What You Need to Know Before Applying for a Business Loan
If you are a small business owner who needs funding to start or grow your business, you may be wondering how to apply for and get a business loan.
There are different types of business loans available, depending on your needs, qualifications and goals.
In this blog post, we will explain the steps you need to take to find and secure the best business loan for your situation.
Step 1: Decide what type of loan you need
The first step is to determine what kind of loan you need to fund your business. Different loans have different purposes, terms and requirements. Here are some common types of business loans:
- Term loans: These are lump-sum loans that you pay back over a fixed period of time, usually with interest. Term loans can be used for large purchases, expansions, refinancing or working capital. Term loans can be secured or unsecured, meaning they may require collateral or not.
- Lines of credit: These are revolving loans that allow you to access funds up to a certain limit as you need them. You only pay interest on the amount you use, and you can reuse the funds as you repay them. Lines of credit can be used for short-term or seasonal expenses, such as inventory, payroll or emergencies.
- SBA loans: These are loans backed by the U.S. Small Business Administration, which guarantees a portion of the loan in case of default. SBA loans have low interest rates and long repayment terms, but they also have strict eligibility criteria and application processes. SBA loans can be used for various purposes, such as starting, buying or expanding a business, purchasing equipment or real estate, or refinancing debt.
- Business credit cards: These are cards that allow you to make purchases and pay them off over time, usually with interest. Business credit cards can offer rewards, cash back or discounts on certain purchases, as well as perks such as travel insurance or fraud protection. Business credit cards can be used for small or recurring expenses, such as supplies, utilities or marketing.
- Personal business loans: These are loans that you take out in your own name and use for your business. Personal business loans can have lower interest rates and easier approval than business loans, but they also affect your personal credit score and expose you to personal liability. Personal business loans can be used for startup costs, working capital or emergencies.
Step 2: Check your qualifications
The next step is to check if you meet the qualifications to get a business loan from your preferred lender. Different lenders have different criteria for approving borrowers, but some common factors they consider are:
- Credit score: This is a number that reflects your credit history and repayment ability. Lenders use your credit score to assess your risk level and determine your interest rate and loan terms. Generally, the higher your credit score, the better your chances of getting approved and getting favorable terms. You can check your credit score for free from various sources online like Credit Karma or Nav..
- Business revenue: This is the amount of money your business makes from selling goods or services. Lenders use your business revenue to measure your cash flow and profitability. Generally, the higher your business revenue, the more likely you are to qualify for a larger loan amount and lower interest rate.
- Business age: This is how long your business has been operating legally and generating income. Lenders use your business age to evaluate your stability and track record. Generally, the older your business, the more likely you are to qualify for a loan, especially if you have a positive growth history.
- Collateral: This is an asset that you pledge as security for the loan in case you fail to repay it. Lenders use collateral to reduce their risk and recover their losses if you default on the loan. Generally, having collateral can increase your chances of getting approved and getting lower interest rates, but it also means you risk losing the asset if you default.
What are the lenders for a business loan?
There are different types of lenders, such as banks, online platforms, credit unions, and alternative lenders, each with their own advantages and disadvantages. In this blog post, we will compare some of the most popular lenders for applying for a business loan in the US and help you decide which is the best for your needs.
Banks
Banks are the traditional source of business loans, offering long-term financing at low interest rates and favorable terms. However, banks also have strict eligibility criteria, and require a good credit score, solid business plan, and collateral. Banks also tend to have a long and complicated application process, which can take weeks or months to get approved. Banks are best suited to established businesses with a strong financial history and significant financing need.
Online platforms
Online platforms are websites that connect borrowers with lenders, offering a variety of loan products and terms. Online platforms have a simpler and faster application process than banks, and often require only basic information and documents. Online platforms also have more flexible eligibility criteria, catering to different credit sectors and industries. However, online platforms also charge higher interest rates and fees than banks, and may have shorter payment periods and lower customer service. Online platforms are best suited for small businesses that need moderate funding and fast turnaround time.
Credit unions
Credit unions are non-profit financial institutions that provide business loans to their members. Credit unions have lower interest rates and fees than online platforms, and may also offer more personalized services and advice. Credit unions also have more lenient eligibility criteria than banks, focusing more on the personality and abilities of the borrower than on the credit score and collateral. However, credit unions also have a limited geographic reach and loan portfolio, and may not offer the type of loan or amount you need. Credit unions are best suited for small businesses that have a good relationship with the local community and need modest financing.
