If you need funds for your business, you may consider getting a small business bank loan as a good option. But before you will be able to get that loan, you must apply and be qualified for it. There are tips to get a bank loan for your small business which we will show you in this article. You must know what banks require for loan applications and the processes. Your business must have all the financial documents like bank statements and a business plan before applying to ensure you get approvals.
Ensure you have chosen the right type of business loan that suits your business needs because if you don’t do so, it might reduce your chances of getting your loan approved. Almost every business will need one type of loan or the other except if your business is self-funded or supported by investors who provided funds and invested in the business. there are tips to get a bank loan for your small business to help you start or boost your business.
Business loans help business owners to introduce as much cash as they need into the business so as to take care of most costs. The following is the information that you must make available when applying for a loan for a small business loan. You must keep the tips to get a bank loan for your small business in mind so that you can get approvals easily and quickly.
Tips To Get A Bank Loan For Your Small Business
Getting business loans from traditional banks is the most common and popular form of business financing for small businesses because it is always secured. The bank lending policies are backed by the federal government and most of their products come with a level of assurance that other non-traditional banking and online lenders do not offer. Bank loans give a considerably lower interest rate when compared with other online lenders.
There are many types of loans that a small business owner can choose from with regard to the type of business finance you need. there are stipulations, requirements and other stated criteria for each type of loan that make it to be preferred, better or fit for your financing need and repayment abilities when compared with others.
Once you have decided the that your business will take a short-term business loan, you must know the exact type of loan you want to apply for. Failure to follow these tips to get a bank loan for your small business will result in incurring sunk costs for the business, loss of time that would have been invested in something meaningful, and other problems associated with small business.
Choosing the wrong type of business loan is one of the biggest mistakes a business owner can make when applying for a small business loan. It is better to you reach out about each type of loan option and finds out all the information you may require before applying for a small business loan. Doing this as part of the tips to get a bank loan for your small business will help you not to waste your time trying to get solutions that will not solve the financial problem your business is facing.
Types Of Bank Loans For Small Business
Below are some of the bank loans for small businesses you may consider using for your business financing.
Business Term Loan
This is the type of traditional bank loan option provided by financial institutions like banks. It also operates with some features similar to a personal loan. Most small business owners apply for this type of loan when they need money for major business upgrades, acquisition of plants and equipment investments and other major needs. This type of loan operates on a fixed interest rate basis with a monthly or quarterly repayment plan but this must be agreed upon beforehand. Business term loans have a fixed date the loan will end. Long-term loans can run as long as 10 years or longer, while intermediate-term loans can run for up to three years or less than that.
Line Credit
This type of business loan is similar to using a credit card. It enables a business owner to borrow up to a certain amount from the bank and the debt will accrue. You can only pay the interest on the amount you have used from the line so far. Using a line credit is very flexible because as far as you stay within the credit limit approved for you, you take decisions on how the money will be used. This type of loan is preferred by businesses with a decent credit history, and a regular flow of income and the business should be willing to put up some of their assets as collateral in case of default in repayment.
Commercial Mortgage
Applying and getting approval for a commercial mortgage is the type of business loan a small business that wants to acquire landed property to expand their business can use. They are secured through liens on commercial property and can also act as home mortgages. If your credit history is nonexistent or unflattering, a bank can request that the business owner or any principals should personally guarantee the loan and promising to take responsibility in case the business goes into liquidation. Commercial mortgages are shorter than residential mortgages that can last for 30 years.
Equipment Lease
Equipment leases involve the sharing of the major purchase cost of the equipment over a set time. Most of the lessors do not require a large initial payment on a lease and anytime the lease has run its course, you can choose to either return the equipment or pay the rest of the value of the equipment based on the life of the lease and appreciation of the item in question. Although the monthly repayment is always lower than the advance cost of buying equipment. You must note that the interest is always added to the cost price of the equipment.
Letter Of Credit
This ai the type of letter issued by the bank to assure customers that they will receive the correct amount that is owed to them on time. The guarantee or assurance comes in two different ways: Buyer protection and seller protection. For seller protection, the bank agrees to pay the seller if the buyer fails to make the payments and is generally offered for international transactions.
Funds meant for letters of credit are sometimes collected in advance from the buyer in a kind of escrow arrangement. Buyer protection is offered as a form of penalty to the seller, like a refund. Banks only provide a letter of credit to businesses that applied for it and have a good credit history or the type of collateral required.
Unsecured Business Loan
This is the type of business loan that does not require the borrower to provide any type of collateral against the amount they are borrowing. An unsecured business loan is more friendly to the borrower than to the bank, here the lender charges a significantly higher interest rate than it will charge for a loan backed by collateral. It is often provided through online lenders or other alternative lenders.
Traditional banks have been known to offer unsecured loans to customers they have an existing and close relationship. It is often difficult to get an unsecured business loan when compared to other loans because it does not have any assurance that will serve as collateral. The inherent risk involved in an unsecured loan means the loan will generally be offered as a short-term loan to reduce the lender’s risk.
