Despite the enduring romance of the rags-to-riches success story, many entrepreneurs have at least some help when building their startup. 

Although ambition and tenacity are crucial, they regrettably cannot ensure the quick cash flow a company may require. What you should think about are business loans, which are essential for providing startup capital for new enterprises.

One of the most popular sources of funding for entrepreneurs wishing to launch a firm or meet other financial obligations is a business loan. But for any business owner, deciding whether to apply for a business loan is a significant decision that should not be made hastily.

This article will walk you through the process of asking for a loan and look at the various aspects that determine whether doing so is best for you and your company.

Why should you get a business loan?

This article will lead you through the loan application process and examine the numerous factors that decide whether applying for a loan is the best option for you and your business.This article will lead you through the loan application process and examine the numerous factors that decide whether applying for a loan is the best option for you and your business.

In fact, the US Small Business Administration (SBA) reports that over 61,000 loans were given out to small business owners in the 2021 fiscal year.

Not sure if a loan is for you? Here are a few telltale signs that you should consider one:

• Poor cash flow: If you don’t have enough working capital to pay for inventory or basic operating expenses, a loan may work for you.
• Expensive equipment costs: Businesses often use loans to fund expensive equipment to help manufacture products. 

• Advertising fees:Every small business needs advertising, but it can be very expensive. To help with fees, you might require a bank loan or company credit card.

• Hiring:Strong team players can be costly, but they also contribute to the culture, efficiency, and profitability of your business. You can build your firm by hiring the proper personnel with the aid of a loan.

• Emergency funds: There is always a chance for the unexpected, such as equipment malfunctions or natural disasters. A loan could be useful to keep your firm operating during these tough times.

It takes time to apply for a business financing. There are various measures you may take to get ready before submitting an application, regardless of the sort of loan you’re seeking for.

Applying for a company loan can take anything from a few minutes to many hours, depending on the lender. But making a potentially large financial commitment at the start of a new business is a significant choice, particularly for entrepreneurs launching wholly unproven business concepts.

At this stage, a little planning can save you a lot of effort later on.

How to get a business loan

1. Calculate how much you need
2. Write a business plan
3. Consider repayment terms
4. Talk to a financial adviser
5. Decide on a type of loan
6. Apply for the loan

1. Calculate how much you need

Use a loan calculator to estimate how much money you’ll need before you apply for a business loan. You must first decide why you require a company loan in order to respond.

The Federal Reserve Bank of New York found three core reasons US businesses take loans:

• Business expansion (64%)
• Operating expenses (45%)
• Loan refinancing (45%)

Consider the scenario where you have a modest but expanding home-based catering business and want to create a single brick-and-mortar facility where you will produce and market a variety of baked goods.

Our fictitious catering company will need a sizeable business loan only to properly equip one kitchen, and that’s before paying for commercial real estate and licences, at an average cost of $95,000 for cooking equipment alone.

It is important to take into account charges outside initial investments when determining how much cash your company will require. A professional-grade kitchen may cost, on average, $95,000 to fully equip, but what about:

• Maintenance costs
• Commercial insurance
• Utility costs

There is much more to think about than just the new hardware’s asking price, which is simple to concentrate on. Because it will directly impact how easily a borrower can meet their repayment obligations, this can be particularly crucial for companies in notoriously competitive sectors like the food service industry, which can take longer to become profitable.

2. Write a business plan

The majority of private lenders who offer traditional business loans will not process a loan application unless it is backed by a thorough business plan. The future direction of your business is mapped out in a strong business plan. It’s very difficult for a potential lender to determine whether your project is commercially viable without one.

Several internet lenders have developed in recent years; these lenders either do not require formal business plans as part of their loan application procedure or have done away with the application process altogether.

For instance, there is no application procedure for Shopify Capital, and qualified businesses are preapproved based on a number of factors related to their Shopify shops, such as total sales, in a manner similar to how Amazon Lending prequalifies specific Amazon merchants.

This kind of financing can be a great choice for established businesses that want to expand their footprint in a financially sustainable way.

