Do you have a great business idea, but you don’t have the funds? Find out how to get a business loan and launch your business!
Applying for a loan for your business can be time-consuming, complex and expensive, but it doesn’t have to be.
Understanding these seven steps to getting a business loan can save you a lot of frustration and speed up the approval process. This article will guide you through seven simple steps to get a business loan and increase your chances of getting approved.
Applying for a business loan is not a decision to take lightly. Take the time to understand how your loan will affect the day-to-day running of your business, from the day you apply to the day you eventually pay off the loan in full.
It is also recommended that you take the time to fully understand the advantages and disadvantages of Small Business Administration (SBA) loans, conventional bank loans, and financing sources that do not involve banks or the SBA. Some of the pros and cons may surprise you.
Breaking down the business loan application process into seven simple steps (starting with understanding your eligibility, then researching lenders before submitting an application), will help you get the financing your business needs. But first, let’s see what a business loan is.
What is a business loan?
A business loan is nothing more and nothing less than a form of credit that lenders offer to businesses. In exchange for their funds, lenders ask borrowers to repay the loan with interest and fees. Most loans require repayments on a predefined schedule, but interest rates and terms vary widely depending on the lender and the borrower’s circumstances.
Business loans aren’t the only financing option businesses have to start up, purchase real estate and equipment, procure inventory, manage payroll and other business expenses. Many startups raise venture capital by issuing different classes of stock in exchange for funds.
Inventors and entrepreneurs with a great idea sometimes get their seed capital through crowdfunding. Some businesses even begin to obtain funding through a grant from a government program or through a charity. However, the majority of businesses obtain their financing through business loans.
How to get a business loan?
When you’re starting out, your business credit and personal credit tend to be the same, even if you’ve started an LLC or corporation. Lenders specializing in small business credit evaluate loan applications based on personal credit reports, or at least until the business is up and running. But there are certain types of financing you can get even when you’re just starting out.
Conventional loan amounts do not have a set limit, but you will need a good relationship with the lender to have your financing application considered. On the other hand, the SBA offers express loans of up to $350,000. SBA 7(a) loans (referring to the section of the law that governs the program) can provide up to $5.5 million.
SBA loans can be repaid over the long term, including up to:
However, the SBA is not the actual lender. The SBA only guarantees repayment of a percentage of the loan, up to 75%. SBA loans also offer favorable interest rates based on the SBA’s Prime Rate or LIBOR, or PEG (Growing Income) Ratio. Loans of $25,000 or less, or for seven years or more, come with higher interest rates. SBA borrowing rates can range from the prime rate plus 2.25% to the prime rate plus 4.75%.
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