Read Also: How To Get A Business Loan From Any Source – See The 7 Guides Here
Alternatives Ways Of Getting Loans
It is not only from banks that one can get business loans. One of the tips to get a bank loan for your small business is to know that there are other ways to get access to loans other than the traditional bank. There are some lenders you can work with so as to secure loans to finance the need of your business. If your business doesn’t qualify to get a loan from traditional banks, you can consider using alternate lenders. The following are the two alternative lenders you may wish to consider.
Online Loans
This is the type of alternative lender that is more flexible with loan qualifications, fast turnaround time, with a higher interest rate compared to traditional loans. Applications for this type of loan are submitted through their secure interface.
Microloans
This is the type of loan that a small amount is given to sort out certain expenses within the business or company. It has a very low-interest rate. Some of the disadvantages of microloans are that it gives a short term or time frame for borrowers to pay back the loan. Most lenders require that money from micro-loans require that the loan should be spent on specific expenses like equipment purchases.
Terms To Watch Out For In A Business Loan Contract
Apart from knowing the tips to get a bank loan for your small business, the type of loan to apply for, and details of the loan. Every loan has a different interest rate and loan term. Before accepting any loan, ensure you read the contract very well till the end to ensure there are no hidden terms. When applying for any loan, the following are the terms to watch out for.
Banking Relationship
If you want to be considered by banks for a business loan, you must ensure that there is an existing relationship between you and the bank. The existing relationship means you must have an account with the bank. If you don’t have one, it means you have to open an account with a bank to establish a working relationship with them over time.
Requirements For Business Loan Application In Banks
When you want to apply for any loan from a bank, one of the tips to get a bank loan for your small business is that you must first consider their requirements. Each bank has a loan application form different from others. Many banks have their loan applications online while some still insist you must go to the bank to fill out the paper application form.
Different banks have their preferred method of applying for loans based on the amount of loan the borrower is requesting. Apart from how the bank wants the loan application to be filled and submitted, there are some other requirements that banks need before they will be able to consider your application for approval. So before you apply for any type of loan from the bank, check the following.
Credit Score: You need to check your credit history before applying for a loan in the bank. If you have a high credit score, it shows that you are reliable in your debt repayment. A good credit score also helps you to get good interest rates and long loan terms offered by banks.
Purpose Of The Loan: Before you go to the bank to apply for a loan, you must have plans on how you want to spend the money when it is approved. For example, getting a lease is generally used to obtain equipment while a mortgage is normally used to purchase real estate.
Available Collateral: If you don’t have a good credit score, some lenders will make an exception to consider you if you can put some of your valuable items like properties up as collateral. With this arrangement, if you don’t meet up with the repayment guidelines, you can lose your collateral to the bank. The bank will in turn sell the assets or property in question to recover some of its losses.
Cash Flow Report: Before you go to any bank to apply for a loan, make sure you have a cash flow statement because banks will want to know how regular your income stream is. Some traditional lenders will be scared about approving your loan if you don’t have a consistent cash flow. Most lenders require you to have a certain amount of revenue before they can consider approving your loan application.
Financials: The bank will also request you provide well-researched cashflow projections or a forecast of your business before they can approve your loan.
Business Plan: Most lenders not minding if it is the traditional lenders or not may request to see a well-drafted business plan of your business before reviewing your application. There are many online resources that can help you write an effective business plan for your business or organization.
Working Capital: Working capital can be described as the money that is available to a business for its day-to-day operational costs. Your business may be considered to be a high-risk investment if you don’t have any working capital.
Be Ready To Apply For A Business Loan
One of the tips to get a bank loan for your small business is to know that you have to apply for the loan. As soon as you have found the right type of loan you want to apply for, and you have considered the requirements from the bank, the next thing to do is to apply for the loan. The following are the tips to get a bank loan for your small business when applying which will make the application process to be easier because you have all the information they may require.
Get Your Financials In Order
Getting all your financial records ready, is one of the tips to get a bank loan for your small business. You can also ask the bank what information they will need during the process of the application depending on the type of loan and the amount of loan you are applying for. Because of this, you should try as much as possible to have a copy of your personal income tax for at least three years, your year-to-date profit and loss figures, account receivable ageing reports, inventory breakdowns if possible and balance sheets.
If you have a CPA or bookkeeper, it is easy to get all the information you may need from them or through accounting software like QuickBooks or Quicken. This software can help you to generate all the information you might need as well.
Create A Business Plan
If you are looking for a loan as a beginner, one of the tips to get a bank loan for your small business is to have your business plan well drawn up. If you don’t have it in writing now, there are so many free resources you can use to draft one online like Local Small Business Development Centers, SCORE and Economic Development Center.
Estimate The Amount Of Money You Will Need As a Loan
You need to have an estimate of how the work or purchase is ready to be shown to the loan officers even if the loan is for a one-time purchase of equipment or any other financing options.
All lenders will want to see that you have your business goals carefully drafted out, know how much loan you need to achieve your business goal and also have a specific plan on how to use the funds wisely. Even if your goal is to buy machinery or open up a second location for your business, check the cost first and calculate how the loan repayment will affect your business budget in the future.