How to Get a Business Loan: Complete Guide

Business Loans

Small business is the backbone of the American economy. If you’re an entrepreneur looking to get into the market, then chances are you’re going to need funding to get your idea off of the ground.

A recent study by the small business Association shows that 90-percent of all new businesses, close their doors within five years. Further research indicates that the main reason cited by entrepreneurs for their business failing is the lack of funding available.

However, when we step back and look at the current economic environment, and the financial support on offer to business owners, it paints a very different picture. Entrepreneurs struggling to receive finance should speak to a consultant about the options available to them for growing the business.

As it turns out, there’s plenty of money available for great business models and ideas, provided that you know where to look. If you’re struggling find finance, then don’t give up. Here are a few ideas you can use to find the funding you need.

The Types of Small Business Loans

There are various types of loans available to small businesses. Your options depend on the needs of your business, as well as the amount of capital you need to raise, and the loan terms that you can afford to meet. Here are the types of loans available that entrepreneurs can take advantage of to grow their business.

SBA small business loans

The U.S. Small Business Administration, (SBA), Provide small business funding that’s backed by a federal guarantee from the government. These loans are available from a variety of lenders and come with low-interest rates and favorable repayment terms. SBA loans are available in quantities from $30,000 to $5 million, allowing business owners to spend the money on purchasing plant and equipment, marketing expenses, and day-to-day operating expenses.

SBA loans are available for almost any sort of small business model. Since the government backs the loans, should you default on your repayments, you will not be liable for the outstanding balance on the loan amount.  However, the loan process can take a substantial amount of time and the loan criteria astringent. Therefore, if you are looking for money in a hurry, then an SBA loan may not be your best option.

Working capital loans

If you require funding to cover your day-to-day operations, then a working capital loan is the best facility for your needs. Companies who struggle with managing the fluctuations in expenses and revenues due to seasonal conditions can benefit tremendously from the use of a working capital loan. Companies with a solid track record will find it easy to secure a working capital loan. However, those businesses with less than a year of operations may have to put up some collateral to obtain the loan facility. Typically, working capital loans are for amounts between $5,000 to $100,000.

Credit lines

this type of financing offers the small business owner a line of credit which they can draw as needed to fund the needs of the business. There is typically a cap on the facility, with most lenders offering a maximum credit line of $100,000 for small businesses. A credit line can help you manage your company’s cash flow and deal with any unexpected expenses related to running your business. Lenders charge a fee for setting up the credit line, but they only charge interest on the funds you draw out of the facility.

Term loans

Business owners in need of finance for operations, capital expenditure, and expansion, should consider a term loan. Term loans are available in fixed dollar amounts, and interest accrues monthly, with the principal requiring payment over six months to three years. Business owners have the opportunity to amortize the loan term or use a balloon payment at the end to settle their account with the lender. Depending on the amount financed, and how long you’ve been in operation, a lender may offer a term loan on an unsecured or secured basis, with variable or fixed interest rates. These facilities are a good choice for those small businesses that require capital for large expenditures such as plant and equipment.

Accounts receivable financing

If you struggle with maintaining your cash flow due to accounts receivables, then AR funding is for you. Some lenders will take on the risk of loaning your business money, based on the amount of cash you have in outstanding invoices. AR financing allows you to access funds immediately, similar to a line of credit. The lender requires you to settle the outstanding amount upon receiving payment. In some cases, lenders will take on the task of chasing your creditors for you, as well as managing your accounts receivable.

New Equipment loans

If you need to make a large equipment purchase, some lenders will secure the loan amount to the assets you intend on purchasing. If you default on the loan, the lender repossesses the equipment and sells it to recover costs. In some cases, lenders may require the business to place a 20-percent down payment on the equipment, before they approve the loan facility. The principal on these loans is typically amortized over a two- to four-year period, with amounts available ranging from $5,000 to $500,000. Lenders also offer fixed or variable interest rates on equipment loans.

Small business credit cards

Some business owners may be wary of using credit cards to fund business expenses. However, if you’re looking for a short-term loan, credit cards are a viable means of accessing cash to cover your day-to-day operating costs and small purchases. Most credit card companies offer a moratorium on interest payments for up to 55-days, allowing small business owners interest-free access to cash. Taking out a business credit card facility can also help your company benefit from partner programs, such as frequent flyer miles. This rewards facility can come in handy if you travel across the country to do business.

Research Lenders

Searching the internet for small business funding yields thousands of results. In today’s economic environment, there are more companies offering loans than at any stage in American business history. Here are the types of lenders you’ll find on your quest to obtain finance.

Commercial banks

When a business owner needs alone the first place, they usually stop at is with their bank. While banks do offer small business loans, they often require collateral to secure a  loan facility. Banks also have the highest loan underwriting criteria, making it a challenge for small business owners with minimal track records to attain finance through these institutions. If you have a short track record in business, then you may benefit from applying with a community bank instead of a commercial bank. Community banks have low barriers to entry, in terms of qualifying criteria to meet loan agreements.

