How To Get A Business Loan: The Ultimate 10-Step Guide

Camino Financial09 Feb 2024
How To Get A Business Loan: The Ultimate 10-Step Guide
Getting a small business loan is key when looking to lift your company off the ground or expand with a new outlet.These products are crucial for a range of needs, such as covering operations, buying equipment, funding expansion, stocking inventory, and managing payroll. This guide that will guide you through the process all the way to the final approval.

How To Get A Small Business Loan

1. Ask Yourself Why You Need Business Financing

Before taking any steps, you must understand your reasons for getting a loan.

Also, you should know what advantages you expect to see out of getting out of the planned investment.

Some helpful questions to ask yourself could include the following:
  • How much money is the business going to need?
  • How much return on investment will the company benefit from?
  • What will you use the money for? Instead of a generic answer, get specific – for example, increase the ROAS by doubling our monthly ad budget.
  • Are there any benefits to getting additional money through a loan instead of waiting for the business to save up some cash?
Once you know what benefits you expect from a loan, it will be easier to keep your goal in mind and communicate it clearly to the lender.

2. Calculate How Much Money You Need

Depending on where you are in your business journey, you might already have a good idea of your expenses, such as office space or licenses and permits. However, if you're in the earliest stages, you may not be sure about that. Using the Small Business Administration's Startup Costs Worksheet is a good place to start. If you're unsure of what these expenses look like in your area, it may be helpful to build connections with other entrepreneurs. They can help you make an accurate projection of your costs. If you are getting a loan to fund progress toward a specific goal, there are some other factors to keep in mind, such as:
  • How long you will need the money? This could impact what interest rate you are willing to accept because that interest will compound over time.
  • What your future financing needs might be. Projecting your cash flow over the next three years and how much money you'll need to keep up is important before deciding how much to borrow now.

3. Decide on the Type of Loan

There are many lending products, all with their pros and cons. The type of loan you choose will depend on your business needs and the interest rates and repayment period your business can afford. There are a variety of loans available. Some examples you may have heard about include lines of credit and commercial installment loans. Here are just a few options to choose from:

Term Loans

Ideal for small business owners, a term loan will provide your business with a lump sum of money upfront that you must repay over time. Term loans are repaid with interest and have a pre-determined repayment timeline. They are some of the most popular types of loans. Apply For A Business Loan!

Equipment Loans

If your business needs machinery or equipment, you may look for an equipment loan. These loans will help you acquire these products, and the loan terms last the lifetime of the equipment. However, you risk using outdated equipment in the future without the ability to replace them.

Small Business Administration Loans (SBA Loans)

If you're finding it challenging to secure a traditional business loan, consider exploring SBA-guaranteed loans offered through the Small Business Administration (SBA). These loans are notable for their government backing, which often results in lower, more manageable interest rates. The range of SBA loans includes various options, allowing business owners to purchase equipment and real estate, or to expand their workforce. Be aware, though, that these loans can be tough to qualify for, with stringent application processes. The loan terms are generous, extending up to 25 years for real estate and up to 10 years for working capital, inventory, equipment, or other business needs.

Microloan

Microloans are loans typically under $50,000. Commercial banks rarely make these loans, but you may be able to get them through:
  • nonprofit organizations
  • small business lenders
  • online lenders
Because microloans are smaller, there is less interest to pay and a shorter repayment period.

Personal Loans

Personal loans can be a viable option for small business financing, especially for newer businesses without much collateral. Personal credit scores and financial histories determine them, not the business's credit.

4. Determine the Payments You Can Afford

Based on your cash flow, credit score, and personal debt-to-income ratio, you may not be able to afford the loan you're looking for. It's crucial to figure out a realistic estimate of how much you can afford.  Even if you can comfortably afford monthly payments on the amount borrowed, the interest can stack up fast. Account for the average business loan interest rates and determine what payments you can afford. If you don't include these interest rates in your calculations, you could end up with payments you cannot pay.

5. Decide if You Want to Offer Collateral

If you have collateral to offer, it may increase the amount you can borrow. But it can also add increased risks if you cannot pay back the loan for whatever reason. Whether this risk is worthwhile is a decision that only you can make. Collateral is an asset that has value, but some assets are better to use as collateral than others. In general, when applying for a business loan, the best collateral to use would be an asset that lenders can liquidate quickly if needed. Securities can also work, but they aren't as favored by lenders.

6. Compare Business Lenders

You will want to compare as many as possible to get the best rates and terms for your business loan. The three main types are:
  • Banks. They are the most traditional type of lenders. Generally, they usually have the lowest interest rates but also require the most documentation.
  • Online lenders. These lenders have become popular in recent years. They use technology to speed up the lending process and often have more flexible requirements than banks.
  • Alternative lenders. They are a type of lender willing to take on more risk than traditional lenders. They often have higher interest rates but can be a good option for businesses that don't qualify for a loan from a bank.

