Start-ups face several ups and downs, especially when it comes to financing, because not only ambition and hard work matter but finance as well. Since it is a new business, it might not generate cash flow immediately after its launch, so business owners are left with the option of taking out a business loan.
Finance is needed to kick-start your business and bring your dreams to life. There are a few financing options left for business owners, and one of them includes a business loan. Funds are vital to every business’s success because they can cover various needs, such as purchasing new equipment, covering unforeseen expenses, and funding new projects.
Many projects have failed to commence due to a lack of funds. As a result, business owners must consider taking out a loan. Its financial decisions are not a matter to be taken with mediocrity. Business owners have to narrow down several reasons for applying for a loan. This blog post will look at several factors to consider before applying for a business loan.
What is a Business Loan?
A business loan is a loan type that a business can get from online lenders, traditional banks, and credit unions. The funds can be beneficial to businesses to cover expenses that come with running and growing a business.
Like other loans, the lender offers financial aid under an agreement to a business, and the loan is to be paid back within the agreed-upon period along with an interest rate.
With a business loan, businesses can use their funds for several purposes, such as paying employees, taking on new projects, buying real estate, and renovating to enhance their business location.
How Do Business Loans Work?
Business loans offer business owners financial aid as a credit line or as a lump sum payment. To get a loan from a lender, you must agree to the terms of the loan and repay the loan along with interest and fees. Based on the loan type, the lender may demand a weekly, daily, or monthly payment until the loan is paid in full.
In addition, business loans are either unsecured or secured loans. Unsecured loans don’t require collateral. But you will have to sign a guarantee that agrees that you accept personal liability if you are unable to repay the loan amount.
However, secured loans require collateral, which is something of high value that the lender can repossess if you are unable to repay the loan, such as real estate, cash, equipment, or investment.
Types of Business Loans
Business loans come in a variety of loan types, allowing business owners to choose which loan type best suits their needs. Here is a look at five types of business loans:
SBA loans are financed by the U.S. Small Business Administration. It generates a small amount of money for the business to borrow through loan programs. This is a government-backed loan that agrees to pay back a part of the bank loan taken by business owners. This type of business loan reduces the risk for business owners.
SBA loans have competitive interest rates and their loan amounts range from $30,000 to $5 million, with a repayment period that can be extended to 25 years. However, to qualify for an SBA loan, you need to meet some of the tedious requirements. It is recommended to have an excellent requirement of at least 680 to be eligible for this type of loan.
These are the most common types of loans. This type of loan is granted by an online lender or traditional bank. It has flexible requirements, and new businesses have a better chance of getting this type of loan approved.
Term loans have a repayment term of up to 10 years and provide loan amounts of up to $500,000 along with an annual percentage rate that starts around 9%. Whether you qualify for the loan is determined by your business creditworthiness, personal credit, and annual revenue. This also determines the term you will have access to.
Merchant Cash Advance
This is an easy way to get short-term financing if your business needs funds. In this type of loan, business owners give the merchant service company a part of the future sales receipt in return for loads of cash.
The loan amount, along with other fees, is paid for from the business sales. However, merchant cash advances have a strong qualification criterion. This business loan is a great option for businesses with a good sales record.
Business Line of Credit
This type of loan provides a flexible way to borrow money if you don’t know the exact funds you need for your business. This is because borrowers can access credit lines ranging from $2,000 to $250,000 on a much-needed basis. This is quite similar to a credit card. Also, you can make use of your credit limit again when you repay it all through the draw period.
The business line of credit draw’s period comes to an end within the span of 12 to 24 months. As soon as the draw period comes to an end, the repayment period commences and you are to pay back any unpaid balance along with interest. The repayment plan can range from 6 months to 5 years.
How to Qualify For A Business Loan
The requirements for a business loan vary depending on your lender and how you would like to use the funds. The type of loan you want to apply for also determines the qualifications that the lender may require before you are granted the loan. Here are some criteria for a business loan:
- Annual revenue: Some lenders may require the minimum total of the business’s annual revenue before they can qualify you for the loan amount. This will prove that your business can repay the debt in full.
- Collateral: Some business loans are secured, and lenders will ask that you pledge collateral, that is something of value such as real estate or accounts, so that they can repossess it if you are unable to repay the loan.
- Minimum Credit Score: Credit score is important in loan applications because some lenders overlook businesses with poor credit. However, if you want to get approved for a business loan, you should have at least a minimum credit score of 680 to qualify for a business loan.
- Debt ratio: Some lenders may require your debt-to-income and debt-to-service coverage ratio. This measures your monthly personal debt in opposition to your gross income.
- Personal guarantee: Some loans and lenders demand a personal guarantee that protects the lender in case of default. If the business doesn’t have honor, you would have to repay the loan amount with your funds.
