5 Steps to Getting a Business Loan

Getting a business loan is a big hurdle for small business, mainly due to the banks’ strict lending standards.

But getting external financing is often required to start or expand a business or cover day to day expenses, including payroll and inventory.

While finding, applying for and getting small business loan approvals can be difficult, the more prepared you are, the better. Here’s how to get a five-step business loan :

  1. Point out why you need the money. Ask yourself how this loan will help your business.
  1. Find the right loan. Choose a type of commercial loan based on your needs.
  1. Find the best lender for you. Compare the options based on the cost and terms of each loan.
  1. See if you have what it takes to qualify. Gather information, including your credit score and annual income.
  1. Prepare your documents and apply. Find out what documents the creditors will need you in advance.

Now you will detail each of these points below.

How to get a business loan

How to get a business loan

1. Ask yourself: Why do I need this loan?

1. Ask yourself: Why do I need this loan?

Lenders will ask this question, and your answer will probably fit into one of these four categories:

  • To start your business.
  • To manage the expenses of the day to day.
  • To grow your business.
  • To have a safe.

2. Decide what type of loan is right for you

2. Decide what type of loan is right for you

Your reasons for needing the loan will dictate the type of small business loan that you get.

If you are starting a business, it is practically impossible to get a loan in the first year of your company.

Lenders require cash flow to support the repayment of the loan, so that startups are usually immediately disqualified from financing.

Instead, you’ll need to rely on business credit cards, friends and family loans, crowdfunding, personal loans, or microcredit from a nonprofit lender. Learn more about how to raise financial resources for companies .

For companies with a year or more of history and revenue, you have more financing options, including term loans, commercial lines of credit, and invoice factoring. Learn more about the types of financing for companies and when to use.

3. Determine the best type of lender

3. Determine the best type of lender

You can get a business loan in several places, including banks, non-profit microcredit and online lenders. These lenders offer products that include term loans, lines of credit and accounts receivable financing.

Of the loans for which you qualify, choose the one with the lowest APR as long as you are able to handle the regular loan repayments.

What is the APR (Annual Effective Annual Rate)?

The Annual Effective Annual Fee represents the total cost of consumer credit (expressed as an annual percentage of the amount of credit granted). The calculation of the APR includes:

  • reimbursement collection costs;
  • interest payments
  • Mandatory remaining charges: taxes, commissions and interest.

You should approach small business loan purchases as you would with a car.

Once you determine what type of lender and vehicle financing is right for you, compare two or three similar options based on the annual percentage rate (total loan cost) and terms.

Of the loans for which you qualify, choose the one with the lowest APR as long as you are able to handle the regular loan repayments.

Use BANKS when:

  • You can provide warranty.
  • You have good credit.
  • You do not need quick cash.

Traditional bank options include term loans, lines of credit and commercial mortgages to buy properties or refinance.

Small businesses find it more difficult to get approval because of factors such as lower sales volume and cash reserves. Add to that bad personal credit or no collateral (like real estate to secure a loan), and many small business owners come in empty-handed.

Getting finance takes longer than other options – usually two to six months – but banks are usually your option of lower interest rate.

Use MICRO FINANCING when:

  • You can not get a traditional loan because your business is very small.

Micro lenders are non-profit organizations that typically lend short-term loans.

The APR of these loans is typically higher than that of bank loans.

The application may require a detailed business plan and financial statements as well as a description of what the loan will be used for, making it a time consuming process.

Moreover, the size of loans is, by definition, “micro”. But such loans may work well for smaller companies or startups that may not qualify for traditional bank loans due to limited operating history, poor personal credit or lack of collateral.

Use ONLINE COMPANIES when:

  • You have no guarantee.
  • You do not have time in business.
  • You need financing quickly.

Online lenders offer small business loans and lines of credit. The average APR for these loans ranges from 7% to 108% depending on the lender, the type and size of the loan, the length of the payment period, the credit history of the borrower and the collateral are required. These creditors can rarely compete with traditional banks in terms of APR.

But approval rates are higher and funding is faster than traditional banks – between 24h-72h.

4. Find out if you qualify

What is your credit score?

Your place in the credit spectrum is a factor that determines which loans you will qualify for. You can get your credit report at agencies like Serasa Experian .

Or you can get your credit score from credit card issuers as well as personal finance websites.

Banks, which, as noted earlier, offer the less expensive small business loans, want borrowers with credit score at least above 680.

If your credit score falls below this limit, consider online small business loans with bad credit or microfinance loans from a nonprofit lender.

How long have you been in business?

In addition to your credit score, lenders will consider how long your company is operating.

You need to be in the market for at least a year to qualify for most small business online loans and at least two years to qualify for most bank loans.

Do you “make” enough money?

Many lenders online require a minimum annual income, which can range from $ 50,000 to $ 150,000. Get to know yours and find out the least that a lender requires before applying.

Can you make the payments?

Carefully analyze your company’s finances – especially cash flow – and evaluate how much you can reasonably pay for the loan installments each month.

Some online lenders require daily or half-yearly payments, so include that in the equation, if any.

To comfortably repay your loan each month, your total income should be at least 1.25 times the total expense, including your new repayment amount.

For example, if your company income is $ 10,000 per month and you have $ 7,000 in expenses, including rent, payroll, inventory, etc., the maximum you can pay is $ 1,000 per month in payments.

5. Now, gather your documents

After comparing your options, it’s time to sign up for loans that meet your financing needs and for which you qualify.

You can apply for multiple small business loans within a short period of time (about two weeks) without a negative effect on your personal credit score.

Depending on the lender, you will need to submit a combination of the following documents:

  • Business and personal tax returns;
  • Business and personal bank statements;
  • Financial statements of businesses;
  • Legal business documents (for example, articles of incorporation, commercial lease, franchise agreement).

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