The first time you are applying for a business loan is probably one of the most nerve-racking experiences for an owner. Borrowers often find it overwhelming and even confusing to seek a loan for a business.
What to expect when applying for a business loan
However, with the right knowledge and preparation, you will realize it’s not as overwhelming as you expect.
As they say, you need to spend money to make some money. Many businesses need to explore various financing options to maintain a healthy influx of working capital. Not all owners have an overflowing savings account to cover day-to-day expenses. The solution? Apply for a business loan that provides access to that much-needed funds.
Booster Financial is a leading financing agency that offers a host of loan options for businesses. Our team can take you through the basics of a business loan through this guide. We want to help you prepare for your loan application through this guide.
Why consider a business loan?
A business loan is perhaps the most reliable way of financing a business. It’s a lending agreement between a lender (banks, credit unions, or alternative lenders) and a borrower. The lender typically provides the money in advance. The borrower is then expected to pay it back plus the interest in regular repayment schedules.
In general, the lender approves a loan based on the credit rating of a business and its owner. Your time in business, financial health, and collateral (assets you can pledge as security) may affect the lender’s decision, too.
In some cases, it can be difficult to qualify for a loan for a business. If you fail to prove your creditworthiness, you might not get the loan of your choice. However, Booster Financial offers financing products even for businesses with less-than-stellar credit. Instead, our experts inspect your business performance and revenue as the main qualifications for a loan.
Here are some of the uses of business loans:
- Maintaining or enhancing cash flow
- Business expansion
- Purchase of assets or stock inventories
- Maintenance or repair costs
- Marketing purposes
- Other one-off expenses
Loans have the potential to boost your bottom line and open opportunities for business growth.
9 things you can expect when applying for a business loan
Every loan product offered by different lenders is unique. However, there are some common features and qualities that you should familiarize yourself with below.
Some loans require collateral
Lenders typically categorize loans into two: secured vs. unsecured. A secured loan is protected by collateral, which is an asset you pledge to the lender. It could be your property, inventory, bonds, stocks, or personal items you purchased like a house or car. The lender uses the collateral to minimize the risk for them. If you fail to repay the loan, they can seize and sell your asset to recoup the lender’s losses.
On the other hand, you can see that an unsecured loan actually does not require collateral. However, these loans have significantly higher interest rates than secured loans.
For traditional lenders like banks, borrowers are expected to pledge hard assets to guarantee a business loan. They will look thoroughly into the value of your collateral to ensure that they face lesser risk.
If, for example, you put up your accounts receivables as collateral, banks will first investigate how solvent (you own more than you owe) your company is. They will usually only accept a portion of the receivables, maybe about 50-75%. The same goes for inventory as collateral—the lender will need to check the quality of your items and only accept a percentage as a guarantee.
Startups and small businesses may seek business loans from a bank if they choose a loan product backed by the Small Business Administration (SBA). The caveat is the strict eligibility requirements and longer approval times. Alternatively, a small business owner may need to pledge personal assets such as house equity to secure a loan.
Lenders may ask for a business plan
Although it’s not always the case, the lender may want to review your business plan to understand your company. Having a well-written business plan may effectively improve your chances of having an approved loan application.
If your lender does not ask for your plan, it’s still ideal to have one ready. Your business plan details your targets and concrete strategies to achieve them. From there, you can gauge how much money you would likely need to borrow.
What’s in a business plan? Here are some of the information you can include:
This section is a rundown of your company profile, which includes everything that will be discussed in the other sections.
Description of the business
Straightforward outline of your products or services and other related information.
This portion talks about the competition you face in the industry. It also summarizes consumer demand for your product or service.
It reveals the ways your business can attract and keep customers. It includes marketing campaign plans.
Business structure and staffing
Information on your leadership and employees, and the dynamic of your staff.
This section talks about your company’s balance sheets, financial statements, and future projections
Any company dedicated to its growth will have a detailed budget in place. It reveals costs related to marketing, manufacturing, development, staffing, and other business-related expenses.
As a rule, you should avoid exaggerating your figures or you could struggle with your repayment terms in the future.
Borrow the amount you need, not want
Now that you have prepared your business plan, it’s time to decide how much money you should ask your lender. Of course, it is tempting to borrow the maximum allowable limit. However, you must remember that you will eventually have to repay it.
Therefore, you should set an amount that you can comfortably pay without disturbing your cash flow. Most borrowers calculate the estimated expenses that need the funding. They will then add a few extra dollars to make space for unexpected costs.
