Whether you wish to start a new business or expand your existing one, you will most likely need to find a source of funding. There are many ways to secure funds for your business venture, and one of the most popular methods is getting a business loan. Business loans are offered by many traditional and alternative loan providers across the country, and each lender has its own set of rates, incentives, and terms and conditions. Choosing the right business loan provider can be a difficult task due to the extensive selection available and the strict requirements involved in some cases. Below is a comprehensive guide on how to secure a business loan.
Know the Different Kinds of Business Loans Available
Presently, there is a wide variety of business loans available in the market, and some of them can meet your needs and preferences better than others. They can differ significantly in terms of maximum loan amount, interest rates, length of loan, eligibility requirements, and terms and conditions. Below are a number of options for you to choose from.
Small Business Line of Credit
This option enables you to get funds from the loan provider as needed. There is a limit as to how much you can borrow, which can be, for instance, $100,000 or $500,000, but getting a line of credit is a great way to manage your cash flow and unforeseen expenses. Usually, you will be required to pay a fee when you are opening a line of credit, but you do not have to pay interest until the funds are drawn down. In most cases, interests are paid on a monthly basis, and the principal is often paid off over years. However, a small business line of credit usually requires annual renewal, which may come with an additional fee.
Accounts Receivable Line of Credit
This type of loan is a credit facility that is secured by the accounts receivable of your company. It enables you to obtain funds right away based on the amount of accounts receivable you have, and its interest rate is variable. The line of credit is paid down as your customers pay their bills.
Working Capital Loans
Working capital loans are debt borrowing vehicles that can be used to finance your daily business operations. You can use a working capital loan to manage revenue and expense fluctuations that result from seasonality and other circumstances. It is possible to get an unsecured working capital loan, but you will have to pledge collateral or obtain a personal guarantee if you do not have a substantial or good credit history. This type of loan is usually a short-term loan that ranges from 30 days to one year, and its maximum amount can be anywhere between $5,000 and $100,000.
Small Business Term Loans
A small business term loan is typically a fixed-amount loan, and it can be used for capital expenditures, expansion, or business operations. It requires you to pay monthly interest and pay off the principal within half a year to three years. A term loan can come in the form of a secured or unsecured loan, with fixed or variable interest.
SBA Small Business Loans
Certain banks provide small business loans with low interest rates that are guaranteed and backed by the US Small Business Association (SBA). Due to the SBA guarantee, this kind of loan offers better repayment terms and interest rate compared to most other types of loan. The maximum amount you can borrow can vary from $30,000 to $5 million. However, you have to be prepared to undergo a time-consuming loan process with strict requirements.
If you need funds to purchase equipment for your business, you can try to secure an equipment loan. An equipment loan usually requires a 20-percent down payment of the equipment’s purchase price, and the equipment serves as the collateral. Interest is usually paid on a monthly basis, and the principal has to be paid off over two to four years. The loan amount for an equipment loan is usually between $5,000 and $500,000, and interest rate can be fixed or variable. Sometimes, this type of loan can be structured as an equipment lease.
Small Business Credit Cards
A small business credit card can serve as a form of short-term financing for your small business. Interest rate can vary significantly depending on the issuer of your credit card, available funds on the card, and your creditworthiness. In many cases, the principal owner is required to be co-liable with your business. Some credit card issuers offer zero-percent interest rate for six to nine months as an introductory promotion.
Do Research on Loan Providers
The best way to find out about potential loan providers is to do research online. All reputable commercial banks and local banks have their own websites, and you can read about their loan options online. You can also find suitable lenders using online tools such as peer-to-peer lending sites, or visit the sites of direct online lenders, such as SwiftCapital and LendingTree. There are also business loan comparison sites that provide convenient tools for you to compare loan offers from many established business loan providers. If you wish to secure an SBA loan, you can get comprehensive information about SBA loan options and requirements on the official SBA website.
Understand How a Lender Determine Your Eligibility
Loan providers have an established set of standards for determining whether or not they should offer you a business loan. The main factors that they will take into consideration are your credit score and risk profile. They will also look into factors such as your business assets, investors, financial statements, and duration of business operation. Before you apply for a business loan, it is best that you check your credit report and get rid of any blemishes you can find.
