How to get a business loan in a few simple steps

When you start a new business, looking for opportunities to grow is always a priority. But most of the time you need money to invest in your business. Find out how to get a business loan in a few simple steps.

Startups are a popular way to introduce new business ideas to the market. But business owners haven’t necessarily had it easier with getting enough money to keep their businesses growing.

Fortunately, there’s been a shift in the way of thinking about startups and small businesses. A few different ways of raising money have come into existence in recent years.

What is a business loan and how does it work?

In simple terms, a business loan is any kind of a loan that is available and offered to a business entity, not an individual person.

Applying for a business loan usually requires you to state why you need the additional funds and what the capital will be used for.

There are a number of different types of business loans, some more suited to the needs of startups and small businesses, while others have requirements that can usually be fulfilled by more developed companies.

Banks are the most well-known institutions from which people borrow money but non-traditional lenders have significantly developed their offer. You no longer have to go for a traditional bank loan to finance your business growth.

However, no matter if you decide to apply for a bank loan or look for alternative financing options, there are some features that will most likely be the deciding factor in your final choice.

Short-term and long-term loans

The duration of your loan agreement is directly related to the amount you borrow, and how comfortable the repayment process will be in the future.

It seems logical to always choose a loan with the shortest repayment time, as this allows for a lower interest accumulated over the whole repayment period. Short-term loans are, however, associated with smaller amounts lent.

As a rule of thumb, the higher the amount you borrow, the more time it takes to repay. Thus, short-term loans are expected to be repaid within a few months up to a year.

Because of lower amounts and shorter repayment periods, applications for these kinds of loans take less time to be considered and approved.

The background credit check is also less complex and less detailed, and this allows for a relatively quick decision from the lending institution.

Shorter repayment time usually comes with higher and less flexible interest rates. This may have a direct impact on how easily your business copes with the repayments. Finishing that process quickly and being a debt-free business is a great position to be in but you need to make sure that higher repayments don’t strain your monthly budgets.

If you need more money, a long-term business loan is usually the go-to choice. That is mainly because the amount borrowed is difficult to repay over a short period of time. It also allows a higher level of comfort in negotiating interest rates and other additional costs.

Long-term loans often come with thorough background and creditworthiness checks. There is also a high probability that warrants and/or guarantee will be a part of the agreement. In this case, the estimated value of your collateral may determine the maximum amount of money you can get.

Collateral security

As mentioned above, borrowing large sums usually comes with some sort of collateral required by the lending institution. A secured loan is an agreement in which you state what will become the collateral if your business is unable to repay the loan.

This could be a property, valuable equipment, etc. that is basically owned by the bank until you repay the loan.

Unsecured business loans are safer for the owners but they usually come with high interest rates and small amounts lent.

Interest rate

It seems obvious that everyone wants to go for a loan with the lowest interest rate. As it’s one of the main factors that business owners looks at when choosing the best loan for them, it’s not only the percentage that is important.

You should consider if you want to repay a fixed rate or go for a variable rate. The second will then change throughout the repayment time according to the market – your rate may go up or down.

This may seem like a great opprtunity for getting lower interest rates at times but there is always risk associated with the dynamic nature of the market.

A fixed rate means you repay the same the same amount with each reapyment. No opportunities for a spontaneous drop of the sum you repay each month but, at the same time, no risk of it going up.

Where to apply for a business loan

Banks seem to be the obvious answer. With so many of them at the market at this moment, their offers have become more attractive and competitive for small and medium business owners.

However, banks are not too flexible when it comes to meeting the requirements for a loan or negotiating its terms. For some business owners, getting a bank loan is either too expensive, time-consuming or even simply impossible, due to the the type of that business.

An alternative option is, for example, revenue-based financing. It’s a model of lending money to businesses in which the repayments are fully flexible because they depend on revenue. As it’s not a typical bank that provides the capital, the application process is shorter and less complex.

To read more about revenue-based financing and decide if it’s the right business loan option for you, click here.

Decide on the purpose of the loan

When speaking about large sums, the lending institution will probably want to know what you’re planning to spend the money on. And it makes sense for them to have such an expectation.

The way you invest the loan has a direct impact on how well your business does and if you’re able to pay back the loan.

Buying inventory, investing in new systems or hiring new employees will probably go well with a bank assessment process. But if you were to purchase a 3D printer just because you find it an interesting device, this could get less approval.

In general, main reasons for small and medium businesses loan applications are expansion, hiring new staff, stocking up on inventory, investing in new equipment, improving cash flow, and sometimes even building up credit history for a bigger loan in the future.

Keeping your reasons for the loan in mind, analyse how much money you actually need.

Borrowing too much will leave you with a large amount of money to repay and can cause financial disadvantage in the long run. Borrowing too little, on the other hand, won’t cover your expenses which is the main reason for taking the loan in the first place.

What else influences yours and banks’ decision about the loan?

Your business industry

Statistics and prognoses may play a significant role in the decision making process of applying for and granting loans.

For you, it is important to analyse whether industry has a significant impact on the predicted future of your business, with regard to how much money you want to borrow.

For a lender, it is the estimated success your business can have in a certain industry that influences the decision about granting the loan.

If you’ve opened a successful organic food shop and it’s been the only one in your area for the last few years, you probably want to expand it and invest a lot of money.

But if in the last couple of months, a few more similar shops have appeared in the same area, chances are that your growth won’t be as dynamic as before.

This will also apply to seasonality of businesses. Uneven (and unstable) revenue throughout the year doesn’t look good on a loan application. If your businesses is highly affected by seasonality, you may want to consider looking for alternative options, such as revenue-based financing.

Credit history

This is an obvious one. Banks analyse your credit score and history to decide whether it’s safe (and profitable) for them to lend you money. If you’ve had no troubles repaying loans in the past, the potential lender will see this as a plus.

This is also the reason why so many new (and relatively new) businesses struggle with getting loans. Banks analyse loan applications based on a set of criteria that are rarely flexible.

If your business doesn’t have a long enough and/or good enough credit score and history, its growth potential and rate will play a rather insignificant role in the process of analysing your application.

Time

Similarly to the one above, the longer your business operates on the market, the higher the chances that banks will be lenient towards your application.

In simple terms, more time gives you a better chance of building a solid credit score.

Cash flow

It’s not only about how much money you make and how well you’ve been managing your debts before.

Banks will be happy to see that your business is making money as this lowers their risk of granting you a loan.

But if the profit your business brings in doesn’t stay there for long, it’s not a good look. Monitor your cash flow as closely as possible as there’s a chance that the lending institution will.

Gather your documents

Whether you apply for a bank loan or decide to go with an alternative lending institution, you will have to prepare an application and a set of required documeents.

The amount of paperwork that goes with applying for a business loan depends on the lender and your business’ position.

Among the most often required documents, you will find:

• Legal documenttation (e.g. business licenses and registrations required for you to conduct business; Articles of Incorporation; Commercial Leases, etc.)
• Business plan
• Business and personal credit report
• Financial statements
• Collateral (description and stating the value)

When applying for a loan, you’ll know exactly what documents are required by the chosen institution.

Apply and… wait

This step may be the most difficult one as in many cases, you will need a lot of patience.

It may take months to get a response from a bank regarding a business loan.

Be sure that you include this time in your business plan when looking for new sources of financing.