In order to build a business and accelerate growth, many organizations –big and small– turn to business loans. While some entrepreneurs feel overwhelmed by the loan application process, it is actually quite straightforward and simple. In this article, we explain the ins and outs of business loans for every type of business owner.
Understand how loan applications are evaluated: Because lenders make decisions based on whether borrowers are likely to pay back loans, they typically select applicants based on various factors, such as cash flow, business experience, credit scores from credit reports, collateral, industry, and loyalty.
Cash flow: Periodic payments are part of borrowing money, so lenders need to ensure an organization can make these monthly payments. Consequently, lenders spend time closely examining an organization’s sales and expenses. In addition, many lenders also scrutinize invoices (paid and unpaid), as well as the organization’s future economic forecast.
Business experience: A successful track record of running a business and servicing debt are important to lenders. As a result, many lenders require one to two years in business so that the business can establish working capital. Because some startup small business owners do not have this business experience, they may have a challenging time qualifying for loans and business lines of credit.
Credit scores: Personal credit scores are frequently added to a business owner’s credit profile because these scores shed light on creditworthiness. So strong personal credit can mean more business loan options. However, it is not surprising that lenders will not look favorably upon business owners with a negative payment credit history due to late payments, judgments, or collection accounts. After all, this equates to high risk for lenders and financial institutions.
Collateral: Some lenders require collateral for small business loans. This means guaranteeing a loan with real estate, equipment, or other forms of collateral.
Industry: Being granted a business loan can sometimes depend on your specific industry. For example, some lenders tend to consider industries, such as adult entertainment, gambling, or brand new technology, to be risky when compared to more established and mainstream businesses. In fact, some lenders publish a list of restricted industries, so business owners can obtain this information before applying.
Loyalty: Existing relationships can sometimes be extremely helpful when it comes to loan applications. This is not surprising, considering lenders are more willing to loan money to the business owners who they consider to be reliable and less risky than unfamiliar entrepreneurs.
Become familiar with the different loan options: It is important to understand which type of financing will best meet your needs. While there are many different types of loans, below is a list of some common ones:
Traditional bank loans: These loans tend to have low rates, but they also tend to have strict criteria and a great deal of paperwork. Amounts vary and repayment can range from between 1 to 20 years.
Small Business Administration (SBA) loans: These loans, which provide low rates and good repayment terms, are typically available in various amounts up to $5 million. The process can take anywhere from several weeks to a few months.
Microloans: These loans provide small amounts of money ($500 to $50,000) to underserved entrepreneurs. As a result, they are generally geared toward business owners who have difficulty meeting eligibility requirements and do not have good credit scores.
Business credit cards: Many business owners use business credit cards to access borrower capital. These credit cards typically provide between $1,000 and $25,000 to business owners.
Lines of credit: This option is a popular source of borrowed capital for many entrepreneurs. Major factors include an entrepreneur’s credit profile and revenue. Amounts of credit range from $1,000 to $100,000 for qualified business owners.
Be aware of required loan documentation: Extensive documentation is usually needed for loan applications. Some of this documentation includes the following:
–Business and personal credit scores
–Business bank account statements
–Tax returns for business and personal tax accounts
–State business licenses and registrations
–Paid and unpaid invoices
–Business plans, including marketing strategies
Selecting a lender: Grasping the different types of lenders will help you decide which lenders provide the specific services you will need for your business. These include direct lenders, lending marketplaces, and peer-to-peer (P2P) lenders. When deciding on a particular lender, consider the following:
–How much money does your business need to borrow?
–What does your credit profile look like?
–Does your business need access to an ongoing line of credit?
–Do you need cash or credit?
–Have you made contact with the banks that you already have a relationship with?
–Have you considered putting up any personal or business assets as a form of collateral?
There is no question that business loans are vital when it comes to launching a new business or building an existing organization. These funds are typically needed to purchase inventory and/or equipment, rent operational space, hire and retain employees, or pay for miscellaneous expenses. While some business loans can be difficult for new companies to secure, the key to success is understanding the entire process, as well as the specific requirements.
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