A step-by-step guide to finding the right business loan

A step-by-step guide to finding the right business loan

Having sufficient capital is the core requirement for any business to function smoothly, irrespective of its size and tenure. Very often, it’s not a lack of ideas but the lack of capital that stands as an obstacle between a brilliant business idea and its implementation. The availability of sufficient capital at several junctures of the business can help build a successful business empire, and that’s where business loans come into the picture. They are essential for any business to kickstart operations and maintain excellent performance and professionalism that can enable its expansion beyond conventional boundaries.

Steps to getting a business loan
While you can get funds for your business via loans offered by banks and other financial institutions, acquiring one is a pretty challenging job. Banks and financial institutions take a critical approach to lending for businesses, so it’s very important for business aspirants to know the crucial steps to acquiring a business loan. This enhances their chances of getting approval. Let’s take a look at the important steps:

  • Have a clear business plan
    Your business plan should give a comprehensive picture of the business’s core activities, its purpose, how it can benefit the general public, and what it can do for the economy. Amid all these essential points, showing a strong financial plan capable of expansion and overcoming potential obstacles plays a decisive role in whether your loan application will be approved. You should be able to explain who you are and what your business is all about, including your business goals, objectives, mission, and how you plan to build it over the next couple of years. A great business plan has considerable chances of succeeding according to lenders.
  • Mention how you want to use your finances
    Banks and other lenders will assess how you plan to use the funds you borrow. You must apply for an equipment loan to purchase equipment and a short-term loan to keep sufficient funds to ensure continued operations. Also, you’ve to clearly state where you’ll use the funds to help banks and financial institutions determine whether the loan will meet all your requirements.
  • Mention the amount of money you need
    Ensure that you don’t overestimate or underestimate the amount of money you require when applying for a business loan. Doing so can cause you to experience financial problems sooner or later, and the bank will question your lack of research and knowledge of your business needs before formulating a business plan. They’ll also question where the additional funds are going, and giving appropriate answers may prove challenging in such situations. You can avoid these unwelcome aspects by designing a good budget with clear and genuine financial projections.
  • Maintain a good credit score
    Banks and financial institutions take stringent measures and verify your eligibility to get a loan. So, it’s advisable to keep your personal credit scores favorable. A credit score of 700 and above is excellent if you want to acquire funds for your business, and anything below 680 can make it challenging to get a business loan. That said, you can apply for a revenue-based loan as an alternate option. It’s better to work on improving your credit score before applying for a loan.
  • Analyze your credit report
    There may be errors in your credit report, and choosing to ignore them can severely affect your credit score. This makes it very difficult to acquire funds for your business, so make it a point to monitor your business and credit reports to ensure that they’re free from errors. Report a supposed or real error to a credit reporting agency and get it rectified at the earliest. You should eliminate all discrepancies in your credit report to improve your chances of striking a favorable deal.
  • Assess all the available lending options
    When you have everything in place and your credit reports are favorable, check out a list of banks and other financial institutions that are willing to offer business loans. Determine whether they’re offering the type of loan you’re searching for, and shortlist and pick banks that offer loans with low-interest rates and have flexible approval guidelines.
  • Maintain proper financial records
    Proper financial statements and a set of financial records come in handy while applying for a business loan. Remember, banks will always check your balance sheet, cash flow statements, and other important financial statements to examine your repayment abilities and approve you as a reliable borrower.

Leading types of business loans
Business owners have several options to finance their startup, small, or big venture depending on their unique needs, terms, and rates. The requirements vary depending on the lenders and their qualifications. The common types of business financing loans include the following:

