We understand that you and your business’s financial needs are unique. When it comes to financing your next business venture, we want to make sure that you’re fully prepared to successfully apply for a business loan. We’re breaking down the top 5 tips you should know when applying for a business loan.
Get Organized and Prepared
Before applying for a business loan, it’s important to consider the different factors that go into the loan application process.
Timelines are important. Do you need this loan in three days? Or do you need this loan in four months? How long do you need to pay back this loan? It can take three days to a few months to secure a loan based on your credit score and the amount you’re asking for.
Additionally, knowing a projected timeline of when you predict you’ll be able to repay the loan will help determine the term of your loan. Knowing what you need in advance is important to help you and your business succeed. If you suspect that your business will be in need of outside funding in the near future, it would be beneficial to start preparing now instead of scrambling later when your needs become desperate.
It’s critical to keep your financial and business records in order. Having your tax returns, income statements, business licenses, permits, contracts, resumes, proof of collateral, credit score and business information organized will make the process easier for you in the long run. It’s also important to have a plan for your business model. When requesting a loan, knowing what you’ll use the funding for helps the lender understand your financial needs and purpose.
Maintain Good Credit
Good credit history is a key factor in obtaining an ideal loan. Your credit score is a value range of 300 to 850.
The higher your credit score, the better rate, and loan you will likely secure. You can improve and maintain your credit score by paying bills on time. About 36% of small businesses were denied at least some portion of their loan request due to their credit score.
Keep in mind that borrowing a loan impacts your credit. Typically, when you apply for a loan, the lender will usually run a hard credit check. A hard credit check pulls your credit history and also lowers your credit score each time it’s pulled.
If you apply for multiple loans at a time, your credit score will inherently dwindle each time a lender performs a hard pull. It may be best to strategically borrow loans by doing research ahead of time, as mentioned previously, to apply for a single loan that you have the highest chance to be approved for rather than multiple loans that you have a less likely chance of securing.
Choose the Right Loan Type for Your Needs
It may be beneficial to shop the market for the best rate available. Do some research to find a business loan rate that works best for you. A common misconception is that the only way to obtain a loan is through a commercial bank.
A couple of alternative options available are to secure financing through private or alternative lending sources. Our team at Innovative Capital has developed relationships with both commercial and private lenders and is well versed in helping our clients find the best loan to meet their needs.
Consider this, a company looking to finance a business startup likely has different needs than an established business looking to expand or upgrade equipment. There are a plethora of loan options available, and we aim to support our clients as they determine how to apply for the right one.
If you don’t know where to start, here are some of the most common loan options that borrowers may pursue.
Traditional Bank Loan
A traditional bank loan is often what people think of when they consider borrowing a loan. You can get one through a local credit union, or larger banks such as Wells Fargo. Traditional bank loans are often associated with lower interest rates, however, they often take a bit more time to close than an alternative lending solution.
Commercial banks have specific guidelines and requirements by which they can and cannot lend. If your needs meet these requirements, you’re in luck! However, if you do not meet their requirements, you may have taken the risk of investing weeks of review only to end up back at square one if you’re turned down.
Additionally, many bank loans require borrowers to make a balloon payment. A balloon payment is a larger payment due at the end of the loan term. Due to their specific requirements and guidelines, securing a traditional bank loan can be challenging. According to Globe Newswire, commercial banks approved only 28.8% of submitted loan applications in 2020.
Private Money Lenders
Private lenders are often a popular option for small businesses because they are usually simpler and faster to be approved. In some cases, turnaround time can be as quick as five days or less. Private lenders’ requirements are typically more lenient than commercial bank loans but depend on the lender.
As a small business, a private lender may be more beneficial because they do not rely as heavily on having a great credit or financial history. You may still be required to provide those documents though. In return for quick approval, you may have higher interest rates.
Before working with an alternative lender, know the rate, fees, policies, and lender ratings. You can look at their ratings through the Better Business Bureau website.
Small Business Administration (SBA) 7a Loan
The Small Business Administration Loan is a government agency that provides loans for entrepreneurs and small businesses looking for funding. They offer a variety of loan types: 7(a) Loans, 504 loans, Microloans, Disaster Assistance, Grants, and more. They implement parameters for lenders and your loans so you have a higher likelihood of securing a loan, especially if traditional loans are harder for you to secure.