Alternative lenders
Alternative lenders are non-bank entities that offer business loans with non-traditional features and terms. Alternative lenders have an easier and faster application process for all lenders, and often offer financing within hours or days. Alternative lenders also have the most relaxed eligibility criteria of all lenders, accepting borrowers with bad credit, no collateral, or no business history. However, alternative lenders also charge the highest interest rates and fees of all lenders, and may have very short repayment periods and harsh penalties. Alternative lenders are best suited for startups or businesses that need urgent financing and have no other options.
Compare lenders
compare different lenders and their loan offers. You can use online platforms, such as NerdWallet or Fundera by NerdWallet, to compare multiple lenders and loan products in one place. These platforms will ask you some basic questions about your business and loan needs and then match you with lenders that fit your profile. You can then review the loan terms and conditions from each lender and choose the best option for you.
- Interest rate: This is the percentage of the loan amount that you will pay in interest over time. The lower the interest rate, the less you will pay in total. However, interest rates may vary depending on the type of loan, the lender's risk assessment, and the market conditions.
- APR: This is the annual percentage rate that represents the total cost of borrowing over a year. It includes not only the interest rate but also any fees or charges that may apply to the loan. The lower the APR, the less you will pay in total. However, APR may not reflect the actual cost of borrowing if you repay the loan early or late.
- Loan amount: This is the amount of money that you can borrow from the lender. The higher the loan amount, the more you can finance your business needs. However, loan amounts may be limited by your eligibility criteria, such as your credit score, revenue, industry, and business history.
- Repayment term: This is the length of time that you have to repay the loan in full. The shorter the repayment term, the less you will pay in interest over time. However, repayment terms may also affect your monthly payments and cash flow. The longer the repayment term, the lower your monthly payments will be but the more interest you will pay over time.
- Collateral: This is an asset or property that you pledge to secure the loan in case you default on your payments. The lender can seize or sell your collateral if you fail to repay the loan as agreed.
Some of the top sources for obtaining a business loan :
Lendio: A lender comparison site that lets you access over 75 lenders with one application. It offers various loan products such as term loans, equipment financing, invoice financing, and more. It has a low minimum credit score requirement of 560 and no application fees1. To apply, you need to fill out an online form and provide basic information about your business and financial situation. You will then receive multiple loan offers that you can compare and choose from2.
Fundera: A marketplace that connects small business owners with lenders that offer SBA loans, term loans, lines of credit, and more. It helps you compare multiple loan offers and find the best one for your needs. It also provides educational resources and guidance3. To apply, you need to create an account and answer some questions about your business and financial history. You will then get matched with suitable lenders and receive personalized loan options.
OnDeck: An online lender that offers short-term loans and lines of credit for small businesses. It has a fast and easy online application process and same-day funding for those who are approved. It has a minimum credit score requirement of 625 and a minimum annual revenue of $100,000. To apply, you need to complete an online application and provide basic information about your business and bank statements. You will then get an instant decision and funding within 24 hours.
Kabbage: A technology company that offers various small business loan options and a line of credit up to $150,000. It has a fast and easy online application process and flexible payment terms. It also offers a business checking account and a mobile app. To apply, you need to link your business accounts such as bank accounts, payment platforms, or accounting software. You will then get an instant approval decision and access to funds within minutes.
Funding Circle: An online platform that connects small businesses with investors who offer term loans up to $500,000. It has competitive interest rates and transparent fees. It has a minimum credit score requirement of 660 and a minimum time in business of two years. To apply, you need to fill out an online application and provide documents such as tax returns, bank statements, and business financials. You will then get a dedicated account manager who will help you through the process.
These sources can help you find the best business loan for your situation and goals. You should compare the loan amounts, interest rates, fees, repayment terms, and eligibility requirements of different lenders before applying.
Conclusion
As you can see, there is no one-size-fits-all lender for applying for a business loan in the USA. You need to consider your business goals, financial situation and preferences before choosing a lender. You also need to compare different lenders based on interest rates, fees, terms, eligibility criteria, application process, and customer service. By doing your research and shopping around, you can find the best lender for your business loan in the USA.