How To Get A Business Loan: The Process For A Successful Application

October 12, 2021

By: Kari Amarnani

How To Get A Business Loan: The Process For A Successful Application

Learning how to get a business loan is a valuable train of knowledge that can help you start your business and keep it afloat. Navigating the business loan process can be long, drawn-out, and intimidating, but with enough awareness and preparation, the potential rewards outweigh the struggle.

In this article, you will understand the process in its entirety. Broken down into manageable and straightforward steps, from understanding how to get a business loan to its purpose and requirements, you will soon grasp everything you need to know to secure the funds you need for your business.

How To Get A Business Loan: The Impact Of COVID-19

Managing a business doesn’t come cheap. No matter the stage of your business, a little extra funding could come in handy, especially at the beginning.

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In fact, this is more important than ever due to the ongoing global pandemic, which has led to the shutdown of almost 100,000 businesses in the United States. Though some markets are gradually moving back up, specific industries have truly struggled, so much so that they have yet to see an upturn.

For example, the 2020 pandemic has severely impacted the airline industry due to the high frequency of lockdowns, quarantines, and the regulations to quell the virus by staying in. Other recreational facilities have also suffered, such as gyms, resorts, tourist locations, and so much more.

In this day and age, it no longer suffices to check if you qualify for a business loan—you must also ask yourself if it is worth it. If your business is an airline or a gym, a business loan may still be unable to compensate for the lack of an active market.

But let’s say that your business is a part of the healthcare industry or courier and delivery services—a business loan may be helpful in these scenarios as these business sectors continue to thrive with consumers needing help and aid during a time full of restrictions and uncertainty.

Understanding how to get a business loan entails learning about your industry during the pandemic. How was it affected by COVID-19? Is it picking back up? These are extra measures on your part to avoid the risks of undertaking the loan process for potentially no returns.

If you feel confident in the industry you have chosen, it’s time to check if your business qualifies for a business loan.

How To Get A Business Loan: A Checklist

Capital is the core factor that can make or break a business, providing it with the resources to run operations smoothly.

Many entrepreneurs think of innovative ideas and ventures, but unfortunately, they lack the funding to make these dreams a reality. This is the purpose of a business loan—it serves as an opportunity to make a mission come alive. However, it isn’t easy to secure a successful application.

Significant responsibilities entail careful planning and, ideally, a favorable reputation. The most common and safest option in getting a loan is applying for it at banks and various financial institutions. They will need access to your records (which you’ll soon learn about), so it would be helpful if your documents scream “responsible business owner.”

But before getting to that, the most critical question is: do you qualify for a bank loan?

You need to understand the necessary steps and checklists before you consider applying for a business loan. Not only will it give you an idea of the outcome, but it raises the likelihood of getting an approved application.

Below is the checklist of five essential items to consider before submitting your loan application.

1. How long has your business been operating?

Bank lenders need to know how long your business has been running because there is a certain quota that you need to hit to qualify for a loan. Your business needs to have been up and operating for a minimum of two years to be eligible for most bank loans.

With that said, there are loans for new business, such as SBA loans, that you may be able to access. You may also apply for an online small business loan. However, you need to have been in business for at least one year. As much as it would be great to get a loan before starting anything, banks need to know that the business has been performing adequately for some time.

2. Does your business make enough money?

Many banks require a specific annual revenue, ranging between $50,000 to $250,000, depending on the establishment. Make the calculations to determine your business’s annual revenue, and look for a bank that accepts your margin.

If your annual revenue isn’t so high yet (under $50,000), that’s okay! You’re not out of the game yet. In this case, consider applying for a short-term business loan. Again, do your research on several banks and determine which one accepts your number to qualify for a short-term loan. Definitely better than nothing!

3. Can you afford the payments?

This is the tricky part. Getting a loan is all fine and dandy, but you have to remember that this is a debt you have to take care of.

