Obtaining a business loan today is a huge hurdle that small businesses are facing, specifically due to the lending terms by banks. However, getting outside funding is necessary to grow or start a business, cover daily expenses such as inventory and payroll.
Making an application and getting approval for a business loan can be challenging if you have no clue on how it is done. However, you can follow a few steps to simplify that process. Here are simple steps that you can follow:
- Point out your need for the finances
- Select the most appropriate loan
- Locate the right lender
- See if you qualify for the loan
- Gather your documents and make an application
Let’s explain those points in details…
- Point out your reasons for the loan
Ask yourself or your team; “why do we need this business loan?” the answer to this question will prepare you on how you will answer your lender. Definitely, each lender would be interested in knowing how you intend to use the money. Doing so will help the lender to gauge your potential to repay the loan plus interests. Therefore, you should evaluate whether you need the loan for:
- Growing your business
- Starting a business
- Managing daily expenses, or
- Having a safety cushion
Once you evaluate your need, proceed to the next step.
- Choose the right loan type
Your need for a business loan will dictate the type of loan to take. These loans fall under two categories: secured and unsecured. But what is the difference between the two?
- i) Collateral
A secured loan is made using collateral for you to get money from the lender. This collateral helps the lender to recoup losses should your business fail to repay the loan.
Unsecured loan, on the other hand, does not require collateral. However, the lender will be interested in the financial position and credit rating of your company. This will help the lender to judge your history and ability to repay the debt.
Besides collateral, secured and unsecured loans have different terms and approval rates.
- ii) Terms
Since you will provide collateral when getting a secured loan, it makes such a loan less risky for the lender. Hence, the rates of interests are lower than those of unsecured loans. Also, secured loans are long term. The amount of business loan you will acquire will depend on your collateral – it can go as high as the value of your collateral.
An unsecured loan, alternatively, hardly goes beyond a certain amount. Mostly, an unsecured loan is short-term and used to start a business. However, some lenders would hesitate to offer the funding to a business that has been in operation for less than two years.
Also, your business should prove that it earns at least a certain amount of profit per year to qualify for an unsecured loan.
iii) Approval
Secured loans are extremely easy to get compared to unsecured ones. Likewise, they are readily accessible because of their low risks to the lender.
The best thing with secured loans is that they have great interest rates and conditions. Once you provide collateral and meet a lender’s needs you will have high rates of approval.
Unsecured loans are meant for established businesses, those with great credit scores and strong business financials. Do you need more information about unsecured loans? Visit UnsecuredFinanceAustralia.com.
- Decide on the right lender
Once you have identified the type of loan you want, the next step is to identify the most appropriate lender. There are online lenders, non-profit micro-lenders and banks that offer both secured and unsecured loans. Additionally, these lenders provide products such as invoice financing, lines of credit and term loans.
Just as you do when shopping for a car, the same applies to when deciding on the right loan lender. Obtain a business loan from a bank if you:
- Have collateral
- Have good credit
- Do not require cash fast
If you do not qualify for a bank loan, then try out online lenders only when:
- You don’t have collateral
- Require funding fast
- Don’t have time in business
Alternatively, you can use micro-lenders when:
You do not qualify for a traditional loan because your business is small.
- Check if you qualify for a business loan
Your credit score is a major determinant of whether you qualify for a loan and which one to get. You can visit any credit bureau in your city to get your credit report – at least one time a year. Banks are obsessed with high credit scores and wouldn’t offer loans to anyone with scores below a certain rate. Otherwise, you can eye on other online options.
Apart from credit scores, evaluate how long your business has been in operation. You must be in operation for at least a year for you to qualify for an online business loan.
Next, calculate the amount of money your business has been making. For online loans, you must be making around 50,000-150,000 dollars per year.
- Compile your documents
Once you know if you qualify for a loan, you should combine your loan documents. These include:
- Personal and business tax returns
- Personal and business bank statements
- Financial statements for your business
The final thought
If you require finances for your company, a business loan is an option. However, you should understand how you will acquire the loan in a manner that gives business capital and cuts down your costs. Following these steps should land you on the right loan for your business.
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