  • Term loans
    This type of business financing offers a lump sum cash upfront, and it must be repaid with interest over a predetermined period. Several online lenders are authorized to offer term loans much faster than banks, and you have the advantage of borrowing large amounts. That said, these loans often require a personal guarantee or collateral. Online lenders generally charge higher interest rates than traditional banks.
  • Small Business Administration (SBA) loans
    The SBA guarantees loans to business owners. The repayment period for SBA loans vary from anywhere between 7 years for working capital to 10 years for purchasing equipment to 25 years for real estate purchases. They have the lowest rates in the market and offer high loan amounts but involve a long and rigorous application process.
  • Business lines of credit
    You can access funds up to your credit limit and pay interest only on the money drawn. This is a flexible funding option for businesses and doesn’t require collateral. That said, additional costs like maintenance fees are important to consider before applying for this type of loan.
  • Equipment loans
    Purchasing equipment for your business is made easy with exclusive equipment loans, for which the equipment itself serves as the collateral. The loan term often matches the expected life span of the equipment or machinery. You also receive competitive interest rates, but they are based on the value of the equipment and your business performance. However, you may need to make a down payment, and you also face the risk of the equipment becoming outdated before the loan term ends.
  • Invoice factoring
    Running a business often requires customer invoices to be cleared within 60 days. You may need cash immediately in such cases, which is why the unpaid invoices can be covered via invoice factoring. If you pass the unpaid invoices to a factoring company, they’ll pay you the money and later reclaim it from the customers when the invoice is due. This type of business loan is easier to approve as compared to traditional funding options.
  • Invoice financing
    While this is very similar to invoice factoring, it differs in that you’re not selling your invoices to a factoring company. Instead, you’re using the unpaid invoices as collateral to get a cash advance. Here, your customers will never know that their invoice is being financed, but you’re still accountable for collecting the invoice payments from them.
  • Merchant cash advances
    With this option, you can acquire a lump sum of cash immediately to finance your diverse business requirements. You need not make fixed payments; instead, you make payments either by withholding a portion of your credit/debit card sales or via fixed withdrawals from your bank account. There’s no collateral required to acquire these types of business loans, but frequent repayments cause cash flow problems.
  • Personal loans
    You can use personal loans for business purposes as well. It’s a viable option for startups since banks generally don’t offer loans to businesses without a history. Your personal credit score is considered for loan approval in these cases, so ensure that you have a good credit history to qualify. This loan is a quick funding option, but it comes with high borrowing costs. If you default on repayment, it can severely hurt your credit score and, in turn, your financial standing.
  • Business credit cards
    These revolving lines of credit can be used to draw from the card as and when needed. That said, you must make minimum monthly payments and ensure that you don’t exceed the credit limit. This option is best suited for financing ongoing expenses like office supplies, business-related travel, and utilities, but it involves high costs and additional fees.
  • Microloan
    These are small loans of $50,000 or less offered by non-profit organizations, including mission-based lenders. These loans are specifically designed to fund startups and businesses in disadvantaged communities. They involve low costs but often have stringent eligibility requirements.
  • Crowdfunding
    Though this is not a business loan in its true sense, it’s treated as one, especially while funding startup businesses. The funds are raised via online campaigns, where a large number of people put small amounts of money so that it adds up to a significant amount. You can give gifts to donors instead of money, and it’s also called rewards crowdfunding. Revolutionary platforms are opening up for equity crowdfunding, and you can tap money from a pool of investors who are willing to raise money in return for equity ownership.
  • Grant funding
    Sometimes, private foundations and government agencies come together to raise capital for startups and other small businesses. While it involves a strenuous process, the capital you get is definitely worth the effort. Federal and state agencies also offer small-business grants. For instance, the Economic Development Administration, FedEx Small Business Grant Contest, and National Association for the Self-Employed are exclusive grant-funding agencies serving the startup and new business entrepreneurs of the nation for several years.

Steps to getting a business loan without collateral
Acquiring business loans with collateral may seem to be an uphill task, where loan terms and approval requirements vary significantly. Funding your business with collateral comes in handy when your business is short on assets. With a little homework and some effort in research, you can acquire a business loan without collateral. Here are the steps to follow for acquiring a loan that works in your favor:

Know your options for a non-collateral business loan
The SBA guarantees loans for small businesses via its network of partner lenders, and there are several SBA loan programs that offer funds for raising working capital. One of the SBA programs doesn’t require collateral for loans of up to $25,000.
Peer-to-peer lending is another popular financing option for small businesses that doesn’t require collateral. These platforms connect numerous investors with small business owners looking for loans. The investors pool money to raise funds, and the business owners are required to repay the amount with interest.

Review your business financials to determine whether you qualify
Some non-collateral business loans are more difficult to acquire than others. You must have at least two years of operating history, and you must:

  • Ensure that your business and personal credit scores are healthy
  • Constantly update your balance sheet
  • Have key financial documents like profit and loss statement and cash flow statement
  • Regularly review your business expenses and overall cash flow

Be prepared for a personal guarantee or UCC lien
You’re most likely required to sign a personal guarantee or settle for a Uniform Commercial Code lien as an alternative option. Personal guarantee is an agreement you take upon yourself to repay the debt on your business. A UCC is a security or a blanket that allows lenders to attach your business assets in case you default on loan payments.

Go through the terms thoroughly before finalizing
This is one of the most important things you must consider before applying for a business loan. Without understanding the loan terms and conditions, you’re setting yourself up for trouble, so ensure that you check the fees, the loan term, and any interest chargeable.

Acquiring the right business loan for your venture is all about considering multiple options and weighing their pros and cons before making a decision. Keep your options open and stay up to date about the funding options for your business to ensure that you strike the most beneficial deal.

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