A step-by-step guide on how to get a business loan
Business loans, if used wisely, can be life-changing.
Small business owners require external funding to finance business growth, expand to new markets, purchase new equipment, or even bridge cash flow gaps in the course of running their businesses.
With the so many loan options and lenders available to borrowers today, it’s possible to get a little intimidated in your loan search.
It is, therefore, important to have a basic understanding of the loan process to make it less daunting and increase your chances of getting approved faster.
In this guide, you’ll get great insights on how to fund your business, and which lenders suits you best.
Below is a step-by-step on how to get a business loan.
- Determine why your business needs funding
When looking for a loan, you need to ask yourself, why do I need a loan? Lenders will also ask you the same question.
They’ll only approve your loan request if they find your reasons valid enough.
Some of the reasons why a business may need small business loans are:
- To start a businessGetting a start-up business loan may be a daunting task, but it’s not impossible.
Fortunately, there are several online lenders who unlike traditional banks are willing to lend out money to small business owners without any transaction history, good credit or stable revenue.
Starting businesses will require funds to pay for their daily expenses and to cover the launching costs until they are stable to fund everything with the profit generated from the company.
- Take advantage of new opportunitiesNew opportunities come with added expenses. To finance business expansion, you’ll need extra cash to hire new workers, lease more office space, or even train your employees to serve your potential clients better.
All these activities will require funds that the current budget may not support.
- To bridge your cash flow gapsTake it as having a fallback plan.
Having some extra money stashed in your business bank account can act as a safety cushion in case of unexpected emergencies and help with the cash flows especially if you have a seasonal business.
Instead of waiting for your debtors to pay, you can use your account receivables to get a loan and manage your daily operations.
Other reasons why a business may need a loan are:
- To consolidate and pay off their debts.
- To purchase new business equipment.
- To buy an existing business.
- To venture into a new line of business.
- To acquire business assets.
- Determine how much you can afford and which option suits you best
The kind of business loan you choose will depend on why you need funding and how much your business can currently afford.
To avoid getting saddled with debt, it’s important to take out a loan that you can comfortably repay without affecting your profit margin.
You’ll need to perform a business loan performance analysis and determine what positive impact the loan is going to have on the business.
You will also have to calculate your debt service coverage ratio. Lenders prefer a number greater than 1 because it indicates that you can repay your loan and have some money left to run the business.
You can get your DSCR by dividing your monthly revenue by your monthly loan repayment.
A number less than 1 shows that your business is not entirely healthy to support loan repayments.
Established businesses with stable annual revenue and good credit scores can qualify for traditional bank loans, business lines of credit, SBA loans, and invoice factoring.
If you are starting out, on the other hand, alternative sources like online business loans, borrowing from friends and family, business credit cards or personal loans may help you raise the capital that you require.
- Identify your preferred lender and which loan you qualify for
With the several loan options available today, it’s essential to identify and choose the one that suits you best.
Eligibility requirements vary from lender to lender, and to qualify for small business funding from them, you’ll have to meet the required threshold.Below are some loans to explore and their eligibility requirements:
- Business line of credit – these loans are ideal for small business owners who require a safety cushion in case of emergencies, need extra working capital and have good credit scores. A business line of credit provides a pool of funds that you can draw from and pay interest on the amount drawn only. Once you pay back the amount you withdrew plus interest, the amount is reimbursed and made available for you when you need it.
- Bank loans – to qualify for these loans, you must have a perfect credit score of above 700, stable annual revenue, an operation history of over 2 year and be ready to put up collateral. Bank loans are the cheapest with the lowest interest rates and APR. However, you must be willing to wait for weeks because banks do a lot of background checks, and study your credit reports before approving your loan application.
- SBA loans – To support small business owners and reduce lending risks, small business administration partially guarantees borrowers to lenders to make them more eligible for small business lending. To qualify for SBA loans, you must have a good personal credit. This loan program offers flexible repayment terms and interest rates of between 5 to 10%
- Short-term business loans – these loans are ideal for borrowers with weak credit scores, have a transaction history of a year or less and can pay back the loan within 3 or 18 months. Short-term loans come with double digits APR ranging from 8.8% to 80% depending on the lender and how risky you are. Since these are bad credit business loans, lenders charge high interest rates to cover the lending risks. If you need cash faster, short term loans are your best bet because you can apply online and have the funds credited to your bank account on the same business day.
What you need to do when applying for a business loan
- Get the right documentation
Some lenders will ask for tons of documents and paperwork before approving your loan request while others may not ask for any.
The documentation required will largely depend on the type of loan, loan amount and lender you intend to work with.
Although the documents required vary by lender, some of the most commonly asked are:
- Business and personal tax returns.
- Balance sheet.
- Profit and loss statement.
- Credit score reports.
- Bank financial statements.
- Time in business.
- Other loan repayment schedule if you have an outstanding loan.
- Apply for the loan and close the deal
The final stage is the actual loan application. You can do it online or apply in the lender’s office.
You’ll need to attach all the required documents and fully meet the lender’s requirements to be eligible for funding.
Depending on the lender, you’ll get approval notifications requiring you to read the terms and conditions before signing off the loan agreement form.
Just make sure you understand all the fees and cost associated with your loan before signing the agreement form.
Once you have agreed to the lender’s terms, the funds will be credited to your bank account. Remember that you’ll have to adhere to the agreed repayment schedule to avoid incurring more expenses.
Although getting a business loan may be a daunting task, it can be less of a hassle if you are well prepared. Have proper documentation, know why you need funding, the associated borrowing costs and if you are comfortable paying them, and the different lenders and loans to explore.
Contact us today and let’s connect you with reputable lenders who can finance your venture as fast as possible. Fill out our loan application form and get the easy business loans your business requires.
Joshua is a financial lawyer who plans on writing a book about his experience on debt collection laws and lending terms and conditions. He is currently one of the senior partners at his law firm but wants to take more time off for his writing.
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