As a business owner, some sort of financing plan cannot be avoided.
That’s the commerce works. In any case, you may be in need of a loan now but aren’t sure how to get one. Well, in this article, we will cover exactly that and a little bit more.
Keep reading to learn how to get a loan for a business venture.
How Much Funding Do We Need?
In reality, most business owners think about this question, “How much money can we get from a loan?”. But a better question you should be asking is this, “How much money do we need to borrow?”.
If you only have a vague idea of how much the company will need to get through short-term expenses, you might end up borrowing more than you need.
On the other hand, some owners are extremely conservative when it comes to asking for a longer-term loan. Don’t underestimate the financing that you require as it can jeopardize the sustainability of your business.
Know what you need and know what you’re asking for to make an investment successful.
Start With Small Business Financing
Now that you have analyzed your needs and come up with a value, it’s time to discover the best options for your small business loan.
Nowadays, financing is very simple, and you can apply online in a matter of minutes. In any case, before you rush to apply, you must prepare yourself.
Make sure your business’s financial records are at hand and organized. It’s also a good idea to ensure your credit score and financial KPI is at its finest when you are applying.
Not only will you improve your chances of success, but you will also land more competitive rates.
Know the Credit Score
Not all businesses are equal in the eyes of a lender. There are certain metrics and scores that separate those who deserve a loan and those who don’t. If you want to get approved on affordable terms, you need to put your business in the former segment.
Because it takes time to build credit, lenders might consider other guarantees or qualifications. Some will review your personal score.
If you apply with bad credit, it will impact your rates and overall costs for financing. So if you have lines of credit, make your payments on time and pay off all of the debts.
Most lenders take note of your debt-to-income ratio, which helps measure the business’s overall financial ability to repay additional debts. If your DTI is over 35%, creditors might deem you unfit for a loan. However, it’s common to see some lenders approve those with higher ratios.
Select the Format for Business Financing
Business owners will often apply for a long-term bank loan without consideration for any other alternatives. And locking down a loan like that can be often difficult. Therefore, most businesses don’t have the financial history to support the acquisition of such business loans.
And even if they do get approved and receive the funding, the terms might dictate their financial actions for many years to come.
Unless you possess long-term capital expenses that cannot be covered via other means, alternative options for financing might be a better decision.
Here are four popular financing options:
The Small Business Administration backs secured loans with low-interest provided by commercial banks, non-profit lenders, and other lending institutions.
When you apply for a regular loan at a bank, you put up assets as collateral. If you need to do this without putting up collateral, such as inventory, cash, or property, the bank will consider the application risky.
That’s when the SBA steps in. The federal agency will provide a capital guarantee that is needed to help you secure the loan. Since an SBA loan is less expensive, they are quite cost-effective and helpful to small businesses.
However, becoming approved for the SBA loan can come with its challenges, and you have to meet their specific requirements.
Business Line of Credit
A business line of credit is convenient and allows you to take as much as you need as long as you don’t exceed your limit. Unlike a regular loan, a business line of credit provides accessible funding for companies of all sizes and those in need of cash to help them get through major expenses.
A credit line enables control over your debt and can be easily secured. And in most cases, it acts as a reserve cash resource to be used only when needed.
Compared with other financing options, a line of credit comes with these benefits:
- Financial control
- Low-interest rates
- Higher limits
- Cash-flow flexibility
Let’s move on to the next one.
Invoice financing is a type of accounts receivable loan, in which you pledge unpaid invoices as collateral in exchange for cash.
This is done by companies that need quick cash for short-term charges, and should only be used when the high-value outstanding invoices are yet to be paid.
A bank will often offer 75% of the face value, and the cash is advanced while the remaining balance is remitted after the invoice has been paid in full—minus any of the fees.
This is a great option for business with bad credit and those having trouble getting a loan because of the lenders being harsh with their creditworthiness.
Anyway, there is a myriad of other financing options, but that would simply take too long. For example, a personal business loan is another alternative. Or how about a dividend-loss investment loan?
The list goes on and on.
Complete the Application
Now that you’ve finally narrowed down the entire list of financing options and hopefully found what’s right for you, you have to go to the lender or apply online. In general, a loan officer will be your first inference point of contact and will answer all of your pertinent questions.
Face-to-face is always recommended as your chances of getting a loan are higher.
Make sure you have all of the necessary documentation on the go, such as:
- Government ID
- Business permits/license
- Proof of ownership
- Articles of Incorporation
- Schedule C and tax return
- Stock ownership
- IRS forms
- Stock certificates
- Doing business as documents
And you or may not need all of these or more, but your loan officer should be able to announce the exact documents you will need to provide.
How to Get Loan for A Business? Simply.
As you can see, securing a loan is not that scary. As long as you know how to get a loan for a business, you are already halfway there. Depending on your current financial standing, you might not be able to get the best possible loan, but you can get A LOAN.
And hopefully, it will be a loan that will help you improve your financial history and secure your future for better loans.
If you’re interested in learning about how online loans work, check out our other article.