Behind every successful company is a solid business plan. Not only does the plan allow you to outline specific goals, bu...
Are you considering taking out a business loan? Make sure you read our guide to answer you questions regarding collaterals, business loan types and steps that need to be taken to apply.
For some business owners, a loan can make a substantial difference in whether or not they’re able to expand their company and, thus, potentially make a larger profit. By fully understanding the loan process, knowing what to look for, and what factors to compare, business owners can potentially make more informed decisions about what type of loan is the best fit for them.
One of the key factors in how to get approved for a business loan is a borrower’s credit score. There are two types of credit scores: a business credit score and a personal credit score. While they share some similarities, each carries important differences. For instance, a good business credit score is usually considered to be 80 and above while 740 and above is considered a very good FICO credit score. Business credit scores can be tracked by Dun & Bradstreet, Equifax, and Experian. Business owners can establish and increase their business credit score by legally registering their business, paying their bills on time, working with vendors that report payments to credit bureaus, and creating business financial accounts. If a consumer recently started their business, chances are, they won’t have much of a business credit history. In these types of instances, lenders will instead use their personal credit score to base their decision on. To check their business credit score, consumers typically need to pay the above-mentioned credit bureaus a fee. If someone is just starting out as a business owner, they can learn more about the business loans to build up their knowledge base on what to know about financing their ventures.
While every lender has different approval criteria, they’ll typically take these considerations into account: credit score, how long the business has existed, revenue, and cash flow. The type of credit score borrowers needs and the age of their business will vary from lender to lender and depend on the type of loan they apply for. This is why, before taking out a loan, it’s important for business owners to know where they stand both with their credit and finances as these factors can make or break whether they are approved. It’s also highly recommended for business owners to shop around to compare the rates and terms they’re being offered. There are several types of business loans a person can take out—Small Business Administration (SBA) loans and conventional business loans. It’s recommended to know the differences between SBA loans and conventional business loans as this can guide business owners as to which to apply for.
Knowing how to apply for a business loan is an important part of the process. Most lenders require that borrowers supply documentation to verify the information. This will give lenders insight into whether a business owner is a good fit. Borrowers may need to gather the following financial documents:
While each lender is different, many of these document requirements may be similar for multiple lenders. So, if a business owner gathers this documentation, they may be able to present them to various lenders. However, since each lender will have different criteria, borrowers may need to ask lenders ahead of time what financial documents they may need. Once a business owner has gathered the necessary documents for a loan, they can then take these steps for applying for a business loan.
When giving out loans, most lenders will probably want to know how the funds will be used toward growing the business and how they will be repaid. To satisfy lenders’ criteria, borrowers may have to submit a plan on how they plan to use the loan. When talking with a lender, borrowers may need to be prepared to defend their plan by demonstrating how a loan would help expand their business and increase profitability. Borrowers may need to supply information on sales, a market analysis, a company description, and information on products or services. To prepare ahead of time, borrowers can ask lenders what kind of specific information they’re looking for when asking how the loan will be used. While some lenders may have stipulations on what borrowers can put a loan toward, oftentimes, borrowers can use business loans for the following expenses:
When a lender provides a loan, they take on a certain amount of risk. By requiring collateral, lenders decrease their risk. However, in the event that a borrower cannot pay back a loan, the lender can legally take that collateral as a form of compensation. There are various types of collateral for business loans, and the type of collateral a borrower may have to offer can depend on the lender. For example, a lender may allow a business owner to take out a loan to finance equipment for the company and use the purchased equipment as collateral for the loan. Depending on the type of loan, the SBA typically does not require lenders to secure loans under $25,000, but if the loan amount exceeds $350,000, lenders may want to acquire as much collateral as possible to ensure repayment. Similarly, private lenders may also want collateral equal to the amount they are lending.
A personal guarantee is when a borrower agrees that if their business cannot repay a loan, they, as an individual, will repay it. It’s similar to a borrower serving as their cosigner. As a result, that debt can negatively impact a business owner’s credit, especially if they’re unable to repay.
While business loans typically require collateral, some lenders offer unsecured loans—meaning borrowers won’t have to put up any valuable assets. Unsecured loans put less risk on the borrower as if they’re unable to repay, the lender can’t collect the collateral. On the other hand, unsecured loans can be more challenging to qualify for as they require higher credit scores and can come with higher interest rates than loans that necessitate collateral.
Before agreeing to take on a business loan, there are various factors consumers should consider that can determine whether taking on debt is in there and their business’s best interest.
In particular, it’s important for business owners to research lenders, compare the types of loans offered, and decide which is the best fit for them. Other aspects to contemplate include rates, amounts, loan repayment plans, the time a business has to be operating for, whether collateral is required, and the minimum required credit score. These conditions can determine whether a business owner may even qualify for a loan and how much they’ll pay over the loan's lifetime.
Borrowers can learn more about their options by comparing business loan reviews and evaluating which lender may be right for them. There are also a number of considerations for funding your business with a personal loan that is worth exploring.
Business loans can offer financial support to business owners looking to expand their companies. They can be used for various means, such as to hire more employees, purchase equipment, or lease a storefront space. To learn more about lenders, potential borrowers can compare the best business loans and rates.