Prepare Your Financial Statements Properly
If you are planning to borrow a large amount, you can expect your loan provider to review your financial statements very carefully. To increase your chances of securing the loan, you have to make sure that your financial statements are complete, thorough, and accurate, including your balance sheet, cash flow statements, and income and loss statements. The lender will evaluate your gross margin, cash flow, accounts receivable, accounts payable, debt-to-equity ratio, EBITDA, and others, so you have to be ready to answer questions about these aspects of your business. It is a good idea to get your accountant to go through your financial statements to look for issues that may be of concern to the lender.
The best thing to do to get your business loan application approved is to hire a certified public accountant to audit your financial statements. However, if you do not want to pay a high price for an audit, you can get a certified public accountant to “review” your financial statements instead. A review or audit of your financial statements may not be required by some loan providers.
Collect Detailed Information for Your Loan Application
Another way to improve your chances of getting approval for your business loan application is to collect and submit detailed information about your business. Make sure the information is properly organized. Some of the types of information that loan providers will typically ask you to provide include:
- Name of your business, including DBAs
- Federal tax identification number
- Names of executive officers, as well as their background
- Legal business structure
- Financial statements for the previous two or three years, and financials for this year, including income and loss statements, balance sheet, cash flow statements, and shareholder equity
- Forecasted financial statements
- State filings, such as certificate of incorporation, good standing certificates, and foreign corporation filings
- Copies of general liability and keyman insurance policies
- Business credit report
- Potential collateral for loan
- Amount of loan needed
- Financial statements of the owner or principal shareholder of the business
- Tax returns of your business for the previous two or three years
- Business bank statements
- Business plan, Investor Pitch Deck, and Executive Summary
Specify the Loan Amount and Explain How the Loan will be Used
When you are applying for a business loan, you will have to specify the amount of loan you need and let the lender know how the funds will be used. Will you be using the loan for capital expenditures, equipment purchases, expansion, hiring, inventory increase, marketing, research and development, or product development? It is advisable that you borrow a little more than needed in case you experience a cash crunch that goes on for one or two months. It is important that you try to avoid defaulting on your loan.
Determine What Kind of Guarantee and Security You Can Provide
When deciding whether or not to offer a loan, the lender is most concerned about the borrower’s ability to repay the loan. If you want to get a business loan successfully, you can give the lender a security interest on the assets of your company, such as property, equipment, or accounts receivable. Some loan providers may ask you to provide the personal guarantee of the main owner of your company. It is best that you avoid giving such guarantee, as it will place the personal assets of the owner at risk, not just the company’s assets.
Evaluate the Key Terms of the Business Loan
In order to make sure that a certain proposed loan is suitable for your business, you should evaluate the key terms that are proposed by a loan provider and make comparisons with the terms offered by other lenders. Below are some key terms that you need to review.
- The interest rate and its variability over time
- Interest payment frequency (weekly or monthly)
- Principal due date and payment
- Loan origination fee
- Costs and fees imposed, such as administration fees, underwriting fees, and loan processing fees
- Operating covenants imposed, such as minimum cash threshold or maximum debt-to-equity ratio
- Circumstances that allow the lender to declare a default
- Collateral or security needed
- Future financial statements and reports that must be given to the lender
- Limits for the use of the loan proceeds
- Possibility to prepay the loan early without incurring a penalty and the amount of penalty
Review Your Online Presence
A loan provider may check your company’s website and social media accounts when deciding whether or not to offer you a business loan. Evaluating your online presence and activities will give the lender a better idea of the popularity and reputation of your business, as well as the effectiveness of your business activities, which can be a good indication of your ability to repay your loan. As such, it is advisable that you make improvements to your online profiles and postings to impress your lender. Make sure your website is professional-looking and up-to-date, and review your presence and postings on Facebook, LinkedIn, and other social media websites. Also, take a look at the reviews that your company received on review sites such as Yelp.
Learn More about Small Business Lending
The more you know about the lending options available for small businesses, the higher your chance of finding and securing the right loan. With extensive knowledge of business loans, you can ask lenders very specific questions and negotiate more effectively to get a loan that meets your needs and preferences. It also enables you to meet the requirements of a loan application more satisfactorily to boost chances of getting approved.
In order to get the best business loan, you have to be prepared to invest substantial time and effort to do research and comparison shopping. Getting the right business loan for your small business can be beneficial to your business in many ways. Other than ensuring that you will have enough funds to start, expand, or improve your business, it can also reduce your interest payments and fulfill your loan obligations with greater ease.