As your business continues to make a name for itself, it’s natural to set your sights on eventual expansion and development.
And as with many growth business decisions, executing these C-level ideas into reality often requires a sizable infusion of capital.
One common way businesses can acquire this funding is by applying for a business loan.
This type of financing is a lump-sum or form of credit that businesses can obtain from a lender, usually a bank, a credit union, or an online lending service.
Getting a business loan may seem daunting for business newcomers; however, the process is actually quite straightforward. But before getting a business loan, it’s also important to have a good reason why you need one.
Here’s everything you need to know about preparing for and acing your first business loan application.
When Is The Right Time To Request A Business Loan?
Requesting a business loan every chance you get isn’t exactly the best business strategy. The timing of your loan is key to maximizing its effectiveness.
When you request a loan with no sound strategy or limited cash flow, it can result in uncontrollable debt that you may not be able to pay off, resulting in bankruptcy and the downfall of your business.
As such, it’s important to time your business loan application appropriately. Here are some scenarios wherein taking out a loan is appropriate:
- Initial business costs
- Equipment acquisition
- Land and property expansion
- Restructuring and hiring
- Improving cash flow for daily expenses
- Purchasing inventory
- Funding business operations
If you’re low on cash and you have a loan due soon, you can also take out a business loan to pay off the first loan. This is a process known as refinancing. This can be beneficial in paying a lower interest rate for your loan that may arise from late repayments.
Business Loan Application Process
Once you’ve dealt with the “why” of securing a business loan, it’s time to get through the process of securing the loan itself.
Here are the general steps for applying for a business loan application:
- Research various lending options: Small businesses have access to many types of common lenders: online lenders, banks, microlending, and more. There are even loans for acquiring equipment. Scour around and find the best fit for your business.
- Evaluate your eligibility: Ensure that your credit score is high, your business is established and registered, and that your business operations are running smoothly. These factors can be determining factors of your approval.
- Gather documents and requirements: Lenders will request certain documents for compliance sake. These include tax returns, financial statements, cash flow statements, business licences, and your business plan, to name a few.
- Fill up applications: Request an application form from your chosen lender and fill in the blanks with your and your business’s information.
- Submit and wait for approval: Once you’ve gathered the documents and filled up the form, submit it to the lender and wait for approval. They will usually call you or send you an email.
The process may have slight variations depending on what type of loaning option you picked.
Regardless, you need to communicate with these lending institutions and vet them so that you can have peace of mind knowing your dealings are transparent and achievable.
You can read this guide to business loans for more information.
The Qualities Of A Good Business Loan
If it’s your first time applying for business loans and are unsure whether you’ve scored a good deal or not, you can use the following metrics below to compare various loans.
- Repayment term: The duration of the loan itself. This can range from as little as a year to as high as a decades-long repayment term.
- Annual percentage rate (APR): This rate accounts for the entirety of the annual fees of the loan itself, including the interest rate and variable monthly fees. This tends to carry the most weight in terms of narrowing down the decision.
- Upfront fees: The total upfront charge for the initial application.
- Approval rate speed: If you need your loan amount ASAP, some lenders can give it faster than others.
Conduct a thorough comparison of your vetted business loans using the aforementioned factors, and align it with your business’s capacity to meet its contractual obligations.
From there, you can select your business loan and push through with your funding plans.
5 Types Of Business Loans
Loans can come in all different form factors, from personal to business.
In fact, many business owners often find themselves taking out a personal loan instead of a business loan when they lack the credit history to get approval for a standard business loan
That said, there are many types of business loans that you can apply for in case your latest loan application doesn’t work out.
Here are some of the most common types of loans that first-time business owners can consider:
- Short-term business loans: These loans are ideal for budding businesses as they offer low interest rates and lengthy repayment periods in Australia. The equivalent of this microloan scheme in the US is called SBA loans.
- Invoice financing: This type of financing uses your outstanding invoice as collateral. This can help you acquire a loan amount equivalent to the amount due to customers.
- Working capital loans: These loans are specifically used to help run the daily operations of the business.
- Equipment financing: This type of financing helps businesses buy equipment on credit, typically through a hire purchase or operating lease.
- Business lines of credit: This type of business loan grants you a fixed loan amount annually. This loan is taken out to help the business manage cash flow and is typically based on your accounts receivable.
There are many other types of business loans out there, such as term loans, startup loans, peer-to-peer loans, and more. That said, the loan types above cover the most common types of business loans you can find.
Secure Vs Unsecured Loans
Small business loans for startups can be secured or unsecured. Secured loans typically have lenders requiring you to submit collateral as a guarantee. Lenders who give out unsecured loans don’t require any collateral on the business’s part.
While unsecured loans may seem more enticing at a glance, they often come at a higher interest rate due to the increased risk on the lender’s part. Secured loans have a lower interest rate, but the lender can seize the collateral if your startup fails to pay back the loan on time.
The better option will depend on your business’s unique set of circumstances. Some startups don’t have enough assets to go the “secured loan” route, for instance, so the best option in that case for them is unsecured loans.
There is risk involved whichever way you turn, so be sure to weigh your options accordingly and select a loan type that your business can handle best.
How To Increase Rate Of Approval For Business Loan
Scaling up your new business requires a tremendous amount of effort and forethought. It can be devastating to go through all the steps only to be rejected.
If you want to ensure your application is successful, here are some tips to help you maximise the odds of an approved business loan:
- Maintain a steady cash flow
- Submit and organise all financial documents
- Fulfil all necessary lender requirements
- Improve your credit score
- Ensure your business plan is sound
- Request a reasonable amount of cash
By doing the above, you can have an easier time acquiring a business loan and ensuring that all your hard work finding the right lender doesn’t go to waste.
Good luck with lender hunting!