A Complete Guide on How to Obtain a Business Loan

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A business loan can be a great solution for any company that wants to expand, invest in new equipment, or manage cash flow. However, without the necessary information, obtaining the best-suited business loan can be a quite difficult task. 

This guide will simplify the process, giving you an understanding of the finance world.

Understanding the Types of Business Loans

There are several types of business loans, each serves different needs and comes with its terms and conditions.

Types of Business Loans

• Term Loans: This is a regular type of loan where you borrow money and repay it over a couple years, with monthly payments. Term Loans are usually processed by banks, and are suitable for major investments such as purchasing a lot of equipment or expanding facilities.
  
• SBA Loans: These are government-backed loans. Therefore, the whole idea of an SBA loan is to help small businesses by usually having good terms and lower interest rates-ideally for businesses that are doing over $4M annually.
  
• Lines of Credit: The way a line of credit is a lender will give you access up to a pre authorized limit. You can pull funds from the line of credit as needed and pay interest only on what you use. 
  
• Equipment Financing: These loans are specifically used to purchase equipment for your business. The equipment is used as collateral, and you don’t have to deal with a lot of hassle to get approved for the loan.
  
• Invoice Financing: Also known sometimes as accounts receivable financing, this is when you borrow against your outstanding invoices. This can be a great option if customers aren’t paying bills on time.
  
• Revenue-Based Financing: Here, you get a business loan in exchange for a share of your future sales, until the loan is paid back. Revenue-Based Financing is the easiest and quickest type of business loan available.

Step by step: How to obtain a Business Loan

Start by preparing for this process after you have identified the loan type that you’re eligible for and best suits your needs.

Here is the process to follow: 

Financial Health: The lenders will analyze your financial statements, they will mainly focus on your revenue and cash flow.

• Business Plan: If you apply with a bank you’ll need a business plan. It needs to incorporate financial projections, market research, and information pertaining to your business model.
  
• Credit Score: A significant factor in determining the loan approval includes your credit score. The better your credit score is, the better the loan approval will be. Check out your credit score report, to know what type of loan you’ll be qualified for.
  
• Documentation: The documents you need, depend on the type of loan you’re applying for. A bank or the SBA will require the last three years tax returns, while an online lender will simply require the last three months bank statements. 

Application Process

How the application process works can be different for various lenders and loan types, but roughly it would go in this order: 

• Find a Lender: Identify those that do offer loans that you’ll qualify for. The most popular options are banks, credit unions, online lenders, and alternative financing companies.
  
• Apply: Fill out your loan application form and submit it with the required documents. Obviously, fill in all the information carefully to avoid any delays.
  
• Underwriting: The lender will review your application, check your credit score, and assess the risk of lending to your business.
  
• Approval and Funding: When working with an online lender, once you get approved, you will be provided with a loan offer. After you accept the loan, the funds will be disbursed to your business account, within a couple hours.

How to Increase Your Chances of Approval

Good credit profile: make all payments on time and reduce debt. A high level of credit history boosts your chances of getting approval for your loan request.

• Strengthen Your Financials: Keep steady revenue and profit levels. Lenders are most likely to approve a loan for businesses that have consistent and increasing financials.
  
• Consider bringing a Co-Signer: A co-signer with a good credit profile can add strength to your application if you have weak credit or financial history.
  
• Be Prepared for Collateral: Secured loans are generally better in terms of approval rates and typically have better terms. Be prepared to pledge assets against a loan, when required.
  
• Get a Professional: It’s always best to consult with financial advisors or loan specialists; they can give you insight and help you through the application process.

How to Overcome a Bad Credit Score

If you don’t have the best credit score, you can either try to improve your credit score or apply with a lender that won’t stress too much about it. If you plan on improving your credit score, you can pay off some debt, and make sure to pay bills on time, (mainly your credit card balances).

The advantages of online lenders:

The online applications for loans can be completed within minutes. The approval process is much quicker than traditional banks.

Their eligibility criteria are more lenient, thereby allowing more and more small businesses to get access to working capital.  

Conclusion

Getting a business loan can give a lot of opportunities for every business. Knowing the type of loans available, and how the process works, will help you obtain a business loan easily.

Crystal Business Funding provides simple & easy working capital solutions to small and medium sized businesses.