It is very common to take out a business loan. Many businesses do especially small businesses like a new start-up. Generally, a loan is taken out when a business requires money and there is a gap between the money they have and the money they need. It is not always compulsory to get a loan to start a new business, it will depend on your requirement. It is not easy to get a business loan for a new business as they have no credit history. Therefore, you must know how to apply for a loan and how to increase your chance of getting a loan.
6 Steps on how to get a loan for a business?
It is essential to understand how to get a loan to start a business. A bank loan could help you inject cash flow into your business without giving up any kind of control of your company. You could use this loan for any reason, it could cover some unexpected expenses or boost your cash flow for the short term. You may find different approaches to getting a loan but more or less everyone needs to follow a few particular steps.
1. Figure out your requirement
You must be clear about your requirement. You must analyze your business financials and understand how much exactly do you want. The first question any lender would ask is “how much do you need?” You should have a clear answer, it shows that you are prepared. The lender may ask you to pitch your idea or goal of why you need that certain amount and how are you planning to repay them. You must understand the effect of repayment on your income.
2. What type of loan do you need?
The most common question you should ask yourself after you know how much you need. What kind of loan will you require. There are many kinds of loans you can take a look at.
- Bank Loan – Traditional way of getting a loan, choose any bank and get a term loan with some specified interest rate.
- Small Business Administration Loan (SBA) – You can take a loan of as little as $50,000 upto $5 million. These types of loans offer flexible repayment terms and may also offer lower interest rates.
- Micro-loans – As the name suggest, you can get a small number of loans from these lenders.
- Equipment Loans – If your purpose itself is to buy equipment, then get this loan. You will have to keep the equipment itself as collateral and pay a fixed amount every month.
- Business Line of Credit – You can take a certain amount as a loan and while you repay the amount, that amount again become available for you to borrow.
3. Check out your eligibility
Once you decide which type of loan to take, you can then see its eligibility. Understand what is required for you to get approved for this particular loan. Check out your credit score to know where you stand, it is tough to get a loan from a bank when your credit score is less than 680. Your other option would be to get a loan from an online marketplace.
4. Gather documents
The next step would be gathering the required documents. These documents act as proof of your loan acceptance. It also allows anyone to understand the basis on which you got the loan. Generally, you may need these documents:
- Your business bank account statements for the past 3-5 years.
- Documents with your tax returns
- Business license and registration
- Any legal contract like franchising or leasing documents
- Other financial documents that may be relevant.
Keeping these documents handy will only help you. The process will be quick and you may get your loan faster.
5. Compare and find the suitable lender
It is important to find the perfect lender for you. You may find multiple lenders offering different services. First, you need to narrow your search to those lenders who provides the services you need. After which you will compare those lenders in terms of different factors. These factors can be the interest rate, repayment terms, etc.
6. Apply for a loan
Finally, apply for a loan. This means the lender will provide you with some applications. You must fill out the application and submit it. It will be a smoother process if you are well prepared It may take a few days depending on your lender to process the application and give you the loan.
Where to get a loan to start a business?
There are multiple sources for a loan. As we discussed the various options of loans you could take. You must also know that not every lender offer those options. It is also not the case of who gives the most option. It is the case of who gives the best loan terms for you. Keep your options open until the end. You must keep all the pros and cons in your mind while comparing lenders. Now let us see where you could get a business loan?
- Bank – It could be any bank of your choice or a bank with whom you created your business account.
- Banks focused on helping business – There are many banks nowadays that promotes small businesses and start-ups. These banks may provide good interest rates and terms.
- Online business lenders: Banks may have higher expectations and qualifications. At such a time, online business lenders may allow easy loans.
- Microlenders: These are useful when you are looking for small business loans. They also offer low-interest rates and focus on helping small businesses.
Alternatives to get a loan to start a business
There are different alternatives to business loans. If you fail to get a business loan or if you have changed your mind due to some reason, then you can take a look at these options as well.
- Business Credit Card – It works just like a normal credit card, its approval will also be dependent on your personal credit history.
- Personal Loan – It is easier to be qualified to get a personal loan rather than a business loan. You may not get the full amount if the amount is huge. Although you may get a small amount in some intervals.
- Family/Friends – If there is any friend or family member who is willing to give you a loan, the terms could be very flexible but you have to try to treat it as a regular loan.
What is the best time to take out a loan?
You must understand what is best for your business. It may not always be a good time to get a business loan. It may sometimes also seem like everything is going smooth and there is no need for a loan but to make progress when everything seems smooth is also important and that is when you can take out a loan.
When you can take a loan:
- If you are trying to buy an asset with return potential.
- To build your business credit score
- To expand your business
When you should not take a loan:
- You should avoid taking a loan when there is a cash flow problem in your business.
- If any of the loan terms are not suitable for you, you should not take the loan.
- Avoid a loan when you have maxed out on your credit card.
Hope you are now clear with how to get a loan to start a business. Many factors need to be considered before taking out a loan. You must also analyse your situation and what could be the situation like in the future to predict your loan repayment situation. At the same time, consider the best option for you by comparing the loan terms and the lenders.