How to Get a Business Loan in 6 steps

If you don’t know how to get a business loan, you may find it challenging to navigate the process and lending standards. Breaking it down into manageable steps, such as understanding qualifications, shopping for lenders, and understanding how to apply for a small-business loan, can help you secure the funding your company requires. Following are the steps to be followed in applying for a personal loan:

 Understanding The Different Types of Small Business Loans

There are different types of small business loans available. It depends on the borrower’s needs and the specific terms of the loan on deciding which loan to apply for. Following are some of the business loans along with their features:

 PPP Loans

This grants loans to qualified small businesses. It is known as the Paycheck Protection Program. It was started on 11th January 2021. The critical elements of this loan are:

1. The business has to show that it had suffered at least a 25% reduction in its annual receipts or any quarter in the previous year.
2. The business needs to have started its operation before 15th February 2020.
3. The business needs to have employed 300 or fewer employees. 
4. If the borrower has previously taken a PPP loan, they must have utilized the total amount of the previous loan. 

The PPP loans can be used for expenses, such as Payroll costs, Utility expenses, paying rent, etc.

 SBA Disaster Loans

The SBA offers a disaster loan for those businesses that have suffered from a declared disaster, such as the COVID-19 pandemic. The Covid-19 Economic Injury Disaster Loan (EIDL) has proved to be very helpful for the affected businesses. SBA loans are available to any business located in any state of the USA. This loan can be used for working capital or ordinary operating expenses etc. The rate of Interest for SBA loans is generally 3.75%. 

 Small business Line of Credit

Under a small business line of credit, a business owner can access funds from a lender as needed. There is a cap on the number of funds accessible. But a line of credit is necessary to manage the cash flow of the company and unexpected expenses. There is a specific fee for setting up a line of credit. But the borrower doesn’t get charged till he draws down the funds.  

 Deciding The Type of Loan You Need

While visiting or meeting a lender, the lender would ask why you require a business loan. The answer to the question can fall between two categories. 

 You Want to Start a Business

Lenders need cash flow to support the repayment of their loans. So companies or businesses cannot get business loans in the first year of starting the business or the company. Relying on personal loans or credit cards can be a good option while starting a business. 

You Want to Grow Your Business

Considering a government-backed SBA loan or traditional term loan can be a good option for this need because it offers higher borrowing limits for the borrower. An SBA loan can reach up to $5.5 million. Many lenders are also seen to be offering specific financial products. 

Determining If You Qualify for The Business Loan

Answer the following questions to see if you meet the eligibility requirements for a small-business loan: What is your credit rating?

Each of the three major credit bureaus, Equifax, Experian, and TransUnion, will provide you with your credit report for free. Several credit card companies and personal finance websites, including NerdWallet, will also provide you with your credit score.

Lenders also review the assets in the business, such as cash and accounts receivable, to make sure that there is a good base of support for loan repayment. 

 Analyzing the Proposed Business Loan

To make sure that the proposed business loan makes sense for the business, proper analysis of the features is very important. Following are some of the key terms to review:

• Rate of Interest of the loan and how it varies over time. 
• The originating fee of the proposed business loan.
• What is the type of security or the collateral required for the loan?
• The circumstances when the lender can call default on the business loan approved.
• Is there any possibility for foreclosure of the loan earlier, and are there any extra charges applicable in the foreclosure?
• Is there any limit on how the loan proceeds can be used?

 Gathering The Documents Required for a Business Loan

Before Applying for a Business Loan, the borrower must arrange the required documents for applying for the loan. Depending on the type of lender, you are required to submit a combination of the following documents:

• Business and Personal Tax Return File.
• Business and Personal bank Statements.
• Business and Financial Statements.
• Legal Documents related to the business
• Future Business Plan etc.

 Applying for the Business Loan

The last step after determining after arranging the required documents is to search if there are any other available lender options similar to the one chosen with better facility and terms and conditions such as lower ROI, etc. After selecting the right kind of financial lender, the borrower can now proceed to the lender with the necessary documents and finally apply for the business loan.