When your business is looking to grow, secure cash flow, or invest in something like new equipment, you might want to consider a small business loan.
If this sounds like you, the good news is, you’ve already taken a step in the right direction. Any business considering a business loan should start by researching their options.
Lack of preparation is the main reason companies are refused during their search. As Mark Palmer, Managing Director of BTIG (an investment firm) says, “a lot of companies just don’t know the application process” and think they can just fill out an application and get approved. But it is not that simple.
Although the strict loan standards make it more difficult to obtain business loans, online lenders offer business owners more options. So if your bank tells you no (or you need a loan fast), follow this step-by-step guide to getting a business loan online:
1. Find out exactly why you need a business loan
A lender won’t consider you if you don’t have a legitimate reason for needing a loan. It is not enough to start a business.
There are many reasons why business owners apply for business loans. You may want to build up credit for a large future project that will require financing. There could be a lucrative business opportunity that requires capital to be seized. Or maybe you need the cash to hire new employees.
Either way, be prepared to ask yourself tough questions, like:
- Do you absolutely need the money?
- What if you don’t get it?
- Are you investing in growth or trying to fill a gap?
- Do you have sufficient cash to repay the loan?
While there is never a guarantee of approval, you need to be able to explain exactly why you need the money. Be prepared to talk to lenders about it. Be aware that some loan goals – starting a business, acquiring another business, or buying out a partner – are notoriously difficult to finance.
2. See if you meet the criteria
Typically, you and your partners should already have good personal credit and industry experience. Having proof of your ability to repay the loan is crucial. Personal and professional guarantees help a lot. And if you’re personally invested in the business, that’s a good sign.
You will also need to put all your documents in order. Again, this will vary with each lender. But you will probably need the following:
- Bank statements: The financial health of your business will be examined (as will your personal financial health).
- Company Info: Lenders need to know how long you’ve been in business, who your customers are, and what your bottom line is.
- Legal documents: You need proof of ownership and all appropriate licenses and permits.
3. Decide on the right type of loan
You should probably decide what the right business loan looks like before you start actively looking. There are many options out there, so it’s worth exploring all that apply to you.
Traditional term loan
With a traditional term loan, you can get the money up front and pay it back over a fixed period (usually 1 to 5 years). These loans are made for a specific business purchase, such as equipment.
Yes, a personal loan can be used for business purposes. Applying for a personal loan is a good idea when your business doesn’t have a long financial history.
Business line of credit
A business line of credit allows you to borrow money only when you need it. They can be a great solution when cash flow is an issue.
Even if you can’t get a traditional loan from an online lender, you’re out of luck. Invoice financing gets you money for invoices before the customer pays (a percentage of the invoice is usually given to the lender).
cash advances to businesses
Also called a merchant cash advanceThese loans provide you with a lump sum capital. You repay by donating a portion of your daily credit card sales. The approval process is easier than other loans and you don’t need exceptional credit. However, the fees are certain, if not the highest on the market.
4. Find a lender
Business loans can range from $ 2,500 (microloans) to seven figures. Naturally, most financial institutions don’t like to deal with small amounts because they are less profitable and still require the same amount of work.
For small loans that would not be approved by traditional banks, consider the following options:
- Not-for-profit microlenders: These lenders generally offer very favorable terms and interest rates. They also work at educate borrowers on the best way to take advantage of loans.
- Community banks and credit unions: These financial institutions are often very willing to work with small businesses.
- Other alternative lenders: These include peer-to-peer lending platforms, crowdfunding sites, purchase order funders and others. Many of these companies offer quick loan approval. But the interest rates are generally higher than those found with bank loans.
The Small Business Association (SBA) is also an option. SBA loans are long term loans guaranteed by the government. These can be used for many purposes and usually have low interest rates.
You can get a general loan, like the 7 (a) ready. Or you can apply for something to meet your specific needs, like a CDC / 504 loan (for real estate and equipment).
The application process is quite long for SBA loans, and you may need to post collateral. But even if you have been refused by a traditional bank, you can still get SBA approval.
5. Compare loans and choose
Usually, loans take anywhere from a few days to several weeks. it may take months if you are applying for a loan from the SBA. But the rise of online lenders offering immediate loans is a game-changer.
You will quickly discover that different oOnline lenders quote their rates in different ways. You need a way to compare apples to apples.
Consider the following when reviewing a loan agreement:
- Interest: This is the cost you pay on the loan until it is fully paid off. The interest rate can be 5%, 10%, 15% or more. Keep in mind that it doesn’t factor in other expenses, like origination fees.
- Annual percentage rate (APR): This number includes the interest rate, as well as the costs associated with obtaining the loan. Remember, the loan with the lowest interest rate is not always the most affordable loan. It’s the APR that tells you more.
- Costs: These are in addition to the total cost of borrowing for the loan. Examples include administration costs, set-up costs, closing costs, etc.
- Factor rate: This type of fixed interest is usually accompanied by cash advances from merchants. You need to multiply your loan principal by your factor rate to determine what you’ll pay back. For example, if you have to borrow $ 10,000 and your factor rate is 1.25, then you will have to pay back $ 12,500.
Whichever option you choose, be sure to look at the Annual Percentage Rates (APRs) and terms. Be thorough. Understand the total cost of the loan and its potential impact on your life. And always choose the lowest APR if possible so that there are no surprises.
Get a small business loan online and grow your business
When it comes to finding the right business loan, it pays to be as prepared as possible. Be sure to seek out loans from all kinds of sources and keep an open mind as to how much money you need. Always ask loan officers as many questions as possible before signing a contract.
Remember: this is your business and you will have to pay back the money. The more research you do and the more precautions you take, the better off you’ll be in the long run. If you are diligent, careful, and resourceful, you will be on your way to securing the best possible loan for your business.