I just didn’t want to deal with the whole process of going through traditional lending—I wanted to focus on the business. A traditional loan felt cumbersome and more restrictive. Shopify Capital has a different mentality to it. It’s so easy.

Tracey Hicks, Founder, All Things Real Estate

Despite this, a lot of lenders give short-term loans with higher annual percentage rates even if they don’t demand a formal business plan as part of the application process (APRs). A higher APR indicates that a larger portion of a loan’s repayments are allocated to interest rather than principle.

In the end, only you can determine whether a business plan is necessary to back up a small-business loan application. If so, you may start creating your business plan by downloading the helpful template below.

3. Consider repayment terms

Making a repayment plan for your loan is your next step. Regarding the monthly payment you can make, be honest with yourself. Take into account external variables like supply chain disruptions, seasonal slowdowns, and even sociological shifts.
Your monthly payments will be established by a lender based on a number of variables, including:

• Loan type
• Business profitability 
• Business type and how long it’s been operating
• Business owners income
• Credit history

Your credit history shows how responsible you are at paying your debts. It directly affects your interest rates. 

• If you have good credit, you’ll most likely be eligible for a lower interest rate on your loan.

• If you have bad credit, your monthly payments will be significantly higher and may even be excluded from qualifying for a loan. 

Small business lenders provide a wide range of lending choices because they recognize that every company is different. The time between payments varies depending on the loan arrangement. Know how long it will take to repay any loans you intend to take out.

Here are some common loan types and their average repayment periods:

• Term loans: Up to 10 years

• Microloans: Up to 6 years

• SBA loans: Up to 10 years for working capital and fixed assets

• Business lines of credit: Up to five years

• Invoice financing: A few months

• Equipment financing: Up to 10 years

4. Talk to a financial adviser

Before selecting a loan, consult a financial advisor. They will gain knowledge of the different financial organisations’ loan schemes. As a result, they can offer you more individualised guidance on which financing choices are ideal for your company and assist you in developing a strategy to pay off any debt you incur and maintain your long-term profitability.

5. Decide on a type of loan

The second choice you’ll need to make if you’ve chosen to apply for a business loan is which type of financing is best for your company’s and its growth objectives. Business loans come in a wide variety and each one offers benefits.

Term loans

Term loans are the most typical kind of business financing. Term loans are a dependable and popular method of funding a business because they are typically repaid over a period of two to ten years.

However, the eligibility requirements for traditional term loans are often stringent. 

• Businesses often need to operate for two years or more, because a demonstrated history of profitability is often a requirement. 

• Many private lenders also prefer to service larger loans—up to $500,000—making term loans an impossibility for smaller ventures that don’t need that much money or for entrepreneurs without a proven track record of success.

• Most lenders insist on minimum, credit scores usually around 680. 

• It can take anywhere from two weeks to two months for a traditional term loan to be processed.

SBA loans

Loans from the Small Business Administration (SBA) are fairly comparable to the typical term loans provided by private lenders. The main distinction is that lenders servicing SBA loans have committed to provide more favourable conditions to groups that might find it difficult to obtain regular small business funding, like women founders and minority business owners.

Loans administered via an SBA-approved lender often require: 

• A formal business plan
• Collateral, such as real estate 

SBA loans can have durations that are up to 25 years long, which is substantially longer than a typical term loan. SBA loans are also frequently smaller; they normally range in size from $10,000 at the low end to $350,000 on average.

SBA loans often have a lower minimum credit score requirement of 650 and are therefore a little more lenient. Although these loans are undoubtedly more accommodating for small firms, the processing time for an SBA loan can still be up to 90 days.

Short- and long-term online loans

In recent years, as entrepreneurs have looked for alternatives to conventional business funding, online loans have grown in popularity. Lenders like Funding Circle and OnDeck provide these kinds of loans. They are frequently unsecured, so you can obtain a loan without providing any assets or collateral. 

