Businesses are highly demanding regarding finances. Every business person needs money when starting a business and keeping it running. However, it is not always that everyone can get money access. The good news is that a business loan can come through and provide us with the funds we need. However, what exactly is the process to get a business loan? 

Below is a simple guide that will help you through how you can evaluate options and apply successfully.

Start by Determining the Reason you Need the Loan

Just like everything is driven by purpose, you need to have a purpose for borrowing. Establishing the reason in advance will help you apply for the right loan. There are several reasons you may want a business loan. 

As mentioned earlier, you may need money to start a business. You may need funds to purchase new equipment, and you may also want to fund business operations- daily expenses, paying the rent, and covering payroll.

Determine the Loan Amount

Once you have established the purpose of your loan request, ask yourself how much money you actually need. You need to determine an amount that matches and will satisfy your business needs accordingly. 

Don’t just come up with any amount. Too much debt that you do not need may get you in greater debt, which may hurt your business- business loans come with interest charges. Conversely, an amount too small may not be what you need to fund the business and may make you miss opportunities. 

The crucial thing is to strike a balance between the funds needed and the goals to be met.

Check if you are Eligible

You will find that lenders for business loans have varying requirements for applications. All in all, you need to see if you can actually qualify for a loan. Checking if you are eligible is about analyzing what a lender requires from you and only applying if you tick the boxes.

One of the factors a lender may look at is your credit score. If you have bad credit, you may want to look at lenders who do not use this metric, like online lenders. Other lenders may want you to place collateral on your loan or provide a personal guarantee in case of default or failure to repay. These can be inventory, equipment, or personal assets. 

For a business that has been in operation, annual revenue may be a relevant factor for other lenders. The time of business operation can also apply, especially for traditional banks.

Make Lender Comparisons

Different platforms may provide you with a business loan. The main ones include online lenders, traditional banks, and microlenders. 

Online lenders give different loans to business owners. You can even get a merchant cash advance (MCA). This is typically an advance transaction repayable using a percentage of your company’s future sales. MCAs tend to be quite expensive, but they are also ways to get quick funds without fixed rates or collateral. 

Online lenders have higher interest loan rates, and their requirements are less stringent than traditional banks. They are particularly lenient on credit scores. Your loan can be approved faster in hours or on the same day. 

Traditional banks may give business loans at lower rates than online and microlenders. However, they follow more stringent application criteria and requirements. They will typically not be your best shot if you need quick funds access. 

Microlenders are primarily non-profit organizations and will usually be designed to help business owners who can’t access traditional loans. Their eligibility requirements are relatively less stringent. Some may give social capital approved loans.

You can also check Small Business Administration (SBA)loans. They are typically pricier than bank loans but still affordable, and you can qualify easily. They have maximum interest rates and will normally require guarantees.

It would be best if you made comparisons to settle on a lender that will provide you with a loan with the best terms per your needs. You have to compare the loan’s fees and the chargeable interest rates by various lenders. Always check if you can afford the loan using a business loan calculator. It will also be useful after you have been given a loan offer.

Put Together Required Documentation

When getting a business loan, a lender may request various documents. These can be documents with personal information. They can also provide information about other business partners or owners. 

You may be requested for business licenses, tax returns, bank and financial statements, building leases, profit and loss statements, credit reports, articles of incorporation, legal business documents, and, if applicable, an existing debt schedule e.t.c 

Based on the lender you have settled on, gather the documents as needed. If you are not sure what documents are required, ask the lender before applying.

It is always best to organize your documents in one location.

Make and Submit the Application

Once you have looked at the metrics above and feel satisfied, it is time to make the application. Even if you have seen different legible lender options, it is not wise to make multiple loan applications, however desperate you may be. If the lenders do a hard pull, your credit score can be hurt.

You will usually make your loan application on paper or online. Some of the information you may need to provide include; your name and that of the business, the loan amount required, your Social Security number, and the loan’s purpose, to name a few. Different lenders require different information.

After you are done with the application and have submitted it, you only need to wait for the lender to make an approval decision. A lender will review your application, and if it is approved, the lender will work on settling the request. 

You may need to sign an agreement before the funds are issued or transferred to your account. Never sign the agreement if you do not fully understand the loan’s terms. 

One essential thing for the application is to understand the fees required, as they will eventually affect your APR. Ask if there are any application, origination, or SBA loan guarantee fees. You will also need to be certain about credit report fees and determine if prepayment and late payment fees apply. If you are going for a merchant cash advance, check to see that it is as affordable as quoted rates.

Always ensure that your chosen lender answers every question regarding the loan’s structure and cost. 

Final Thoughts

As a potential or already established business owner, waking up and deciding to apply for a business loan shouldn’t occur to you. You need to have a solid plan and take time and effort before applying. Whether you need a big or small loan, the bottom line is that any loan is a debt and must be repaid fully.

If you do not know where to start, use our guide above to make your loan application process less straining and successful. If you are already operating and maybe you have been denied business loans before, you can also use the guide to see where you have been going wrong.