Online lenders

there are hundreds of online lenders willing to supply your small business with the financing need. Online lenders are a great source of capital for working capital loans, cash advances, and operating expenses. Short-Term loans are typically for smaller amounts ranging up to 30000 dollars, but some lenders may offer you a facility of up to $500,000.

Crowdfunding sites

One of the more new-age types of lending services is crowdfunding. Crowdfunding sites like Kickstarter allow the entrepreneur to create a proposal on the website requesting funding. Site members then have the opportunity to contribute to the financing of the project. Once you achieve your funding goal, the platform releases the funding into your account,  and you are then liable to repay your investors as per the terms of your proposal.

VC’s and angel investors

Venture capital and angel investment is a popular funding model for tech companies that require millions of dollars in funding. VCs have access to vast pools of money from numerous investment sources. Provided you have a solid business model; you can expect them to take an interest in your business. This type of funding suits small companies that wish to expand and grow into their market. These types of investors will typically take a stake in your company, which often involves financial control to preserve and protect their interests.

Know Your Credit and Risk Profile

When you visit a lender and apply for a credit facility, the lender or investor has to make a judgment call on whether or not they should lend you money. To limit their risk in the transaction, the lender will look at your credit history to determine your risk profile. Most lenders will not loan money to businesses that have a poor credit history and plenty of outstanding debt.

If your business is sinking, then the chances are that you don’t need a loan,  you need a better business model. However, if you do have good credit,  then the lender will view your risk profile as acceptable, and offer you the funding you need.

Lenders will also look at your income statements and balance sheet to determine the cash flow of your business, and whether or not you can afford to repay the loan. Lenders will also look at the assets in the company, such as plant and equipment, cash reserves, and accounts receivables when determining your risk profile.

Lenders also find it favorable if the company has been in operation for more than three years, and if you currently have any other investors backing the business. Other investors in your company show signs of confidence in the business model, reassuring the lender.

It that you have all of your financial statements in order when applying for a new business loan. No commercial bank or VC investor will provide you with funding unless you can show your financial statements. Cash flow, debt to equity ratio, gross margin, accounts receivable and payable, as well as the company’s earnings before interest, tax, depreciation, and amortization (EBITDA), are all vital in determining your companies risk profile.

Before you apply for a loan, check with your accountant to ensure that all your financial statements are in order. Most lenders prefer that your financial statements are audited by a CPA, which is an expensive exercise for any small business. Therefore, having your financial statements “reviewed,” instead, is a more cost-effective solution, and it should satisfy the needs of most lenders.

Preparing for Finance

Before you run off to the bank or another lending facility with your business plan, it’s vital that you have all the paperwork ready. This strategy helps to minimize the time spent by the lender in assessing your risk profile. Before you think about applying for finance, ensure that you have all the details necessary to help the loan process move forward smoothly. Here’s a brief list of what you need.

  • Your federal tax ID for the business.
  • A list of all of the executives in the company – remember to include their experience in business and background.
  • All your paperwork for incorporation.
  • Financial statements, marketing plan, and business plan.
  • Liability and keyman insurance policies.
  • Your business credit report.
  • The amount you require for the company’s loan facility, as well as any collateral you have available.
  • Tax returns for the company, going as far back as 3-years if possible.
  • Your business banking statements

After completing your paperwork requirements, you’ll need to create an executive summary, which acts as an elevator pitch when presenting to lenders. Keep the brief as short as possible and to the point. Lenders don’t like to waste their time or yours. A well addressed executive summary can help the lender identify if their facility can benefit your business, or if you should look for another source of funding. Your executive summary should also include why you need the money, and how you intend to spend the loan amount.

Wrapping Up – Persistence Pays Off

The chances are that your first visit to a lender’s office will not go well. Some business owners may have to go through several lenders before they find the right financing facility for their company’s expansion needs. However, as a business owner, the chances are that you have plenty of tenacity to see you through your search for funding.

If you’ve exhausted all of the channels for funding available to you, then it’s time to sit down and reevaluate your business. Sometimes closing your doors may be a better option than pumping money into a project that is going nowhere.

Before you attempt to find finance for your company, speak to your accountant and ask them for their objective opinion on your finances, and the financial health of your company.  A CPA deals with many companies at the same time, and they know what a healthy balance sheet looks like. If your CPA tells you that you should consider folding the company, then take the advice when making your decision.

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Oliver Dale is Editor-in-Chief of MoneyCheck and founder of Kooc Media Ltd, A UK-Based Online Publishing company. A Technology Entrepreneur with over 15 years of professional experience in Investing and UK Business. His writing has been quoted by Nasdaq, Dow Jones, Investopedia, The New Yorker, Forbes, Techcrunch & More. He built Money Check to bring the highest level of education about personal finance to the general public with clear and unbiased reporting.


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2 comments

  1. I thought it was interesting when you mentioned that the largest reason that small businesses close their doors is that they don’t have enough funding. If I were to guess, it would be really hard to run a business with money out of your own pocket. That’s probably why so many small businesses use loans to get on their feet.

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