Business loans are critical for helping your business grow and stay viable. Your loan can help you get the funds necessary for many business operations. But not all lenders are going to provide loans to any borrower. You’ll have to receive approval from a lender before you can get your loan. This guide on how to get approved for a business loan will help you understand what to expect when getting a loan ready.
What Makes Investors More Likely To Give You the Money You Need?
Investors will use many factors to determine if they should give money to someone asking for a business loan. These points include things like these:
- The credit history of a business
- How much money the borrower wants to get in a loan
- The general capacity of a company to bring in money, including the stability of revenue
- Any capital a borrower wants to use as collateral
- Further conditions like industry status, future stability, and how long a business has been running
All investors have different ideas for who they consider worthy of receiving credit. Following the best steps for being approved for a business loan can help improve your chances of getting a loan.
How Does a Small Business Loan Work?
General Cost
The expenses for a small business loan entail more than the interest rate. You’ll also have to review some of the basic costs of a loan, including:
- Application fee, including getting the application for a loan ready
- Origination fee; this charge refers to the creation of a new account
- Maintenance fees, including if you pay them each month or year
- Late payment charges
- Prepayment penalties, or charges for cases where you pay your loan off early
The total value of those fees can vary, but you could spend hundreds of dollars or even a few thousand dollars. Check with a lender to see what the terms are before signing up.
Loan Terms
You must also review the terms for a small business loan. These terms include:
- How long the loan can last, specifically how many months or years it will last
- How often you can pay off a loan; you could use weekly or monthly payments
- Whether you have the option to make additional payments
- Whether you can adjust the rate on your loan, especially if your credit rating improves
The terms are typically set throughout the life of the loan. Check how flexible those terms are before agreeing to a deal.
Loan Structure
Your loan structure will also include a few features:
- The amount of money you’re requesting
- The term length
- The annual percentage rate or APR
- An approximation of the amount of interest you will pay on your loan
- How often you’ll pay off the loan, including how much your regular payments will be worth
The complex details of a loan make it an investment that requires careful analysis. You can talk with a lender about what can work in your specific loan.
How to Get Approved For a Small Business Loan
Any small business can receive a loan, but the process of how to get approved for a small business loan is critical to note. You’ll have to review how well the loan works before going forward.
There are three factors you’ll have to review when looking at how to get approved for this type of loan:
- Cash Flow
Cash flow is a measure of how money moves in and out of your company. A cash flow report will show how your business is spending money and where it gets its money from. Your business should show it is bringing in enough money and that it is not experiencing too many outflows.
The cash flow should also be consistent. A long-term analysis of your cash flow can show how you’re earning the same amount each week or month, plus you can show if there are trends over how you may experience a rise in cash flow.
- Credit Score
The business credit score measures how well your business is managing its funds. A business with a higher credit score will show its capability of managing its money. The score can review things like:
- How you can pay off expenses on time
- How much credit you are utilizing
- Whether you have arrears
- Any legal actions or other concerns to your business
These factors can influence your credit score in many ways. Businesses that pay off their expenses well and cover them on time are more likely to succeed in finding a loan.
Some lenders might also review your personal credit score, but that is for cases where there aren’t enough details on what your business holds. This analysis may also work if you’re trying to provide a guarantee for your loan.
- Debt-to-Income Ratio
The debt-to-income ratio measures your monthly debt payments divided by your company’s gross monthly income. A lender will be more likely to offer loans to businesses with DTIs of less than 50%. The rate is necessary for ensuring you have enough money coming into your business without having too much going out to other debts.
How to Get Approved For a Startup Business Loan
A startup business will require extra help, as it is one that hasn’t been around for long and doesn’t have much of a credit history. There are some steps you can follow when looking at how to get approved for a startup business loan:
- Review your personal and business credit.
Startup business loan providers often review both the personal and business credit ratings of whoever applies. Your personal credit will link to your Social Security Number, while business credit comes from your Employer Identification Number. A lender will be more likely to provide you with a startup business loan if you have a good enough rating in either field.
- Grow your annual revenue.
Your next step is to review your annual revenue and find ways to grow it. You will be more likely to get a better loan if you have more revenue coming into your business.
- Continue operating for long enough.
You might also have to show you’ve been in business long enough before getting a loan. Startup loans are often available to s that have been around for about six to twelve months, although the terms will vary by lender.
- Find collateral or a cosigner for your loan if necessary.
Your chances of getting a loan will improve if you have collateral or a cosigner for the startup loan. Collateral entails assets in your possession that you will secure the loan with. You will provide these assets as payment if you cannot pay off your loan.
A cosigner is another party responsible for paying off the loan if you cannot complete payments. The cosigner should have enough income and a good credit rating.
Both these options reduce the lender’s risk of giving your startup money, as the lender knows someone will be on hand to cover the loan cost.
What Documentation Do You Need For a Business Loan Application?