7. Check Your Eligibility

Before applying for a business loan, ensure you meet the lender's criteria. Key requirements often include:
  • Social Security Number (SSN): Necessary for applying. Lenders use it to check your credit score and assess eligibility.
  • Personal and Business Credit Scores:
    • Varies by lender; some may be more lenient.
    • The lender will review your business and personal credit scores, especially for small business loans.
    • Typically, you need a personal score above 650.
  • Annual Revenue:
    • Many lenders set minimum monthly or annual revenue thresholds.
    • Commonly, you should expect to generate a minimum of $100,000 in annual revenue.
    • Verification through bank statements is standard.
  • Business Plan:
    • Your strategy for running and managing your business with the loan is critical.
    • Lenders evaluate your business plan to gauge potential success.
  • Years in Business and Industry:
    • Minimum business operation time varies by lender, often at least two years.
  • Business Industry and Size:
    • For SBA loans, ensure your business is small and for-profit.
    • Some industries might not be eligible for loans from certain lenders.
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8. Gather the Required Documents

Depending on the type of loan you are applying for, there may be some differences in the documentation required. However, some standard documents are good to have in one place that is easy to access. This list includes
  • The goals and ROI you expect to achieve with this loan
  • How do you plan to pay it back (collateral)
  • Both personal and business income tax returns from the past three years
  • Financial statements include your balance sheet, income, cash flow, and bank statements.
  • Accounts receivable and accounts payable
  • Articles of incorporation
  • Business licenses and registrations
  • Copies of any contracts. This includes contracts with third parties, commercial leases, and franchise agreements
Also, consider if there are any industry-specific documents that a potential lender would like to see and add those to your list. Some lenders, like Camino Financial, offer a completely digital process. This allows you to submit all documents online anywhere, anytime.

9. Submit Your Commercial Loan Application

It's time to apply! Depending on the lender, you can do it online or in person. Visit the lender's website and fill out an online form, or go into a branch and speak to someone in person. Ensure you provide accurate information about yourself, your business, and your plans for the loan. Providing false information will hurt your chances of getting the loan. Be prepared to send additional documents or information and verify your identity.

10. Wait for a Decision

The amount of time it takes to receive an answer will depend on the lender. More traditional lenders often take several weeks to decide your eligibility and provide you with an answer. This timeline may also fluctuate if there is a collateral requirement. If this is the case, you may need to wait for an appraisal of your collateral. This adds to the time it takes to decide but will provide you with the amount and interest rates your business qualifies for.
At Camino Financial, you can receive an answer in a few days.
The next step is signing the loan agreement and making repayments if you receive loan approval. If you are not approved, the lender will usually:
  • give you feedback on why your application was unsuccessful
  • tell you what you can do to improve your chances of receiving approval

Tips for getting a commercial loan

These tips will help you submit a successful loan application:
  • Make sure your credit report is free of errors. Review your credit report to be sure everything is correct; if not, fix the errors.
  • Be realistic. If you set an unrealistic goal (like turning a mom-and-pop store into a multinational in 6 months), the lender will think you don't know how to run a business.
  • Have a plan. Even if the lender doesn't require it, writing a business plan is a good idea. It will be the road map to help you make sound investments and stay on track.
  • Be sure to ask questions. Ask any questions you have before submitting your application. Having all the information upfront can help ensure that everything goes smoothly.
  • Stay organized during the process. Keep track of the documents you submit and follow up with your lender periodically to ensure everything is going smoothly.
  • Strengthen your credit score before applying. Try to improve your score by making timely payments on your existing debt or paying off past debt before filing a new application.

Why You Should Apply For A Business Loan

  • Helps you keep ownership of your company. Other financing forms, such as selling equity, can mean letting other people take on some level of ownership of your company. With a business loan, you maintain full ownership.
  • Submitting payments online can raise the credit score of your business. By making payments on time, you can improve your business's credit score. This empowers your business to access more opportunities later. Not all lenders report payments to credit bureaus.
  • Helping your business grow. When used wisely, business loans can empower you to expand into a new market, offer new products, or hire more employees. While the upfront costs can be high, a loan can help you pursue them sooner, leading to profitable and relatively fast growth.
If you have realized that a business loan is exactly what you need, we recommend applying with Camino Financial. Our straightforward requirements, easy application process, and customer service differentiate us from the competition. Act now! Apply For A Business Loan!

FAQs

How hard is it to get a business loan?

The difficulty varies depending on the lender and your credit score. If you have a strong business plan and a good credit history, you may be able to get approved for a loan easily. However, getting approved for a loan may be more difficult if you have poor credit or a weak business plan.

How can I get a loan to start a business?

If you only started your business or are planning on opening one, you likely won't receive approval from a regular business loan. Fortunately, there are startup loans available for businesses in their early stages. Startup loans usually have different requirements and terms.

What are the chances of getting a small business loan?

If you go with a traditional bank, the chances aren't usually in your favor. They only approve about 27% of small businesses for the loan they apply for. This is usually because small businesses are at higher risk than larger businesses and may not have a very impressive ROI. It's easier to get a loan with alternative and online lenders.

What are the alternatives to getting a business loan?

There are a few alternatives to getting a business loan, such as
  • using personal savings
  • getting a business credit card
  • borrowing from friends or family
  • getting a line of credit from a bank
  • finding angel investors
  • selling equity
;

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