Starting a business can be an exciting but daunting prospect. With so many steps to consider, it can be overwhelming to know where to start. One of the most important steps is to secure financing, and getting a business loan is one of the most popular and reliable ways to do that.
Securing a business loan can seem intimidating, but it doesn’t have to be. With the right research, preparation, and understanding of the process, you can be on your way to owning and running a successful business. This guide will provide the necessary information to get a business loan.
Why is a Business Loan Important?
A business loan is one of the most common ways for a new or existing business to secure financing for expansion, renovation or even startup capital. Traditionally, these loans require the assets and equity of the business as collateral.
When you obtain a business loan, you not only obtain the funds you need to proceed with your project or start a new business. Businesses can’t grow without resources and the money to support them.
This is why loans are so important. They provide quick and easy access to capital so that you can expand your business and use the increased profits to pay back the lender over time.
A business loan can be a great way to secure financing for your business. However, it’s important to understand the different types of business loans, what they require and why they are important to your business.
Types of Business Loans
The different types of business loans are based on what you are approved to use the money for. Most loans have restrictions on what the funds are intended for, and you will have to prove that you used the funds appropriately.
The type of loan that you apply for is important because it determines many of the other features and restrictions for the loan, such as the interest rate or payment schedule. Most business loans are secured by the assets of the company. The business could be in a start-up phase or it could be an established company that is looking for additional funds for expansion.
There are a few different types of business loans, and each has its own requirements and benefits.
Term loans are among the most widely used in business and among the easiest types of loans to get. In a nutshell, you get a certain amount of cash from a lender with a predefined time limit to pay it back. This is called the “term”, and you have to pay back the entire loan within that time.
These loans are usually very simple and easy to manage, and have no limits on what you can use the money for. However, it is easy to overdo it with these loans. Make sure that you only take what you need and can pay back.
These loans are unsecured, but the business owner or owners must have a high-quality credit score (usually above 680). These loans are often used for short-term cash flow issues, or for ongoing operational expenses.
You would only take out a blanket loan when you have cash coming in the future (i.e. when clients pay an invoice, etc…) but you need cash immediately to run your business. Once that cash comes in, you need to immediately pay back this loan as fast as possible.
These loans are often used as a stop-gap measure between financing periods, such as a construction project that requires financing before the first payment is due. They are similar to blanket loans, but they are designed for short-term, specific use circumstances to keep a program or project running until it brings in expected cash.
Working Capital Loan
These are sometimes called asset-based loans because they are unsecured loans that are tied to the value of the business assets. These loans are very commonly used in the service and retail sectors. You use this loan to, for example, buy retail inventory, then pay it back as you sell that inventory.
What Are the Requirements for Getting a Business Loan?
Any loan that you apply for is going to have restrictions on who qualifies for it. Know the requirements before you apply so that you can be sure that you fit those requirements and any restrictions on the loan.
There are a few requirements that are standard for most business loan applications.
Most lenders want to see that you have a good business history before giving you any money. This is particularly important for business loans because you are asking for someone else to take an unsecured risk.
Lenders will want to see that you have created a financial plan that shows exactly how you plan on paying the loan back with a realistic timeline.
You may need collateral, or something of value, to offer as an incentive for the loan. If you don’t pay the loan back, you may forfeit what you put up as collateral. You will likely need something that is the same value as the amount you are taking in the loan.
Factors to Consider When Applying for a Loan
Before you agree to the terms of a loan, there are several factors that you should consider. These factors include:
There is a wide range of business loan types, each with its own requirements and benefits. It’s important to understand what type of loan works best for your business.
The amount of money you are applying for is critical. Borrowing too much could leave you in a difficult situation if something goes wrong in your business.
The repayment terms are critical, particularly the interest rate and how often you will make payments. It’s important to shop around and get a few loan quotes before deciding which one is best for your business.
What Information Should You Provide When Applying for a Loan?
You should provide a wide variety of information when applying for a business loan. This includes things like income, assets, and liabilities. Some examples of what your loan officer will ask for include:
- Current income
- Earning potential
- Liabilities (what you owe money on, debt, etc…)
- Monthly expenses
- Other expenses
- Repayment plan
- Business development plans
Every loan has its own requirements that changes based on the loan office, your situation, the type of loan, and the lender. Work with the loan officer to understand what information you need to provide. Then you can process the application quickly and with as little hassle as possible.
How to Compare Lenders and Terms
As you shop around for business loans, you will likely come across a number of lenders and terms. When comparing lenders, it’s important to look at more than just the interest rate.
You need to consider things like any fees associated with the loan, the repayment terms, and the ease with which you can make payments when it comes time to make repayments.
When comparing terms, it’s important to make sure that it meets your needs and the timeline you have set for repaying the loan. It’s also important to make sure that the business loan terms are in line with your financial situation and your overall financial situation.
When it comes to comparing lenders, you want to make sure that each lender is legitimate and has the ability to make the terms you are seeking. You also want to make sure that they compete in the marketplace and that they are properly licensed.
Alternatives to Small Business Loans
If you cannot find a small business loan that matches your needs or you have been declined for a loan or credit, there are other options for you.
Business investors and individuals who have money to lend may be the alternative you have been looking for. You can find these types of investors through websites like Funding Circle or Lending Club—online lending platforms that match borrowers with lenders who are willing to fund their loans.
Be sure to check each lender’s terms, and read the fine print to make sure that the terms and conditions are fair and reasonable for both parties.
Use Funds To Build Your Business Effectively
No matter which type of loan you take, the key to success is to use those funds to build your business effectively. That means investing in resources and services that add value to your offering, solve specific problems, and create a better customer experience.
For example, hiring an answering service can do all of those things and help you grow your business in terms of revenue. The better service you offer customers, the more likely they are to buy from you and recommend your company to others. As you grow your company, don’t forget to look into how support services, like an answering service, can make a big difference in your company’s success.
If you’re ready to get started with a professional answering service, we’re here to help. Contact Answer Aide by calling (866) 427-3500 or by filling out our online form. We’re happy to partner with you to support your business while it grows.