At some point, your business is going to require extra cash. While the general idea behind starting a business is to make money, you should keep in mind that money is also a necessary ingredient for growth. One of the best ways to get money for your business when you run short is to get a business loan. According to Finder, the number of businesses seeking non-pandemic-related government funding decreased in 2020. That number went from 43% to 37% in 2020. A business loan can give you the money you need to cover daily expenses, expand operations, or purchase equipment. However, for you to get the money, you need to know how to begin and which documents are required. Here’s a simple guide to walk you through the process of getting a business loan for your company.
What Is the Reason for Your Loan?
Any lender that you approach will want to know how you are going to use the money you get from them before they hand over a significant amount of money. This is a valid concern. The way you use the money from the loan will affect your company’s income and your ability to pay the loan back. For instance, something like covering payroll may not pass a lender’s smell test. General rationales for companies seeking business loans include expanding, acquiring extra equipment, and just starting a new company.
Determine The Type of Loan You Need
Once you have established reasons for getting a loan, you also need to determine the loan amount. Never ballpark it. Loans are expensive, and ending up with too much to pay back is not a good idea. If you can’t figure out exactly how much you need, you can also end up with a loan amount that’s too little to cover the purpose of borrowing. If you are looking to buy equipment or expand, this means you need to take the time to come up with a proper budget, so you know exactly how much is needed.
What Are Your Options?
Now that you know what you want to do with the money and you know the exact amount needed, let’s look into your loan options. Unfortunately, if you are a small business, you should keep in mind that lenders will only go so small.
The majority of lenders have requirements that your company be somewhat established with several years in your ledgers. If you are just starting out and don’t have collateral, you may have better luck with personal loans and business credit cards. While interest rates on these options are usually a lot higher, they can be the lifeline you need in times of trouble. Established companies, on the other hand, have access to several types of loans. These loans include:
Bank Loans
Business loans from banks are quite straightforward. If you qualify for one, you will be able to receive a lump sum of money from the bank. The bank will require you to repay over a specific period with interest. This is the best option for established companies with good credit. Bank loans are a perfect option if you need expansion cash quickly.
Medium-Term Loans
This type of loan has a repayment period between one and five years. They are quite popular with businesses that don’t require large sums of money. For instance, a medium-term loan is ideal if you need an amount below $500,000. The loans come with fixed interest rates, and they will require that you have a perfect credit history or collateral.
Microloans
This is the perfect type of loan for businesses that are looking to build their credit score or boost their cash flow. Microloans are short-term loans that are usually under $50,000. The advantage of these loans is they can be approved in as little as two weeks as opposed to months.
SBA Loans
The United States Small Business Administration loan is meant for lenders that have been previously turned down by banks. However, you need to meet strict borrower guidelines. The backing provided by this administration instills confidence in banks and other lending organizations to give them a chance to previously turned down applicants. The loans come with low-interest rates, but the approval process can take several months.
Business Lines of Credit
BLCs are less rigid than bank loans. They can give you access to as much money as your credit limit will allow. With this loan, you will pay interest only on the cash that you would have withdrawn. This is the perfect option if you are looking to cover short-term expenses.
These are the several types of loans you can get for your company. You can also look into commercial real estate loans if you want to purchase a commercial property. It’s important to choose the type of loan that suits your needs as a company. If you are not sure which option is best for you, try to sit with a financial advisor first before applying.
Choose a Lender
But wait, there’s more: once you have decided which type of loan you are interested in, you should also choose a lender to approach. Not all lenders are the same. You need to ensure that whoever you are borrowing money from is registered and reputable. You should also assess your situation and figure out which lender is likely to accept your application. Some lenders work well with small businesses, and others consider those with bad credit.
But what if you have bad credit? Getting a business loan with bad credit can be frustrating. Fortunately, you can still get funding. There are certain types of loans that are available for companies with bad credit. All you need to do is demonstrate a healthy business and the ability to successfully pay back your loan. Some of the sources of funding available to companies with bad credit include invoice factoring, microloans, business cash advances, and secured business credit cards. The best way to ensure that your application gets approved when you have bad credit is to take steps to improve your credit. This will take some time, but it will help you get affordable loans that are profitable for your business.
Prepare the Necessary Documents
No matter which lender you choose or what type of loan you want, you will need to present your business’s full financial information. This includes things like your credit score, which plays a large role in determining whether you qualify for a loan, and other documents as well. For instance, you will need to prepare your business and personal financial statements, tax returns, business forecasts, licenses, and state registrations. The lender may also need legal documentation that includes commercial leases, articles of incorporation, and franchise agreements.
Submit Your Application
If you need a substantial amount of money, you should apply ahead of time. It can take months for a lender to approve a loan, especially if you are looking for large amounts. Fortunately, there are several ways to speed up the application and approval course. For instance, you can use avenues like lending marketplaces. This can shorten the approval period, but you still won’t get money overnight. When submitting your application, you need to keep an eye on application fees, early/late repayment fees, and loan guarantee fees. These fees will eventually affect your APR.
These are some of the things you need to figure out if you want to get a loan for your company. It’s important to take your time to decide on the loan amount and which lender to approach. You should also ensure that your business affords the loan you are taking.
