Business loans are primarily intended for business purposes only. Like other loans for business, a debt is created that will be paid with interest added. How to get a business loan is important for a business to grow?
Why take a business loan?
To buy real estate to expand business operations. A successful business firm needs to purchase real estate to expand their operations if the firm is turning a profit and has positive forecasting.
To purchase equipment
One of the best reasons to apply for a loan is to purchase equipment. You can take a tax write-off and can also use the equipment for life.
To purchase for an inventory
A bank loan is needed to purchase a large number of goods prior to an inventory. Bank loans for this purpose are generally short-term in nature.
To increase working capital
Working capital money is used to manage daily operations. Small business owners need funds until their earning assets are sufficient.
Most Important Business Loan Requirements
Personal Credit ScoreA personal credit score of about 700 and above could give you access to a wide range of business loan options.
Personal & Business Tax Returns
Provide advance planning by keeping your business and personal federal tax returns for the past two taxable years.
Provide a snapshot of the financial health of your business through the robust balance sheet of your business.
Profit & Loss Statement (P&L)
P&L shows the amount of revenue you bring in, the way you spend that money, and how much money is left over as the period ends.
Bank statements will give them an idea of your cash flow and how well you handle your money. Make documents easily accessible online.
Time in Business
From the lender’s perspective, the longer the business has been in operation, the better as it proves that your business withstands tough times.
Use of Funds
Lenders will also want to know what you plan to do with the money; some small business loans have strict requirements about how funds are used.
Steps to getting a business loan for bad credit
Loans with low-interest rates and long terms on loans are offered by both national and community banks and you will find nothing comparable to these loans from online or other non-traditional lenders. Here is a brief look at the main types of traditional bank loans available through banks:
A term loan is the basic type of business loan and can be secured with business assets or unsecured; they provide capital that’s payable monthly over a set year period. SBA Loans – Small Business Administration or SBA loans are used for business expansion, real estate and equipment financing, working capital, to start a business and various other purposes.
Business Lines of Credit
A lender approves the credit line that you used as a pool of funds and drawn from the lines of credit online lenders whenever you want or need to and you pay interest only on the money you draw.
Equipment Loans – Many banks offer vehicle and equipment financing and can finance 80% to 100% of the cost of your equipment, so you don’t have to put up a big down payment.
Business Credit Cards
Credit cards provide business owners with a convenient way to make purchases as banks offer rewards points and introductory interest rates as incentives on their credit cards.
All of these types of financing can be qualified for business owners with the best credit but the process of bank loans are the long process that is definitely not for business owners who need speedy funding.
Five steps to get a business loan
Step # 1 – Why do I need this loan? Your answer will be any one of these 4 categories: (i) to kick-start your small business; (ii) to use funds for managing day-to-day expenses; (iii) to grow your business; and (iv) to have a safety cushion in case of business emergencies.
Step #2 – Decide which type of loan is right for you. – Why you need the loan dictates which type of small business loan you want. It is virtually impossible to apply for a loan to start a new business in your company’s first year.
Cash flow is required by lenders to guarantee that the loan will be repaid so startups are immediately disqualified for any financing.
Your other options are to depend on business credit cards, borrow from friends and family, using crowdfunding, personal loans or a microloan from a nonprofit lender.
Step # 3. Opt the best small-business lender type –There are several other places to apply for small-business loans: get from banks, select non-profit microlenders and go for online lenders.
Of the loans you qualify for, choose the one with the lowest APR, as long as you are able to handle the regular repayments.
Use the bank when: You can provide collateral, have good credit and don’t need cash fast.
Use microlenders when: you can’t get a traditional loan because your company is too small; microlenders are typically lending short-term loans of less than $35,000 but the APR is typically higher and compared to bank loans although they are nonprofit.
Use online lenders when: you lack collateral; you lack time in business and you need funding quickly.
Step #4 – Find out if you qualify – One factor that determines which loans you’ll qualify for is the place you occupy on the credit spectrum.
Secure your credit report for free from any of the three major credit bureaus, namely:
(i) Equifax, (ii) Experian and (iii) TransUnion — per year.
Your credit score is available for free from several credit card issuers, from personal finance websites, like NerdWallet.
Borrowers that attained credit scores of at least above 680 are offered by banks the least expensive type of small-business loans. Aside from considering your credit score, lenders will inquire how long your business has been operating.
One year business operation is a requisite to qualify for most online loans for small-business and at least two years’ period operating a business is needed qualification for the majority of bank loans.
Requirements by most lenders is a minimum annual revenue with amounts ranging anywhere from $50,000 to $150,000 to fund their business.
Know your credit score and inquire of the minimum amount a given lender requires before you file your application. Daily or twice-monthly repayments are required by some online lenders so factor this requirement into the payment equation if that’s the case.
Step #5 – Now, gather your documents Once your options are compared, you are ready to prepare a loan application that fits your financing needs and that you qualify for.
Within two weeks, you can even apply for multiple small-business loans without affecting negatively your personal credit score.
A combination of the following documents must be submitted with your application: Business and personal tax returns Business and personal bank statements Business financial statements Legal documents such as business articles of incorporation, business commercial lease, and business franchise agreement.
How to get a business loan is indeed a great obstacle that small businesses have to confront as lending standards by banks are rigid and tight.
Financing from outside is available to begin and sustain a business or to cover daily expenses, to include payroll as well as inventory but if interest rates are sky-high, with no long-term payments and lacking collateral requirements, interest rates are extremely hard to meet. However, through your own initiative, you may still qualify for a bank loan by gaining more knowledge of their requirements.