- Time in business: A business that has been established longer has a higher chance of getting approved for a loan. The lender requires that the business be in operation for at least two years.
What Credit Score Do I Need for a Business Loan?
The minimum credit score for a business loan depends on the requirements of the lender. Also, the type of loan you are applying for plays a crucial role in the requirement of a credit score. Before a lender can approve you for a business loan, you need to have a high credit score.
Most lenders typically demand a credit score of 640 to 700 to be approved for business loans. Although the credit score doesn’t have to be excellent, at least it must be good.
How to Get a Business Loan
A business loan can help you finish the projects that you are planning to start and also cover the cost of daily expenses and buy other types of equipment. If you haven’t applied for business loans before, you might be curious about how to do it. Well, don’t fret. Here’s a quick guide to getting business loans:
Analyze why you need the Financing
There are several types of business loans, and you must decide why you need the financing you are applying for to help you choose the right type of business loan. Here are some reasons why you might need a business loan:
- Pay for daily operations: A short-term loan can be used to cover day-to-day expenses such as payroll and rent, as well as some short-term cash flow issues.
- Purchase new equipment: Most lenders provide equipment loans. This type of loan is created to help you buy business equipment such as furniture and machinery. This type of loan is secured by the equipment. If you are unable to repay the loan, the lender will seize the equipment.
- Establish a business: Many lenders require business loans, and if you are a start-up, you might find it difficult to get approved for a loan. Some options, such as business credit cards and microloans, are the right choice.
- Borrow a little amount of money: If you need a small amount of money, you can apply for a microloan. The United States Small Business Administration has a microloan scheme that enables eligible applicants to borrow loan amounts of up to $50,000.
Check if You Are Eligible
Although some loan requirements vary, most lenders require a minimum credit score of 680 to be approved for a business loan. Some other criteria include time in business, annual revenue, credit score, and collateral. Make sure that you provide the necessary documents and meet the criteria of the lender to be approved for the business loan.
Compare Business Lending Options
There are multiple places you can get a business loan, and some of them include:
- Online lenders: They provide several loan products to business owners, such as term loans, microloans, lines of credit, and merchant cash advances. The approval for this loan is much higher than for other traditional bank loans. One major reason for this is that lenders have fewer requirements than other traditional banks, and you might find it easier to get approved for a loan if you have a bad credit score. Also, online lenders are much faster because the loan application is online, and if you are approved, you can get the loan amount the same day you apply.
- Traditional banks: They can also offer several types of business loans similar to online lenders. The main merit of applying for business loans with a traditional lender is that it offers a lower interest rate for qualified applicants. However, if you have a bad credit score, you might not be approved for business loans.
- Microlenders: These are nonprofit organizations that grant microloans of up to $50,000 to eligible applicants, and they are designed to offer business owners who aren’t eligible for traditional business loans an alternative. They also have a lower eligibility requirement.
Collect the Required Documents
After understanding your lending options, the next step is to gather the documents required. Most lenders will require items like:
- Business plan
- Business license
- Personal and business tax returns
- Building lease
- Financial statement
- Articles of incorporation
- Profit and loss statements
- Personal and bank statement
You can also contact the lender if you are skeptical about the documents required for business loans.
Submit Your Application
This is the last step before applying for business loans. Depending on the lender that you want to work with, you can submit your application in person or online. Here are some details that the lender requires:
- Business name
- Your name
- Loan purpose
- Annual revenue
- Social security number
- Business Tax ID
- Desired loan amount
After submitting your application, you need to wait for approval for the loan. Once your loan is approved, the lender will send you a copy of the loan agreement and ask you to sign it before you are issued the funds.
The Best Lenders for Business Loans
In the meantime, there are several lending companies and online lenders that will grant your business the loan amount that you need. Here are a few of the lenders that grant business loans:
- National Funding
- TD Bank
- Funding Circle
These are some well-known lenders that grant business loans of all types to business owners. If you are interested in any of the lenders, you can check their official websites to learn more about them and find out their requirements.
How Can I Get Approved for a Business Loan Without Collateral?
If you sign a personal guarantee, some lenders would be willing to grant you a business loan. When you provide a personal guarantee, it means that you agree legally to be personally responsible for repaying the loan amount with your own money if your business is unable to.
Some criteria vary by lender, so it is advisable to look around to find the loan type that fits your situation. Some online lenders are best for approving no-collateral loans.
Is It Difficult to Get a Business Loan?
Certain factors, such as credit scores and annual revenue, can make it more difficult to get a business loan. Your loan application could be denied if you do not meet the criteria. Depending on some factors, some loans may require collateral or have a very high interest rate, and such qualifications may strain the business.