Banks take this part seriously, as not being able to make the payments defeats the purpose of giving you a loan. Note that some banks require daily repayments, so make sure you ask about their payment structure before applying.

Have a careful look at your finances, particularly the monthly cash flow. This way, you can evaluate whether you can even apply for the loan. Businesses can be unpredictable, and there are investments all around you. Ideally, you should be able to pay off the set amount and still manage your business comfortably.

4. What is your credit score?

There is a personal credit score and a business credit score and you need to provide both to the banks that you will be applying in. Most banks would prefer numbers above a specific threshold.

The ideal personal credit score for a loan is 680 and higher, while the preferred business credit score is at least 75 (which ranges from 0 to 100). If your personal credit score is low, do not fret, there are other options.

If your credit score is between 550 and 679, you may qualify for a short-term business loan. Again, it’s much better than nothing. You also have the option to pull back on the application and work on your credit scores to reach favorable limits. Once you reach these numbers, give it a go, and it’ll be a big boost in your favor.

This might seem like a drag, but banks need this information to determine how trustworthy and responsible you are with your finances. You can get your credit reports from any major credit bureaus: TransUnion, Equifax, and Experian.

5. Do you have collateral?

Collateral is an asset that you pledge to the bank, such as real estate properties, land, equipment, etc., to keep the loan alive. Essentially, if you can’t make the payments, the bank can seize the collateral and sell it to repay your loan. The collateral that you provide must cost more or at least be equal to the loan amount.

This brings you to the difference between a secured business loan and an unsecured business loan. Secured business loans require collateral from you, while unsecured ones don’t. These are the benefits of a secured loan:

  • It’s much easier to get than an unsecured loan.
  • It offers higher borrowing limits.
  • It comes with a lower interest rate.

Now, you’re reading this to learn how to get a business loan, and business loans almost always fall under the secured selection which means you need collateral. If you don’t have collateral (or don’t want to provide one), your credit score needs to compensate for you, meaning it must be extremely high.

You can always apply for an unsecured loan, but keep in mind that these types of loans are best suited for businesses that:

  • Don’t have many assets
  • Prefer not to provide security
  • Need funding quickly

Putting up collateral is risky, but if you have faith in your business growth, it’s likely that it won’t be compromised. Plus, you get a higher loan amount with less interest, which can benefit your business.

So, this is everything you need to know in determining your qualifications for a business loan. If something is amiss, that’s okay. Put in the time and effort to ensure that you attain the requirements. If everything is set, go ahead and apply for that business loan!

How To Get A Business Loan: 6 Steps For A Smooth Application

These are the six steps on how to get a business loan and secure your funding:

Step 1: Create a business plan.

The first step in how to get a business loan is creating a solid and well-structured business plan. It should describe the essence and mission of your business to a tee, and most importantly, how you plan on achieving these goals.

Your business plan almost says more about you than it does your business. Behind every great business plan is an ambitious and responsible leader. And that is a big step in the right direction of communicating your legitimacy to the bank.

Ensure that you include your fiscal information, as well. Banks need to know that you have an organized financial plan before they grant you a loan.

Step 2: Determine the type of loan you need.

The most common types of business loans are:

  • A business line of credit
  • Working capital
  • Business term

A business line of credit is a flexible loan that allows you only to pay the interest on a portion of the money that you borrowed, working similarly to a credit card. You may draw and repay money as you need to, as long as you avoid exceeding the credit limit.

A working capital loan is a short-term business loan designed to provide you with extra funds for the business to use for growth and day-to-day expenses such as inventory or payroll purposes. You can also use working capital loans to take care of emergency costs.

A business term loan is a bulk of capital that you reimburse in regular payments at a fixed interest rate for a set time, usually one to five years. The purpose of this loan is to finance you with large purchases for your business, such as new equipment and facilities.

