Business Loans 101: What to Know Before You Apply


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Businesses across all industries often face the same problem: How do you finance operations, projects, and expansions when you don’t have the cash on hand to do so? There are many answers, but one of the most common is to take out a business loan.

 

Let’s say you’ve crunched the numbers and decided that a loan, or “debt financing,” will deliver enough ROI to make the investment worth it. Now that you’ve identified a business loan as a possibility, what else do you need to know?

 

Review the following requirements, considerations, and factors of most small business loans before you apply:

Your desired loan amount and purpose

One of the first things you’ll need to consider is how much money you need and why you need it. The first rule of thumb: You shouldn’t borrow any more than what you need to complete your project.

 

Nailing down this number, or at least a close approximation of what you need, is important for two reasons. One, the amount you need will help dictate what loan product you’ll pursue. Not every loan option is suitable for the same amount of money.

 

Second, lenders need to know how much funding you want. Many applications will ask for a business plan or other documents that show you have a vision for your money, and aren’t just taking on their funding for vague business costs.

The different factors that affect your application

A multitude of factors affects what loan products and terms you’re eligible for. And although there is no set criteria across the industry, the factors considered are mostly the same, give or take a few variables. `

 

When applying for a loan, you should be aware of how the following affects your application:

 

  • Personal credit score: A strong personal credit score (700 or above) is an excellent indicator of whether you can qualify for a traditional loan. (Though loans for business owners with bad credit are available.)
  • Business credit score: Your business has a score as well—and the longer you’ve demonstrated a history of responsible business decisions, the better.  
  • Time in business: New businesses, or startups, simply don’t have the demonstrated history of established businesses, and as a result certain loans won’t be available to them.
  • Business plan: A written business plan, in part detailing how you’ll spend an infusion of capital, is sometimes required by lenders.
  • Industry: The industry your business is in can affect your loan eligibility, as some industries (child care, finance, and health care) are barred by certain lenders as being too risky.
  • Entity type: The structure of your business—whether it’s an LLC, sole proprietorship, or corporation—may also affect your application.
  • Proof of collateral: Collateral—in the form of cash, or more often, equipment or real estate—may bolster your case for a loan. A “secured loan” may also encourage more generous terms and rates.

The different types of business loans available

When you think of a business loan, you probably think of a traditional term loan from a bank: The bank extends you a set chunk of money, which you repay over the course of months and years plus interest and fees.

 

There are, however, many different kinds of debt financing that may work better for your business’s needs in the long run. Here’s a rundown of some of the most common types of business loans and financing:

Term loans

As mentioned above, term loans are the most traditional form of business financing. You can get a term loan from a bank (which will likely have the best terms on the market) or an online lender (which will have more expensive terms, but will be easier to obtain). Term loans can be long-term or short-term, lasting 25 years or just a few months.

Lines of credit

Business lines of credit are a form of revolving credit: flexible pools of money that your business can dip into on an as-needed basis. Once you’re approved, you can keep a line of credit in your back pocket and use it over and over, paying back each draw on its own schedule. Both banks and online lenders offer lines of credit.

Equipment loans

If you’re looking for a loan specifically to buy a piece of equipment or machinery, some lenders or sellers will offer you a loan for the amount of that equipment.

 


Invoice financing

If outstanding invoices constantly grinds your cash flow to a halt, you can use them to acquire funding: A lender will extend you the majority of your owed invoice, and give you the rest (minus fees) once your client pays up.

SBA loans

Loans backed by the Small Business Administration help small businesses acquire funding from banks that wouldn’t normally be available to them. SBA loans are competitive, but they favor business owners who come from underserved communities such as women, veterans, and minorities.

Business credit cards

Credit cards are a form of debt financing, albeit for much smaller amounts than loans or lines of credit. But the principle is the same: Credit card companies loan you money for your business expenses. As an added bonus, you’ll accrue reward points that you can reinvest into your business.

 

These are just some of your options, though not every business loan product is an affordable choice for small businesses. Make sure you compare the annual percentage rate (APR) of any loans you’re considering to get a true apples-to-apples comparison.

What you can use a business loan for

Though exact uses depend on your loan product and lender, you should be able to use your business loan for a variety of important business purposes, including:

 

  • Starting a business
  • Buying a business or franchise
  • Working capital
  • Covering cash flow
  • Growing your business
  • Emergency spending
  • Equipment financing
  • Refinancing debt

Documents to have on hand

Requirements for a loan application will vary depending on the lender and your situation. Regardless, it’s likely that a reputable lender will ask to review at least some of the following:

 

  • Annual business revenue and profit
  • Bank statements
  • Balance sheet
  • Personal and business tax returns
  • Copy of your commercial lease
  • Disclosure of other debt’
  • Legal contracts and agreements
  • Business licenses and permits

 

Lenders may ask for additional documentation, such as a personal guarantee or accounts receivable and accounts payable aging reports. Talk to your accountant and lawyer about obtaining as much of these documents are possible before you move forward.

 

***

Applying for a business loan takes a lot of careful planning and managing. That being said, the payoff—in the form of a wealth of new funds that can help take your small business to the next level—is worth the effort.  

The post Business Loans 101: What to Know Before You Apply appeared first on forex trading news for beginners.

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