If you are applying for a business loan, you should always have money in the bank to fulfill your monthly loan repayments. Otherwise, you could be facing sanctions from your lender.
Your credit score
Most lenders, especially traditional ones, look closely into your credit profile before they grant you a loan. They will check your history and determine your creditworthiness. No lender wants to loan money to someone who might end up struggling with their finances due to debt.
There is no standard score that dictates 100% approval of your application. However, lenders may investigate your credit history thoroughly. They can check your existing or past loans and whether you repaid them well.
If you do not need immediate funding, you can work on building your credit before attempting to try a loan for a business. Even if you had past issues with your credit but managed to improve it, you could still become eligible for more favorable loan products.
Suppose your business isn’t as creditworthy as banks prefer. You don’t have to lose hope because you can still apply to other lenders. Booster Financial considers a business’s performance and revenue rather than credit history. Any company seeking additional funding can trust our agency to provide the most suitable product to match your needs.
Applying for a business loan will have you paying the interest and other related fees. The amount depends on what you and your lender agreed upon. Additionally, you may shoulder costs such as origination fee, service fee, legal fee, and other expenses incurred during the application and approval process.
You can use a loan calculator to get an estimate of the overall costs of your loan. It can also provide a preview of your monthly repayments. Learning this information helps you adjust the amount you can afford to borrow and the duration of the loan.
For example, you have a $5,000 loan over two years at a 6% interest rate. You will be expected to repay $221.25 monthly, with an overall loan cost of $5,310.
Not all lenders are the same
You might notice that lenders will offer the same loan products. However, each of these funding options has unique elements that you should learn before signing that document. They can have varying terms and conditions, eligibility requirements, interest rates, and repayment terms.
Therefore, it is better for you to shop around before saying yes to a specific loan. You must research lenders that offer your preferred loan type. Inspect their reputation, as well as the interest rates they offer. You will want to work with a lender that you’ll have no trouble dealing with for the foreseeable future.
Some lenders allow you to check your qualifications before you submit a loan application. You can also do your research on the eligibility requirements for your loan of choice. If you have questions, you can read FAQs and guides on the type of loan you are eyeing.
However, if you’re still not sure whether you are eligible for a loan, some lenders will consider different factors other than their declared requirements. You can discuss with the lending agency representative to determine whether you are qualified or not.
When you head out to a business loan interview, always bring these essentials with you:
- Proof of identity
- Proof of address
- Insurance documents if necessary
- Tax return copies
- Copy of your business bank accounts
Read the print
Do you want to pay off your loan early or make a lump sum deposit? Before you do, check the terms and conditions. Some loans can have you shouldering a prepayment penalty for paying off your loan earlier than the end date.
Reading the contract ensures that you know everything there is about your debt. It protects you from surprise costs and penalties that you could otherwise avoid if you only reviewed the closing documents before signing them.
Questions during the interview
If you finally choose a lender and begin the application process, you’ll likely have to answer several questions such as:
- Why do you need the loan?
- How are you planning to spend the money?
- How long does it take for you to repay the full amount?
- Are you capable of pledging an asset to secure your loan?
- What are your past successes?
- Can you walk us through your business’s financial plan?
- What makes you confident that your business can succeed where competitors have failed?
Frequently asked questions
What is the loan limit for business loans?
The average range of loans extended to businesses in the US is around $13,000 to $1.2 million. You can get loans as much as $5 million (SBA-backed loans) or as low as $5,000 from alternative lenders. The amount may vary depending on what the lender can offer the borrower based on their eligibility.
How long will the loan be disbursed?
Disbursement of the loan may take place in a matter of days or months based on the type of loan you applied for. For example, SBA loans may take more than a month to process and disburse. If you apply for a loan from online lenders, you can expect to receive the funds in as fast as a day.
Is it difficult to obtain a business loan?
Like any other funding option, business loans are all about preparation. You should have your business plan, financial documents, and other important information that the lender might ask of you. It’s possible to avoid the hassle and worry by thoroughly preparing for your application process.
Is it true that I am less likely to be approved if I ask for more money?
No, your preferred amount should not adversely impact your loan approval. Any lending agency is willing to finance the borrower if they can prove their worth. Every successful loan application not only benefits the borrowing business, but also the lender.
Knowing what you might go through when applying for a business loan can help you prepare for it the right way. You can refer to this guide if you want to look for suitable financing options for your business.
For business loans, you need not search further because Booster Financial is here to offer you the best loan products that match your current, most pressing needs. We have affordable loan packages with attractive terms and rates to help you reach your targets and progress!
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