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Tips on How to Get a Business Loan

Securing a business loan can be a crucial step in turning your entrepreneurial dreams into reality or helping your existing business grow. Whether you’re starting a new venture, expanding your operations, or need working capital to sustain and enhance your business, understanding how to navigate the loan application process is essential. Business loans come in various forms and from different sources, each with its own set of requirements and considerations. Fuel your business growth! Learn how to navigate the process of obtaining a business loan to support your entrepreneurial journey.

Types of business loans

There are so many types of business loans, from the traditional one to the not-so-traditional one. Basically, you can loan money for your business from anywhere. Here are 5 examples of business loans.

  1. SBA Loans
    SBA loans are government-backed business loans offered through the U.S. Small Business Administration. These loans provide a level of security to lenders by guaranteeing repayment of up to 85% of the loan amount in case of borrower default. In 2021, SBA loan interest rates ranged from approximately 2.8% to 13%, but the actual annual percentage rate (APR) is determined by approved SBA lenders. These loans come with flexible repayment terms of up to 25 years, depending on the specific program. The three popular SBA loan options include SBA 7(a) loans, which can be used for expanding a business, securing working capital, or acquiring another company (with borrowing limits of up to $5 million); SBA 504 loans, designed for purchasing fixed assets like equipment or real estate; and SBA microloans, which provide smaller amounts, up to $50,000, for working capital, inventory, or equipment. While SBA loans offer affordable financing, they often come with extensive borrowing requirements, including a minimum personal credit score of 680, and the application process can be time-consuming.
  1. Term Loans
    Term loans are a common choice for how to get a loan for a small business. With term loans, businesses borrow money from traditional banks, credit unions, or online lenders and repay the funds over a fixed period, usually at a fixed interest rate. Well-qualified businesses can borrow significant amounts, sometimes exceeding $500,000, and secure competitive APRs, typically starting around 9%. Repayment terms for term loans can extend up to 10 years, offering flexibility in how the funds are used, whether for working capital, inventory, or equipment. However, these loans may require personal guarantees and collateral, making them suitable for businesses with good personal and business credit. Online lenders often provide faster application and funding processes, but it’s essential to carefully assess the terms and conditions.
  1. Short-term Loans
    Short-term loans are an option when businesses require quick access to cash and prefer shorter repayment periods, typically under three years. Some online lenders can provide funds in as little as one day. These loans may allow borrowing up to $500,000, with APRs starting as low as 8%. Repayment terms for short-term loans typically range from six to 18 months. The key advantage is the speedy funding process and more straightforward qualification criteria. However, some borrowers may encounter higher APRs and additional fees, such as origination fees or prepayment penalties. Some lenders may also require daily or weekly payment drafts, which can affect cash flow management.
  1. Startup Loans
    Startup loans cater to new businesses that may not have an established credit history or a significant operating history. These loans come in various forms, including SBA microloans, online loans, or business credit cards. Interest rates, fees, loan amounts, and repayment terms can vary widely. Startup loans are generally more accessible to new businesses, even those with little or no credit history. However, they can sometimes be more expensive than other financing options. Effectively managing a startup loan can help establish and build better business credit for the future.
  1. Business Lines of Credit
    A business line of credit offers a flexible financing option, similar to a credit card for businesses. It allows businesses to borrow money as needed and pay interest only on the amount borrowed. The issuing bank determines a credit limit, and as businesses use and repay the borrowed funds, they can access the credit line repeatedly throughout the draw period, which typically lasts 12 to 24 months. Once the draw period expires, a repayment period begins, which can extend up to five years. Business lines of credit are flexible and useful for managing uncertain or varying expenses. However, obtaining a line of credit with favorable terms often requires good credit, collateral, or personal guarantees. Unlike credit cards, interest typically accrues immediately upon fund withdrawal, without a grace period. Businesses need to carefully assess their financial situation and creditworthiness when considering this option.

Eligibility criteria, credit score considerations, and documentation requirements for loan applications

When applying for a business loan, of course there are some requirements and documentation you need to prepare. Here is the list of what you need to prepare to get a business loan.

Common Personal Loan Requirements

  1. Credit Score and History
    Lenders consider credit scores, typically around 600 or higher, to assess creditworthiness. Some lenders accept applicants with no credit history.
  1. Income
    Lenders impose income requirements to ensure borrowers can repay the loan. Minimum income varies by lender, often requiring proof through tax returns, pay stubs, or bank statements.
  1. Debt-to-Income Ratio (DTI)
    A DTI below 36% is ideal, but some lenders accept up to 50%. DTI reflects the portion of monthly income used for debt payments.
  1. Collateral
    Secured personal loans may require collateral, such as assets related to the loan purpose (e.g., home or vehicle).
  1. Origination Fee
    Many lenders charge origination fees, typically ranging from 1% to 8% of the loan amount, to cover application processing and credit checks.

Personal Loan Documents Required

  1. Loan Application
    Borrowers complete a loan application, providing personal information, loan amount, and purpose. The application format varies by lender, with options for online, phone, or in-person submissions.
  1. Proof of Identity
    Applicants need government-issued identification, like a driver’s license, passport, or birth certificate, to verify age and citizenship.
  1. Employer and Income Verification
    Borrowers must demonstrate employment history and current earnings. This involves providing pay stubs, tax returns, W-2s, 1099s, or bank statements.
  1. Proof of Address
    Lenders may require proof of residence stability, such as utility bills, rental agreements, or insurance documents listing the address.

How to Qualify for a Personal Loan

Qualifying for a personal loan involves factors like credit score (ideally 670 or higher), consistent income, and a DTI ratio below 36%. However, these requirements can vary among lenders. Prequalifying for a loan allows you to compare potential loan offers without affecting your credit score.

Tips for improving your loan application and increasing your chances of approval

One tip on how to get a business loan is improving your loan application. That way you can increase your chance of the loan to be approved. Here are the tips for improving your loan application.

  1. Check and Improve Your Credit Score
    The first tip emphasizes the importance of reviewing your credit score regularly. A good credit score significantly increases your chances of loan approval. If your score is lower than desired, take steps to improve it by paying bills on time, reducing outstanding debts, and correcting any errors on your credit report.
  1. Research and Compare Lenders
    This tip suggests researching and comparing different lenders to find the one that best suits your needs. Not all lenders have the same criteria for approval, and interest rates and terms can vary widely. By shopping around and considering multiple options, you can increase your chances of finding a lender willing to work with you.
  1. Prepare a Solid Business Plan
    For business loans, having a well-thought-out business plan is crucial. Lenders want to see that you have a clear vision for your business and a strategy for repaying the loan. A comprehensive business plan can demonstrate your commitment and preparedness to potential lenders.
  1. Build a Strong Financial Profile
    This tip advises taking steps to strengthen your financial profile. Lenders will examine your financial history and stability. Paying down existing debt, saving for a down payment, and maintaining a consistent source of income can all contribute to a more appealing financial profile.
  1. Consider a Co-Signer or Collateral
    If you’re struggling to get approved for a loan on your own, you might consider having a co-signer with a strong credit history or offering collateral to secure the loan. These options can provide lenders with added assurance that the loan will be repaid, increasing your approval chances.

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