The Quick And Dirt Guide To Getting A Business loan
To start a business, you must first fund a business. It sounds simple enough, but this is one of the most difficult hurdles a small business owner must overcome. Even when you pass this milestone with startup capital, you may need a loan later on. This new capital may fund further expansion or upgrade the offerings you provide. Unfortunately, getting a business loan is often easier said than done. It is especially difficult for new and small businesses. However, it’s not impossible.
Identify If and Why You Need a Loan
This may seem like an absurd first step. After all, what business doesn’t need a business loan? However, that’s precisely the problem. There are so many things you could do with extra capital that it is important to remember specifically why you need the loan. This helps to ensure you use the money for its intended purpose and nothing else.
Identifying why you need a loan may also help you determine if you need one. Entrepreneur.com points out that many people fund their business via input from friends and family, personal savings, angel investors, venture capital, and crowdfunding. Determine if these are better options for you.
According to NerdWallet, here are some of the plausible reasons you should consider getting a business loan:
- To expand your business
- To get your business off the ground
- To manage your initial operating expenses
- To provide a safety cushion when taking risks
Determine the Type of Business Loan
Deciding on the purpose of the loan makes it easier for you to identify the type of loan you need. The options differ based on your eligibility, the lender you choose to work with, and your financial status.
Small Business Term Loans
When most people think of getting a business loan, this is the type of loan they have in mind. In the case of a term loan, the lender provides you with a predetermined amount of capital. You may first begin with interest only payments and then you repay the remaining balance over a predetermined period of time. This is usually about three years.
SBA Small Business Loans
To account for high risk, lenders often charge higher interest rates to small businesses. You can secure much lower interest rates when the U.S. Small Business Administration backs and guarantees the loan. Through this avenue, you can get a loan valuing as much as $5 million in capital. The main drawback to this approach is that there are strict requirements. It also takes a lot of time and effort to complete the process.
Small Business Lines of Credit
Building a business line of credit allows you to access capital for managing expenses as they arise. This is particularly helpful if you have a business high on assets but low on cash. This is often the case in the earliest stages of manufacturing or retail. Note that you may need to pay a fee to set up this line of credit. You also pay another fee annually when it renews. Finally, you usually need to have good personal credit to access this.
Small Business Credit Cards
A small business credit card works similarly to your own personal card. You get access to a certain value of revolving credit, but it is usually of much smaller value than a business credit line. Even so, this can help to cover small expenses that may arise. If you travel frequently for work, consider getting a card with travel benefits so you can rack up travel miles for later use.
Working Capital Loans
Sometimes cash-in-hand fluctuates in a business. Again, this may happen most frequently in products-focused businesses, such as manufacturing and retail. Working capital loans help to ensure you can meet your operating expense while waiting on products to sell and buyers to pay off their bills.
Accounts Receivable Financing
Another way to secure financing for working capital is to use the accounts receivables to secure a line of credit. Unlike a regular business line of credit, the lender may set a cap based on the AR. Also, with this type of financing, the debt reduces when customers pay off their bills. Note also that the bank may opt for variable interest rates.
This works a lot like a conventional loan for an investment property. You put 20% down to purchase your asset, and then the asset becomes collateral in case you default on the loan. Business owners most often use equipment loans to purchase vehicles, software, and machinery. The loan value typically ranges from $5,000 to $500,000.
If your small business does purchase property for commercial use, banks may have a specific loan for that. You can use a commercial mortgage to purchase anything from an apartment complex to a detached home for renting. You may also use it to purchase hotels or commercial office space.
Decide on Your Lender
Banks are the most common choice for getting a business loan, but you do have other options. You can also consider online lenders and nonprofit lenders. Identifying the type of loan that is best for you will help you to narrow down your options. Few lenders provide all of the options highlighted above.
NerdWallet recommends working with banks if you have good credit and possess assets that you can use for collateral. Banks are also a good option if you don’t need the money immediately. Banks often take anywhere from 60 to 90 days to complete the application and underwriting process. If you are sure you want to work with a bank, plan way ahead. Banks are also best for traditional loan types, such as commercial mortgages, lines of credit, and term loans.
If your company is too small or doesn’t meet the revenue requirements to get funding from a bank, try a microlender. These lenders are also a good option if you have poor personal credit and no collateral. Microlenders provide short-term loans valuing around $35,000 or less. However, note that these loans often feature higher APRs.
Another good option when you have no collateral and are new to business is online lenders. They provide funding much faster than banks. Some claim to offer funding almost immediately after acceptance, while many others provide funding within 72 hours or less. You can secure up to $500,000 via this avenue, but watch out for the APR. Some lenders provide interest rates as low as 7% while others go up to 108%.
Assess Your Eligibility
Determining your eligibility beforehand saves you time and money you may have spent on a temporary lost cause. Many business owners make it to this point and realize this is not a good time to take out a loan. Note that level of preparation, the field you work in, and what you bring to the table may affect your eligibility. For example, dentists and other medical practitioners may find it easier to get traditional loans because their work is in high-demand.
However, someone opening a restaurant or starting a tech company may have a more difficult time convincing a lender to fund his or her business. Similarly, if you have collateral, the lender may feel more at ease, because they can reclaim the asset to recover their loss. Having at least a year of steady business income may also help you to secure a loan.
You also need to assess your personal credit history. To get a business loan, NerdWallet recommends a score of at least 680. However, a credit score of 700 and up may get you better interest rates. Note that as loan values climb, even a small difference in the interest rate can have a strong impact on your monthly payments.
Finally, you need to assess the company itself. How long have you been turning a profit? Have you defaulted on any other business loans or missed payments? The stronger your business finances are and the longer you’ve been at it, the better your chances of getting a loan. Note that lenders generally prefer to see income levels ranging from $50,000 to $150,000 to consider you a good borrower.
Apply for a Business Loan
If you meet your own internal checklist, then proceed to the final step. First, you will need to gather all the necessary documents. This may include tax returns, bank statements, and legal documents. Different lenders will have their own requirements for what they need. Thanks to technology, you can submit most or all of this information online.
Do not apply for just one loan. Spread out your options. You can apply for multiple loans within a two-week period. Just as when you shop around for a car, the credit bureaus generally lump these together as one major hit, helping preserve your credit history. Having multiple options to choose from ensures that you don’t find yourself backed into a corner when getting a business loan.
If you find that neither you nor your finances are in a good place to secure a loan, you still have options. Tighten up your spending and give yourself a few months to a year to recover. Remember that a denial is only temporary. You can always try again.
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