The SBA can guarantee lenders that loans will be repaid since they will usually cover about 75%-90% of the loan. A drawback of an SBA loan is they do have stricter requirements. They typically require more paperwork, higher fees, and take longer for approval (about 30-90 days).
Term Loans
There are three types of term loans: short-term, medium-term, and long-term. They all have different purposes and functions and are flexible to meet various business’ needs. The interest rates secured may be fixed or floating depending on the loan.
Short-Term Loans
These loans are typically used to fund smaller projects or expenses within your company. This option may be a suitable alternative for a business line of credit.
Short-term loans typically range from $5,000 to $250,000. They may be used to cover an emergency expense, or even help capitalize on a time-sensitive business opportunity. Loan terms typically range from 3 to 24 months.
Approval for short-term loans can often occur in less than 24 hours. A drawback of a short-term loan is that they are typically associated with higher interest rates. Make sure you know a loan’s interest rate and think about how quickly you can pay it back before accepting the loan. In some cases, interest rates can reach up to 400%.
Medium-Term Loans
Medium-term loans are a great option if you are looking for quick funding for a one-off expense, typically under $500,000. The approval process usually takes a couple of weeks, and these loans offer the benefit of paying back predictable payments over a set period of time, usually about two to five years depending on what the lender decides. Interest rates will likely vary based on your credit history and the loan amount, but you can often predict mid-market interest rates.
Long-Term Loans
Looking to fund a larger and longer-term financial project? A long-term loan may be a great option for you. As the name suggests, these types of loans provide a longer timeline to repay the amount borrowed (usually around three to five years, but they may be longer).
When it comes to securing an interest rate, the process is similar to a short or medium-term loan. Your credit history, financial history, and desired amount to be borrowed are all considered. You’ll usually secure a mid-market interest rate if you choose a fixed rate.
It’s critical to consider the fact that a long-term loan may put you and your business in financial strain for the larger period of time it takes to be repaid. Remember that a large portion of the repayment cost ends up falling heavily towards making interest payments to the lender. A long-term loan will also make it more difficult for you to apply for other loans during the time that the long-term loan is held.
Line of Credit
A business line of credit can be understood similarly to a typical credit card that you may individually open. When you open a credit card, the bank you open it with will assess your credit history and cash flow to determine what credit limit they will grant you.
A business line of credit is similar, but typically on a larger scale. The lender will factor in your credit and financial history to determine the credit limit that they will loan you. Borrowing a business line of credit may be useful for a business that needs to make multiple purchases or payments over time rather than one large purchase such as a real estate property acquisition.
Utilizing a line of credit allows businesses to spend and repay the amount that they borrow at their leisure while maintaining a standard interest rate on the amount borrowed. It should be noted that lines of credit loans typically have a higher interest rate than other loan options.
Once you understand the different types of loans available to you, narrow down the best fit for your business needs. You don’t want a long-term loan if you are looking to fund a $12,000 project that you know you can repay quickly.
Know How Much Money You Need
How much money you need to finance your project is one of the most important questions you need to ask yourself. It will help you determine where you want to apply for a loan, and what type of loan you want to pursue.
Think about how much you need to fund your project in addition to how much you can afford to borrow and eventually pay back. Take into account that more often than not, you will need more funding for a project than you think.
Be prepared for those situations by considering how much of a buffer you may need. In some cases, it may be better to borrow a little more than your exact budget than to be underfunded for a project. Knowing how much you need to borrow will guide you in the right direction.
Have Sufficient Cash Flow
Proving you have the financial backing to consistently make your loan payments is appealing to lenders. It helps prove that you’re in a strong financial position to borrow and repay the loan in a timely manner and lets the lender know they are making a smart investment and taking a worthwhile risk.
Lenders want to see that your business is bringing or will bring in enough revenue to fulfill monthly payments on time. Take a look at your financial records to confirm if you have a history of paying off loans on time. In any lending scenario, the lender will review your tax returns, credit history, and debt to determine whether or not they will approve your loan, and at what rate and terms.
If you or your business are in need of an innovative funding solution for your upcoming venture, our team at Innovative Capital Corporation can help. Our team of experienced experts aims to match your unique needs with the right loan to fulfill them most efficiently. We eliminate the waiting game of processing approval for one loan at a time by sourcing your unique needs to our pool of lenders, including both commercial and private sources. For more information or to get started, speak to our team today.