A business loan can assist you in starting your company, but comprehending the loan process and stricter lending standards can be challenging. Understanding criteria, finding lenders, and knowing how to apply for a small-business loan are all straightforward steps that will help you acquire the money your firm requires. Here is how you can get a business loan in four easy steps.
1. Determine If You Are Qualified for a Company Loan
To check if you qualify for a small-business loan, answer the following questions:
How Long Have You Been Managing Your Business?
Lenders will look at how long your business has been in operation. You need to be in business for at least a year to qualify for most online small-business loans and a minimum requirement of two years to be eligible for most bank loans.
Do You Have Enough Money to Live On?
Many lenders want a certain amount of annual revenue, ranging from $50,000 to $250,000. Calculate your salary and find out what each lender’s minimum is before applying.
Are You Able to Make the Payments?
Examine your company’s finances, especially cash flow, to see how much you can afford to devote toward loan repayments each month. Keep in mind that specific internet lenders want daily repayments.
To swiftly return your loan each month, your income must be at least 1.25 times your total costs, including your higher repayment amount. Assume you earn $10,000 per month and spend $7,000 on rent, wages, and other living expenditures. According to this method, you should afford a $1,000 monthly loan payment because $10,000 equals 1.25 times $8,000 in total costs.
Do You Have Any Security?
A large number of lenders offer both secured and unsecured business loans. A secured loan requires you to provide business collateral, such as property or equipment, which the lender may seize if you default on the loan.
Putting up collateral is risky, but it may increase the number of money lenders willing to give you money and result in a lower interest rate.
Lenders may require a personal guarantee even for unsecured loans. This means that if your firm can’t repay the loan, you’ll have to pay it back yourself, and a lender may take your house or car if you don’t pay.
2. Make a Decision on the Type of Loan You’ll Need
Lenders will want to know why you need a small-business loan. Your preference will most likely fall into one of three categories, determining which type of company loan is most appropriate for you:
- You want to open your own company. Lenders require cash flow to keep their loans repaid. As a result, most enterprises will be unable to acquire financing in their first year. You’ll have to rely on alternative sources of initial capital, such as corporate credit cards and personal loans.
- You’d like to keep track of your daily expenses. A business line of credit could be advantageous. This form of flexible funding allows you to use it as needed to cover expenses like payroll or unexpected costs like repairs, giving you a handy safety net when you need it most.
- You want to grow your business. Consider a typical government-guaranteed term loan, which usually has higher borrowing restrictions.
3. Compare Loan Providers for Small Businesses
Internet lenders, banks, and nonprofit microlenders are the three leading providers of small-business loans. Each has a lot of advantages. However, one may be better in specific scenarios. Having a co-founder to help you in getting funds for your business is another way. Visit StartHawk if you want to find a co-founder.
4. Gather All of Your Paperwork
Before you apply, make sure you have all of the essential documents. Making these documents available as soon as possible helps to streamline the process of getting small-business funding.
You may be needed to supply a combination of the following documents, depending on the lender:
- Tax returns for individuals and businesses
- Bank statements for both personal and business use.
- A company’s financial statements.
- This is a business strategy.
You’ve done it! Now that you’ve decided the type of loan and lender is ideal for you, it’s time to apply.
Begin by weighing the gains and drawbacks of two or three comparable options based on loan terms, annual percentage rate, or APR. Because it covers all loan charges in addition to the interest rate, the annual percentage rate (APR) is the simplest way to understand the total cost of a business loan for the year.
Choose the loan with the lowest APR among those you qualify for and apply with the documents you’ve collected. It’s important to note that credit bureaus don’t differentiate between commercial and personal inquiries. If you use your personal credit history to apply for a small business loan, your credit score may be harmed, which is why it’s vital to go with your best option. Know more about getting capital for your business in articles on startups at StartHawk blog.