There are many advantages to short- and long-term online loans:

• Borrowers with lower credit scores can still benefit from this type of financing. Minimum scores of between 500 and 600 are considered acceptable by many lenders.
• Businesses that have been in operation for one year are often eligible for this type of loan.
• Annual revenue requirements are also typically lower—around the $100,000 mark in many cases.

For short-term loans, the range can be as low as $5,000 and as high as $250,000, while for long-term loans, it can reach as much as $500,000. They are therefore a wise solution for entrepreneurs with less urgent capital requirements.

This kind of loan is perfect for business owners who lack specific assets because it practically never demands collateral. Additionally, decisions can sometimes be done the same day; some lenders even give same-day decisions.

Both short- and long-term internet loans have disadvantages, though. Depending on your creditworthiness, the APRs for these loans might be excessively high—up to 99% in some situations.

Invoice factoring

Another popular yet somewhat less conventional type of business loan is invoice factoring.

Businesses that depend on invoices for payment frequently have to wait a long time—up to 90 days in certain cases—before those bills are paid. This can thus negatively affect a company’s operations, especially smaller companies who cannot afford to wait three months for unpaid invoices.

Companies that offer invoice factoring services buy unpaid invoices from other businesses; this process is also known as buying accounts receivable. Businesses can sell their past-due invoices to an invoice-factoring company to earn cash sooner, often in as short as 24 hours, rather than waiting for their clients to pay them.

In the end, invoice factoring is a compromise. While invoice factoring saves businesses from having to wait months to get paid, it also results in some of the money owed being lost.

For clients with less favourable credit, invoice-factoring companies often pay 70% of an unpaid invoice, and for clients with superior credit, up to 90% to 95%. Another issue to think about is that factoring might not be appropriate for companies that rely heavily on smaller invoice quantities because the service fees might not be financially viable.

6. Apply for the loan

Once you’ve done your research and decided which loan you want, it’s time to apply. 

Choose a lender

If you have a strong credit score and small business resources, you can probably use a traditional lender. If you don’t satisfy those conditions, you might need to search online for less traditional loan choices like a merchant cash advance.

The approval ratings of different lenders vary. The Small Business Lending Index from Biz2Credit provides a breakdown of loan approval rates by lender type.

• Alternative lenders: 24.3% (up from 20.5% in 2020)
• Institutional lenders: 23.6% (up from 21.4% in 2020)
• Credit unions: 20.4% (up from 20.3% in 2020)
• Small banks: 18.7% (up from 16.9% in 2020)
• Big banks: 13.5% (up from 11.5% in 2020)

Get your documents ready

You will receive a list of the particular documents that a lender requires in order to execute your application. Although each lender will have slightly different requirements, the following list frequently appears on them:

• Details about your business, such as business plan, name, address, and tax ID.

• Personal and business-related financial statements, such as tax returns, bank statements, credit card bills, pay stubs, balance sheet, lease agreements, list of business assets, and other related files. 

• Information about business owners, like personal details for anyone who owns more than 20% to 25% of a company. 

Each lender will have their own requirements for submitting applications as well as their own application procedures. The process usually includes interviews. It can entail visiting a bank location or scheduling a phone interview.

Observe the guidance that your lender has supplied. Find out how long it typically takes them to process applications during the interview so you’ll know when to anticipate a response. Contact your lender again if necessary.

Consider your options before making a decision

A company loan application is a significant financial choice that shouldn’t be made hastily. Significant economic upheavals can have a major impact on anything from revenue projections to the viability of a business itself, as 2020 ably proved.

You alone can choose whether getting a business loan is the best course of action for your company. Be sure to double-check that you’ve considered all your options before making any decisions:

• Before requesting a business loan, be as specific as you can about the amount you need and how you’ll use the money to grow your company.
• Consider creating a formal business plan (if applicable) even if it is not required as part of a loan application for your company in order to spot any crucial details you might have missed, such reasonable revenue estimates.
• When deciding on repayment arrangements, be honest about how much your company can realistically afford in terms of repayments and examine any outside variables that can put this at risk.
• To discover more about available company finance options, talk to a local financial advisor about your objectives.