Unless your small business is entirely self-funded or has investors backing it, you will almost certainly need a bank business loan to get started or expand. Business loans, which are frequently issued by banks, provide a much-needed injection of cash to help meet most costs, however many small business owners struggle to get accepted. When applying for a business loan from a bank, keep the following information and ideas in mind to help you be accepted more quickly and efficiently.
What To Consider When Choosing A Bank business Loan
Due to the inherent safety nets in traditional banking, business loans from a traditional bank are among the most sought-after sources of funding for small firms. Banks and most of their products are backed by the federal government, although many unconventional and online banking lessors are not. Furthermore, bank loans have lower interest rates than loans obtained from online lenders.
When it comes to different types of business loan, you as a small business owner have a lot of alternatives. Each type of loan has its own set of terms, conditions, and other characteristics that may make one type of loan a better fit for your current financial status and repayment capacity than another.
After you decide that your small business may benefit from a short-term business loan, it’s critical to determine which type of loan you want to go after. For any small firm, failing to do so might result in missed time, sunk expenses, and other serious headaches.
One of the most common mistakes small business owners make when applying for a business loan is choosing the wrong type of financing. It’s best to research each type of funding option before applying for a business loan, so you don’t waste time looking for a solution that may or may not solve your financial problem.
Common Types Of Small Business Bank Loans
Here are some of the more typical types of business loans to look out for when considering potential funding options:
1. Business term loan
This loan is a standard bank loan granted by a financial institution, and it functions in some ways like a personal loan. This form of loan is frequently used by businesses when they require funding for big expenditures, business renovations, acquisitions, or other major needs. These loans often have a set interest rate and a monthly or quarterly payment schedule, depending on the terms of the deal. These loans have a set maturity date, with intermediate-term loans lasting three years or less and long-term loans lasting ten years or longer.
2. Line Of Credit
Consider a business line of credit in the same way you would consider a credit card. Your small business can borrow up to a particular amount of money from the bank if it is approved. You only pay interest on the amount you’ve used so far as you accumulate debt. This option gives you a lot more choice in how you utilize the money as long as you keep under the credit limit. This option is ideal for small firms who have a consistent stream of revenue, a good credit history, and are ready to put assets up as collateral in some situations.
3. Commercial mortgage
A commercial mortgage is the type of loan you’ll need if you’re intending to develop your firm. Commercial mortgages are similar to home mortgages in that they are secured by liens on a commercial property. If your credit history is poor or non-existent, a bank may ask the business owner or any principals to personally guarantee the loan, guaranteeing to pay the debt if the company fails. Commercial mortgages are often much shorter than residential mortgages, which normally last 30 years.
4. Equipment lease
Equipment leases, like vehicle leases, spread the expense of a big equipment purchase over a specified period of time. Most lessors do not require a substantial down payment on a lease, and once the lease has ended, you can choose to return the equipment or pay the balance of the equipment’s value based on the lease’s term and the item’s appreciation. Though the monthly payments will be lower than the cost of acquiring the equipment outright, it’s vital to keep in mind that interest will be added to the total cost.
5. Letter Of Credit
A letter of credit is a bank promise that a seller will get the proper payment on time. There are two types of guarantees: seller protection and buyer protection. The former is often offered for overseas transactions and involves the bank agreeing to compensate the seller if the buyer fails to make payments. In some cases, funds for this type of letter are collected in advance from the buyer in an escrow arrangement. Buyer protection is provided in the form of a penalty, similar to a refund, to the vendor. Banks issue these letters to companies that apply for them and have the necessary credit history or collateral.
6. Unsecured business loan
A borrower who takes out an unsecured business loan does not have to put up any collateral to secure the transaction. The lender charges a substantially higher interest rate than it would for a loan backed by collateral because it is nicer to the borrower than the bank. Although traditional banks have been known to give unsecured loans to customers with an existing relationship with the institution, this type of loan is most typically provided by an internet lender or other alternative lender. Unsecured business loans are sometimes more difficult to obtain than other loans because they do not come with any guarantees in the form of collateral. Due to the inherent danger of an unsecured loan, it is typically issued as a short-term loan to reduce the lender’s risk. You can check out our article on how to get a business loan without collateral.
Alternatives To Bank Loans
You don’t have to rely on bank loans. To get the money you need, you can engage with alternative lenders. If your company doesn’t qualify for a standard loan, you should look into other lenders. What alternatives are there instead of bank financing? Consider the following three alternative loan options:
1. Online loans
Online lenders are usually more flexible with loan qualifications and have a faster turnaround time, but their rates may be higher than traditional loans. To get loan from online lenders, just download their mobile application and create an account with them. After filling out the application, they will give you a feedback on your loan status.
Microloans provide a little sum of money to help you handle some of your company’s expenses. The interest rate for microloans is usually rather low. Microloans have a few drawbacks, including a shorter repayment period and some lenders’ requirements that the money be used for specific purposes such as equipment purchases.
Crowdfunding has exploded in popularity in recent years, becoming one of the most appealing ways to raise funds. An entrepreneur can use crowdfunding to fund his or her idea by posting it on any of the best crowdfunding platforms, where individuals from all over the world can donate in exchange for a perk from the entrepreneur. Crowdfunding for real estate has become very popular in the US and United kingdom.
