begin.
It’s normal for most people to turn to banks when they are thinking about how to get a business loan. However, you should know that banks can be quite complicated and difficult. They have the strictest regulations, and they themselves need to comply with federal regulations and rules. It’s safe to say that they have quite high standard. However, if you meet the requirements and you have good credit score, it’s most likely that you will get approved. The extra efforts are truly worth it because you will likely deal with lower fees and also lower interest rates.
In general, you need to make between $5,000 and $10,000 on monthly basis if you want to get a loan for business, but the minimum (income) requirement usually different among lenders. If you have business ideas without revenues, you can turn to crowdfunding. It is the exception for the common and standard business loan matter. If you turn to business credit card providers, they tend to make decisions based on the total income of the owner, which means that it includes personal income – so, not just the business revenue.
Don’t forget about credit scores. The standard 680 or even 700 is usually applied although some lenders may implement the score of 650. Online lenders are more versatile. They would approve borrowers with scores in the mid 600s or even lower, while business cash advance may allow those with scores of 500 or lower, but they need to provide enough revenues.
Those are some basic facts about getting a business loan, whether you want to start a business or you want to expand it. Now that you already know how to get a business loan, it’s time to get started and off doing your research.