You will require multiple documents to help you get a loan. The process of how to get approved for a business loan requires many documents on your end, including these:
- A business plan, including your financial history, balance sheet, and future projections
- Business tax returns
- Personal income tax returns may be necessary for startups
- Bank statements for your business
- Business licenses
- Employer Identification Number
- A description of your planned loan use
- A credit report for your business
- Cash flow estimates, including what you have now and later
- Income statement
- Details on any prior loans you might have taken out
All lenders will have different rules for what you require during the application process. Contact your lender of interest for further details on what you’ll provide to that lender.
How Long Does It Take For a Small Business Loan To Get Approved?
The timing for when you can get a small business loan will vary by lender. Some online lenders might offer a loan in as little as 24 hours. But traditional lenders might require a few weeks before you can get approved. The extensive analysis process can be tough to go through, but lenders will require this timing to ensure your ability to pay off a loan. People with better credit ratings often wait less time to receive approval.
How Do You Make Sure a Small Business Loan Is Right For You?
You can ask many questions when looking for a small business loan. These questions are essential to helping you understand where you’re going when getting a loan ready.
- Why are you borrowing money?
Take a look at what you’re doing when getting your money ready. You might need to acquire equipment for your business, for example. You could also require money to cover some assets or operating costs to help you get your business running well. Look at why you’re trying to borrow money, as your lender may provide different options for your work needs.
- What type of loan meets your needs?
You’ll find many business loans that can fit your unique needs. For example, an SBA or Small Business Administration loan is one that the federal government can guarantee, plus they help businesses acquire working capital. You could also find a traditional term loan from a private vendor or a startup loan.
Other loans available include a business line of credit that you can draw money from as necessary. You can also explore invoice factoring, a practice where you sell outstanding B2B invoices and pay back the loan through outstanding payments from your customers.
The specific loan type you’ll use will vary on how you operate your business, how new your entity is, and other factors for work. Talking with a lender about different loans available for your use will help you find a good solution that works for you.
- Can you meet your loan obligations?
The rules for managing a small business loan are complex, and you’ll need to ensure you have the money necessary to cover your obligations. Be sure when applying for a loan you know what you will expect to spend each month and compare that with how much your business brings in every month. You should confirm you can afford to pay off that loan while doing so on time.
- Is an alternative loan right for me?
Alternative loan financing can work in some situations. This measure involves financing from a outside of the traditional banking system. You may be able to avoid some fees and also receive more funds, but the terms for your loan might vary. Some alternative lenders might charge extra out of convenience, or they might have higher rates because they cater to high-risk borrowers.
How to Choose the Right Type of Business Loan
You can find many business loans today, but be careful when looking around. You can find one of four different business loans:
- Bank Loan
Bank loans are often trustworthy because they come from traditional providers with enough assets to ensure you can receive financial support. Many bank loans will include SBA loans that help you get funds guaranteed by the government.
Bank loans will require some protection to ensure the bank isn’t subject to much risk. Adding collateral or a personal guarantee can help, but qualifying for an SBA loan may be even better. Since an SBA loan is mostly guaranteed by the federal government, a lender will be more likely to offer this loan to someone.
Bank loans can often include hundreds of thousands or even millions of dollars. Since a traditional bank has access to more assets, it’s easier to find a high-value loan that fits your needs.
- Online Lenders
Online lenders are popular for offering more lending options. These online s often provide more options for high-risk borrowers. Many of these lenders also streamline the application process by automating many functions, helping you get your money in less time. Whereas bank loans can take weeks for you to receive approval, online lenders can get you your money in days. You might even get approved during the same day if you apply early enough.
The amount of money you’ll get from an online lender will also vary, with many lenders offering less money on average. While you won’t have as much borrowing power from an online lender, you’ll still have access to plenty of funds.
Be advised that some online lenders might charge more for their loans than traditional banks. Online lenders often charge extra for the convenience of handling a loan online.
- Alternative Loans
Finding a loan from an alternative provider outside a traditional banking system can help, but be cautious when using this option. Since an alternative lender won’t have the same infrastructure or backing as a regular bank, it might ask for collateral or a guarantee on your loan to reduce the possible risk.
Alternative loans might also cost extra due to the minimal infrastructure. Many of these lenders also offer loans to s with poor credit histories, so the potential for you to spend extra on a loan is high.
- Microloans
Microloans are also available through the Small Business Administration. A microloan will provide up to $50,000 to help startups expand. You’ll pay back the loan like any other option, but the monthly payments are typically smaller because you’re borrowing less money.
Microloans work well for new entities or those who have minimal expenses to cover. But the terms for microloans are often the same as other loans, and interest rates can still be high. Check with a microloan provider for details on what you could get from a loan.
A Final Word: It’s All About Dependability
The process for how to get approved for a business loan is critical for all businesses to follow. You can receive approval by contacting a lender and providing enough info on what you want to get. You’ll find various choices for use, but you’ll need to review your current situation and determine whatever might find your needs the most.
The most essential part of finding a business loan is to prove that you’re dependable and capable of paying off your loan. Whether it entails producing an elaborate business plan or providing a guarantee or collateral on your loan, you’ll need to prove your dependability. Lenders will want to see that you can cover the expenses in your loan before you can get anything.
Contact us at the CapCompass if you have further questions on how to get more from a business loan. Our team can help you review your current situation and identify a lending plan that fits your needs.