Business loans are a crucial source of funding for many small business owners. However, the process of applying for a business loan can be confusing, long, and intimidating.
According to the Small Business Administration, 50% of small businesses fail within the first five years. One of the biggest reasons cited for their his failure was a lack of funding. This guide aims to explain everything you need to know about business loans as well as the steps you will need to take to apply for them.
What is a business loan application?
A business loan application is a formal request made to lenders by a business. This request asks for funding to support business operations or expansion.
Business loan applications will include information about the business, including its legal structure, business plan, financial statements, credit checks and collateral. This helps lenders to decide whether or not to accept the request for a loan.
What information should I include in a business loan application?
A business loan application should provide a thorough overview of your business, going back months at minimum. You should include information about your business’s structure, history, operations, and financial performance.
Although different lenders will have different requirements, they will typically ask you to provide the following information in your application:
- Business Plan: Describe your products or services, target market, marketing strategy, management team, and financial projections. Show your goals and how you plan to achieve them, realistically.
- Financial Statements: This includes your balance sheet, income statement, and cash flow statement. Your lender uses this to decide whether or not you will be able to repay your loan.
- Credit History: Your lender will use your credit history to evaluate your creditworthiness, which tells them the level of risk associated with lending to your business. If you have a poor credit score, you are less likely to be approved for a loan. If approved, you may face unfavourable interest rates.
- Collateral: Collateral is an asset that you offer as security for the loan. This means that if you default on the loan, the lender can seize the collateral to make up for its losses. Common forms of collateral include real estate, inventory, and accounts receivable.
- Personal Information: This includes personal information about the business owners, such as their credit scores, financial statements, and tax returns.
How do I work out how much funding my business needs?
To determine how much funding your business requires, make a detailed budget. Include salaries, rent, inventory, marketing, and the salaries of your staff. This should give you some idea of the amount of money you could need.
However, you should also think about the return on investment for the loan. If your financial needs are higher than what you can realistically pay back with the profit you make, you might want to lower that figure. Think about how much you can realistically borrow without putting your business in a spiral of debt.
Borrowing too little may not provide enough money to achieve your goals, reducing your profit and therefore your ability to pay back the loan. On the other hand, borrowing too much could result in excessive debt payments that strain your cash flow.
If you have other outstanding debts, you must consider how the loan will impact your ability to repay them. Also try to factor in any expected changes in revenue, expenses, or market conditions that could impact your ability to repay the loan.
What are the types of business loans?
There are many types of business loans, each with its own pros and cons. Some of the most common types include:
- Term Loans: Term loans are a type of loan that provides a lump sum of money upfront, which is repaid over a fixed period of time with interest. These loans are often used for long-term investments, such as equipment purchases or real estate.
- Lines of Credit: Lines of credit are a type of loan that provides access to a revolving credit line, which can be drawn upon as needed. These loans are often used for short-term cash flow needs, such as inventory purchases or payroll.
- Equipment Loans: Equipment loans are a type of loan that is used to purchase or lease equipment for the business. These loans are often secured by the equipment itself.
- Commercial Real Estate Loans: Commercial real estate loans are a type of loan that is used to purchase or refinance commercial property. These loans are often secured by the property itself.
- SBA Loans: SBA loans are a type of loan that is guaranteed by the Small Business Administration. These loans are often easier to qualify for than traditional bank loans, and offer favourable terms and interest rates.
How long does it take to get approved for a business loan?
This can vary between lenders, and will also depend on the type of loan. Some lenders might get back to you with their decision in a few days, whereas others may take several weeks.
There are some steps you can take to speed this process up. Make sure you provide complete and accurate information in your loan application, and gather all the necessary documents before you begin. Be sure to give thorough, accurate, and long-spanning details in your loan application too.
What are the steps to applying for a business loan?
This may vary between lenders, so you should always check your lender’s unique process. However, in general, these are the steps to applying for a business loan:
- Determine the type of loan you need: There are many types of business loans available on the market. Find one that fits your business’s unique needs.
- Gather your documents: Collect your business plan, financial statements, tax returns, and collateral information. Try and gather information that dates back months.
- Research lenders: Try to focus on lenders who specialise in your industry, if possible. Read reviews and customer testimonials.
- Submit your application: Complete the lender’s loan application and submit it with your supporting documents.
- Wait for a decision: The lender will review your application and make a decision on whether to approve or deny your loan request within the next few days or weeks.
- Close the loan: If your loan is approved, you will need to review and sign the loan agreement, provide any necessary collateral, and receive the loan funds.