Terms To Watch For In A Business Loan Contract
Consider the loan’s details in addition to the type of loan you’re applying for. Each loan has its own interest rate and term, as well as other factors to consider that are just as significant as the type of loan you take out. It’s critical to read the contract in its entirety to ensure that there are no hidden clauses or costs.
When applying for a bank business loan, check the following:
- Interest Rates: Aside from the amount of money you want to borrow, the loan rate (also known as the interest rate) is an important factor to consider. Loan rates vary depending on the type of loan you’re looking for, the bank from which you’re borrowing money, and your personal credit score, among other factors. If you’re looking for a business loan, you’ll want one with a low interest rate. Rates might range from 3 percent to 80 percent annual percentage rate, depending on the type of loan.
- Term: The term of a business loan refers to the amount of time you have to repay the loan. If you can afford the payments, a shorter loan period is preferable to a longer loan term. The longer your rate is, the more interest you’ll pay in the long run and the more your loan will cost overall.
- Banking relationship: Many banks require that you have an established relationship with them before being considered for a business loan. If this is not the case, you will need to open a bank account and develop a long-term relationship with it before you can be considered for a business loan.
What Do Banks Look For In A Business Loan Application?
What do banks look for when applying for a business loan? It’s critical to keep a bank’s requirements in mind when applying for a business loan. Each financial institution has its own set of loan application forms. Many of them have online applications, but some still require you to come to the bank premises and fill out a paper application. The bank may have a preferred way of application depending on the loan size and type of loan you’re looking for.
You should consider the conditions that a bank requires in order to be evaluated for approval, in addition to how a bank prefers to receive a loan application. There are several elements that go into a prospective acceptance, so examine the following before applying:
1. Credit score
A high credit score demonstrates that you are dependable when it comes to debt repayment. A solid credit score can make or break your application, as well as the interest rate and loan term length offered by the bank. See how you can get a loan with bad credit score you can also build your business credit
2. Purpose of the loan
The purpose of the loan you want to obtain from the bank is very important. Some banks would even monitor how you are utilizing the loan amount just to make sure you are using the funds for the right purpose. Some loans include restrictions on how they can be utilized. A lease, for example, is typically used to obtain equipment, whereas a mortgage is typically used to purchase real estate.
3. Available collateral
Some lenders will exempt you if you can put up some valuable assets (typically property) as collateral if your credit score isn’t strong enough. If you don’t satisfy the repayment terms of the arrangement, you risk losing your collateral to the bank, which will likely sell the assets in question to recuperate some of its losses.
4. Cash flow
The amount of money that comes in and goes out of a business is referred to as cash flow. Businesses generate revenue from sales and spend money on expenses. Interest, investments, royalties, and licensing agreements, as well as selling products on credit with the idea of receiving the money owed later, are all possible ways a business can earn income. Banks want to see that you have a consistent source of income. Traditional lenders may be hesitant to approve your loan if you don’t have a continuous cash flow. Before even considering such a loan, many lenders demand a particular amount of earnings.
One form of document that the bank will want to see before authorizing a loan is your cash flow history. Hence, cash flow history is the history of all the money going out and coming into your business for a specific time. You’ll also have to present well-researched financial projections for your company.
6. Business plan
Before assessing an application, any sort of lender may request your business plan. There are numerous resources available to assist you in writing an effective business plan for your company. These materials can be found online or you can even consult an expert to help you. All you will do is tell them what you want and also pay them for the service. The amount to be charged depends on the your location and the client you are working with.
7. Working Capital
The amount of money a company has on hand to pay operating costs is referred to as working capital. You can be deemed a high-risk investment if you don’t have any working capital.
Prepare To Submit An Application For A Bank Loan For Your Business
You’ll need to apply for the loan once you’ve selected the proper loan for your needs and evaluated what your bank would require of you. The application process will go more smoothly if you remember the following three suggestions, because you will already have the information when the potential lender asks.
- Make sure your finances are in order: An applicant’s financials should be ready to go, according to one expert. To do so, inquire as to what information the bank will require during the application process in relation to the type of loan you’re seeking and the amount you’re requesting. To that end, you should have three years’ worth of business and personal tax returns on hand, as well as year-to-date profit and loss statistics, balance sheets, accounts receivable aging reports, and inventory breakdowns if at all possible. You can normally acquire all of that information from your CPA or bookkeeper, though accounting software like QuickBooks or Quicken can generate the majority of it just as readily.
- Make a business plan: If you’re looking for a loan as a startup, you’ll need to have a business plan prepared. If you don’t have it written down yet, there are many free resources available, such as local Small Business Development Centers, SCORE, and Economic Development Centers.
- Calculate how much you’ll require: It’s also necessary to have estimates for the work or purchase ready to present the loan officer if you require a loan for a one-time purchase or alternative financing option.
- “Lenders want to see that you have carefully considered your business goals, know how much money you will need to reach them, and have a detailed strategy in place to utilize the money,” Karen Axelton explained. “Do the math to figure out how much it will cost to create a second store or buy new machinery.” Calculate how loan repayments may impact your company’s budget in the future.”