How to get a small business loan and what to do before applying

How to get a small business loan and what to do before applying

Many entrepreneurs are able to get some assistance, despite the romanticism of the rags–to-riches success tale. Although grit and ambition are important, they don’t guarantee the cash flow that a business might need. Business loans are a vital source of financing for new businesses.

Business loans are one of the most popular forms of financing for founders who want to start a company. The decision to apply for a loan for your business is an important one. You can read our guide on how to start your business.

This post will discuss the factors that affect whether a loan for business is the right option for you and your company. We will discuss some of the most common terms and conditions that are associated with business loans, and how to prepare for the application process.

How can you get a loan for your business?

It takes time to apply for a loan for business. No matter what type of loan it is, there are steps you can take before you submit an application.

  1. Calculate how much money you will need to borrow
  2. All supporting documentation should be collected
  3. Find the right type of loan to meet your business goals

The time it takes to apply for a loan for business can vary depending on the lender. Entrepreneurs who are launching new business ideas should be aware that they will need to take on significant financial obligations at the beginning of any venture.

Planning at this stage can help you save a lot of time later.

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What are you looking for in a loan?

You will need to have an idea of the amount you need before you can apply for a loan. This will help you to determine the purpose of a business loan.

Let’s take, for example, a growing home-based catering company that wants to open one brick-and-mortar store, where you will make and sell various bakery products. An average cost of $95,000 for kitchen equipment means that our hypothetical catering company will need a substantial business loan to adequately equip its kitchen. This is before licensing and commercial real estate costs.

It’s worth looking at the costs of ongoing investments when estimating the amount of funding your business will require. A professional-grade kitchen can cost $95,000, but what about the maintenance costs? What about insurance. Oder utility costs?

While it is easy to be focused on the sticker price for new hardware, there are many other factors to consider. This is especially true for businesses operating in industry sectors with tight margins like food service. It can take longer to achieve profitability. The result will be a direct impact on how easy borrowers can pay their repayment obligations.

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What business plan do I need?

Private lenders won’t approve traditional business loans unless the loan application is accompanied by a detailed plan. Your company’s roadmap for the future is a solid business plan. A business plan is essential for any prospective lender to assess whether your idea can be commercially viable.

Many online lenders have made it easy to get loans without requiring business plans or eliminated the need for them.

Shopify Capital does not require an application. Eligible businesses are preapproved on the basis of their Shopify storefronts. This includes total sales. It is similar to how Amazon Lending prequalifies some Amazon merchants. This type of financing is a great option for established businesses looking to expand their reach in a financially sustainable manner.

However, short-term loans are available from lenders who do not require a business plan to be submitted as part of their application process. They also offer higher annual percentage rates (APRs) for those with less formal business plans. Higher APRs indicate that a larger percentage of the loan’s repayments will go toward interest, rather than principal. This can lead to higher repayments, longer repayment terms, or both. These loans have an average APR of around 24%, but may be higher for those with poor credit.

Only you will decide if you require a business plan in order to support a small-business loan application. To get started on your business plan, download the template below.

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What type of business loan should you apply for?

After you have decided to apply to a loan for business, you will need to decide which type of financing you want to use to achieve your goals. There are many types of business loans. Each one has its advantages.

Term loans

The term loan is the most popular type of business loan. Term loans can be repaid in between 2-10 years. They are reliable and a common way to finance a business.

Traditional term loans have strict eligibility requirements. Because of the strict requirements, traditional term loans are not suitable for businesses that have been operating for less than two years. Often, a proven track record of profitability is required. Private lenders prefer to service loans up to $500,000, making term loans impossible for small ventures or entrepreneurs with no track record of success.

Lenders require minimum credit scores of 680 or more. A traditional term loan can take up to two weeks to process.

SBA loans

SBA loans are very similar in terms to private lenders’ standard term loans. SBA loans are provided by lenders who have agreed to provide more favorable terms for groups that may not be able to obtain traditional business financing such as minority business owners and women founders.

SBA-approved lenders often require a business plan and some collateral. SBA loans have a longer term than traditional term loans. Some may be up to 25 year. SBA loans are typically smaller than traditional term loans, with a starting price of $10,000 and increasing to a maximum loan amount of approximately $350,000.

SBA loans usually require a minimum credit score of 650. Although these loans are more friendly to small businesses, processing an SBA loan can take up to 90 business days.

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Online loans for short- and long-term

As entrepreneurs seek alternatives to traditional financing, online loans have been growing in popularity. These loans are offered by lenders like OnDeck and Funding Circle.

Online loans offer many benefits, both for short- and long-term. This type of financing is acceptable for those with low credit scores. Many lenders will accept borrowers with scores between 500 and 600. This type of loan is often available to businesses that have been in business for at least one year. Annual revenue requirements can also be lower, usually around $100,000.

The loans are available in a range of amounts, from $5,000 to $250,000 for short-term loans to as high as $500,000 for long term loans. These loans are a good choice for small business owners who have less urgent funding requirements. These loans don’t require collateral and are ideal for entrepreneurs without assets. In many cases, the decision can be made within days or less; some lenders even offer same-day approvals.

Online loans can have short-term and long-term drawbacks. These loans have prohibitive APRs up to 99% in extreme cases.

Factoring invoices

Invoice factoring is another popular but less common type of business loan.

Invoices used for payment are often held up for long periods of time. Sometimes, it can take as much as 90 days to pay an invoice. This can negatively impact a business’s operations, especially for smaller businesses who cannot wait three months to pay outstanding invoices.

Factoring companies buy invoices that are owed to them. Also known as purchasing accounts receivables, these invoice-factoring services purchase outstanding invoices. Businesses can sell outstanding invoices to invoice-factoring companies to make payments much quicker, often in less than 24 hours.

Invoice factoring is ultimately a compromise. Factoring invoices allows companies to avoid having to wait for months before they are paid. However, it can also mean that some money is owed to them. For clients with poor credit, invoice-factoring companies will pay 70% of the outstanding invoice and for those with good credit, up to 90%-95%. Factoring is not suitable for businesses that rely heavily on smaller invoices. The service fees might not be financially feasible.

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Before making a decision, consider all options

A business loan is a significant financial decision that should not be taken lightly. As 2020 has shown, major economic disruptions can have a significant impact on everything, from revenue forecasting up to the financial viability of a company.

Only you will be able to decide if a loan for business is right for you. Be sure to review all of your options before making any major decisions.

  • Before applying for a loan for your business, be sure to have a clear idea of the exact amount you will need. Also, know how you intend to invest the money in your business.
  • Even though it is not required for a loan application, you should consider a formal business plan. This will help to highlight any key points, such as revenue projections and realistic revenues.
  • When determining repayment terms, be realistic about what your company can afford in terms repayments.
  • Discuss your plans with your local financial advisor to find out more about different types of business financing.

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