If you are planning to get a loan to support your already existing business or start up a new business, getting a business loan won’t be a bad idea, but before applying for a business loan.
It is critical to understand what they are, the standard terms and language used in business loans, what you’ll need to apply and qualify for a business loan, and how to get a business loan.
If you are yet to know how to get a business, don’t worry because we got you covered. All you need to do is to read this post to the end.
Business loans are a source of funding that is used exclusively for business-related expenses. It provides business owners with financing either as a lump-sum payment or credit line. See the Difference Between Business Loan And a Personal Loan.
In exchange for this funding, your business agrees to repay the money it borrows over time, plus interest and fees. Depending on the type of business loan, your lender may require daily, weekly or monthly payments until fully repaid.
Moreover, business loans are either secured or unsecured. Secured loans require collateral, something of value the lender can repossess if you fail to repay back the loan, like real estate, equipment, cash or investments.
Unsecured loans, however, do not require collateral. Instead, you typically have to sign a personal guarantee agreeing to accept personal liability if the business doesn’t repay its debt as promised.
Here Are Steps on How To Get A Business Loan
While every bank has its own procedures for processing loan applications, there are six basic steps to expect when applying for a business loan.
1). Reach Out to a Lender
There are countless banks to choose from when selecting a lender for your business loan. Shop around for a bank that has offerings suited to your needs with competitive rates and terms. It is okay to speak with more than one lender to ensure you get the best rate.
2). Provide Information That Best Meets the Business’s Needs
When you speak with a lender about a business loan, they can help you find the type of loan best suited to your needs. Lenders will gladly explain all the terms and associated costs with the type of loan you are considering.
3). Lender Requests Documentation
Next, the lender will ask you to provide the supporting documentation we covered earlier in this article to assess your application. Depending on your lender, the required documentation may be submitted electronically or physically.
4). The Business Loan Goes into Underwriting
Loan underwriting is the process in which a bank, loan provider, or online lender reviews your application and accompanying documents to determine the risk and benefits of loaning you money.
The underwriting time period varies by lender, but on average, a business loan takes two weeks to underwrite once all information is received and sometimes happens much quicker.
Once a borrower’s credit, capacity, and collateral have been assessed and the organization is deemed eligible for the loan, the lender determines the amount, interest rate, and repayment terms they will offer.
5). Closing of the Loan
To close on the loan, both the lender and the borrower will have to sign documents agreeing to the terms.
6). Receiving of Funds
Time to receive your loan! After the loan has closed, the borrower will receive the funds via wire, account transfer into their account, through a closing attorney, or as otherwise agreed to in the loan documents.
Factors Most Lenders Consider for Business Loan Approval?
So now that you know have known how to get a business loan, let’s take a look at what’s involved in the approval process.
Getting approved for a business loan involves the lender evaluating various factors, depending on the type of loan you are seeking. See Documents Required For A Business Loan.
These same factors influence the rates, terms, and amounts for which you can get approved. Below are six important aspects that are commonly considered during the business loan qualification process.
Cash flow is the net amount of cash and cash‑equivalents being transferred into and out of your business. If you have positive cash flow, it shows your company is adding to its cash reserves, allowing it to reinvest in the company, pay out money to shareholders, or settle future debt payments. These are all good things, and they will leave a lender optimistic.
There are three forms of cash flow: operating, investing, and financing. Operating cash flow includes all cash generated by your company’s primary business activities, like the sale of products and services.
Investing cash flow consists of all purchases of capital assets and investments in other business ventures. Financing cash flow includes all proceeds gained from issuing debt and equity and payments made by the company.
Debt service is the cash required to cover the repayment of interest and principal on any debt your business has for a particular period, which could be calculated monthly or annually.
Think of this as trustworthiness or reliability. The lender wants to know that you can safely and realistically cover the loan payments.
An organization’s debt service ratio helps determine the borrower’s ability to make debt service payments because it compares the company’s net operating income with the amount of principal and interest the firm must pay.
If a lender decides that a business cannot generate consistent earnings to service debt, the lender will most likely not make the loan.
A credit score is a valuation based on your credit in use, credit history, payment history, and amounts owed versus income.
Most business loan applications take your credit score into account, but each lender will have its own requirements. The quality of your credit score will also affect the interest rate and other terms of your loan.
Your annual revenue is equivalent to your total yearly income, which includes gross sales and any other money your business brings in, like rent.
Many lenders have different criteria for annual revenue minimums based on the type and length of the loan you are seeking.
For SBA loans, your revenue can’t be higher than the SBA’s definition of a small business, which varies by industry.
Any business that applies to borrow money will need a formal written business plan. A business plan is essentially a road map for how your business will operate, earn money, and succeed.
The document should clearly outline the business’ goals, the methods for how these goals can be attained, and the timeframe within which these goals need to be achieved.
Most lenders will want businesses to secure their loans with collateral. Collateral is an asset the borrower pledges to the lender for the life of the loan.
If the borrower defaults on the loan, or can’t make the required payments, the collateral can be seized and sold to repay the outstanding balance. Lenders use collateral to reduce the risk of losing money on the loan.
Vital information that you need on how to get a business has been discussed in this article, we believe it was helpful to you. If you want to make more inquiries on this topic, you can let us know by sending a message to us in the comment box.