The bank lender will likely ask you why you need a business loan, and you might respond with any of the following:

  • You want to manage day-to-day expenses. In this case, a business line of credit and a working capital loan are your best choices.
  • You want to grow and build your business. Here, the business term loan is the most suited for you.

It depends on what you believe your business needs the most. It helps a lot to be informed about the different types of loans when you explain your reasons to the bank lender, giving them the impression that you have done your research and know what you need.

Step 3: Ensure that you have an excellent credit score.

A credit score of 680 and above is fantastic and will surely help secure your application. If your score is lower than expected, take some time and work hard to raise it before applying for any bank loan. Your credit score is one of the most critical aspects of the application as it shows them how capable you are.

Having an excellent credit score is a big plus, but make sure that you also keep a keen eye on your credit reports. Sometimes, there are clerical errors that may negatively impact your credit score. Monitor these documents carefully, and should you find any errors and mistakes, contact the credit bureau immediately to rectify them and increase your score.

Step 4: Organize your financial records.

You must prepare your financial statements for the bank’s perusal. Next to your credit score, this is a fundamental factor that affects the likelihood of getting a successful application.

Prepare your cash flow statements, balance and accounting sheets, income statements, and annual revenue documentation. These requirements allow banks to ascertain whether you can afford to repay the loan. If you don’t have these documents yet, make sure that you do. You won’t only need them for bank loans.

Step 5: Do your research.

Given that your business plan, credit score, and finances are set, take some time to research and make calls on which banks would suit and accept your requirements well. Every bank has different procedures and structures, so compile a list of everything you need to know and your business numbers. Then, look for the most suitable bank.

Remember the type of loan that you need, too. Ensure that the bank offers it. Don’t be afraid to ask questions! Another essential thing to remember is to ask for their interest rates and approval guidelines. Choose the bank with the lowest interest and most straightforward and flexible regulations.

Step 6: Apply for a business loan.

You’re at the finish line! You’ve compiled everything that you need and hopefully found the most suitable bank for you. Make sure that you have all these documents with you before beginning the loan application process:

  • Business plan
  • Business license
  • Personal and business tax records
  • Personal and business bank statements
  • Business insurance plans (if any)
  • Financial statements from the last two years
  • Legal business documents (articles of incorporation, leases, etc.)
  • Credit reports
  • Annual revenue documentation
  • Collateral documents (if any)
  • Affiliated business ownership (if any)
  • Personal identification (driver’s license, passport, etc.)

The process of how to get a business loan can entail you reaching into nearly every crevice of your financial history, personally and for your business. Organize these documents ahead of time to avoid the stress of last-minute scrambling.

Have everything prepared? Great! Now, it’s time to state your terms:

  • How much funding do you need?
  • How are you going to spend your finances?

You must observe your business direction and do thorough research on the amount you need to avoid overestimating or underestimating your finances.

If you go too low, you may still face some financial complications in the future, which defeats the purpose of the business loan. If you go too high, not only will you show the bank that you don’t have a grasp of the process, but you also risk facing more financial issues as you still need to make repayments.

To avoid this scenario, come up with a proper budget based on your financial plans. It also doesn’t hurt to research other business owners who applied for bank loans, learning about the reasons behind their budget choices and requests.

Once you’ve mentioned the amount needed, you will have to explain why and how you will use this funding for your business. This is when the bank determines whether you will be putting the loan to good use, so prepare accordingly.

Be genuine. Explain why you need the loan and how you believe it will positively impact your business. Reassure the bank lender that you have faith in your business growth and that you’re undoubtful of any failures to make the payments.

How To Get A Business Loan: Rewards Over Risks

Learning how to get a business loan is the easiest part of the process. When you’re smack dab in the middle of it, you’ll realize how much effort and preparation it takes to keep your business alive— and that’s precisely what makes it special.

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Knowing how to get a business loan is an indication that you care enough to keep it afloat. It may take some time and sacrifice, but the potential rewards outweigh the risks of your business failing, especially during these uncertain times.

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