Whether it’s securing real estate, building inventory, purchasing equipment or covering other expenses, no one knows your business vision better than you do, which is why knowing how to get a business loan is so important.
By Marcus Boykin, Gate City Bank Vice President, Retail Manager & Business Lender
Applying for a business loan is a great sign of growth for your business. It’s also a necessary and responsible step toward a successful enterprise. After all, many businesses aren’t backed by investors, and some haven’t had time to build enough earnings to fund the level of growth they’re seeking. Whether you’re a well-established business or just starting out, a business loan can help put your entrepreneurial dreams in motion.
From identifying the type of financing that would best suit your venture to moving forward with an application, here are five tips to consider when pursuing a business loan:
It’s important to establish why you need funds in the first place. Are you looking to expand your footprint? Upgrade your kitchen equipment? Purchase a company vehicle?
Depending on your growth goals, each loan will come with its own interest rate and specifications. Common loan options that help lead to business growth include:
One of the more common business financing options, a term loan allows you to borrow a sum of money and make monthly payments over a fixed period of time. It’s especially useful for any larger, long-term financing needs your business may have. You can purchase a delivery vehicle, expand your inventory or finance just about any other business need. It helps to find a loan with various payment plan options.
To ensure your business has the right tools and materials to succeed, an equipment loan might be the right route. This loan allows you to easily purchase necessary equipment, whether it’s computers, retail shelving, forklifts or anything in between. Having the right equipment loan will help you enhance operational efficiencies, leading to greater prosperity.
Strategic locations and property investments may be key to your business strategy. A real estate loan helps you purchase, update or build a property that will facilitate core business operations. (Psst. Look for an option with flexible terms!)
Whether it’s furniture for customers, office supplies or other potentially smaller purchases, consider securing a microloan. According to the Small Business Administration (SBA), the average microloan is about $13,000.
Speaking of the SBA, the loans it backs make it easier for small businesses to obtain funding, especially during unprecedented economic circumstances, such as those involving recovery and mitigation amid a national disaster.
An example of this would be when businesses needed help covering payroll and other operational expenses with the Paycheck Protection Program during the COVID-19 pandemic. SBA loans are offered through approved lenders, usually banks.
In certain cases, a secured or unsecured operating line of credit may be another option, especially if you’re looking to gain access to fast and flexible funds that allow you to borrow money on an as-needed basis. You can easily meet immediate working capital needs, take advantage of vendor discounts and finance your accounts receivable.
Whether it’s payroll, inventory, maintenance or something similar, an operating line of credit is an ideal option for short-term expenses – and a beneficial alternative to high-interest credit cards.
While business loan requirements can vary depending on which financial institution you’re working with, when it comes to assessing creditworthiness and ultimately deciding whether or not to provide you with a loan, most traditional lenders tend to focus on the same factors:
Lenders will likely look at both your personal and business credit scores. Easily check your credit score with one of the three main credit reporting agencies.
To secure your loan, there’s a good chance you’ll need to offer something of value, such as a business vehicle or equipment, which can be used as collateral and collected if a loan is defaulted on.
How long you’ve been in business may play a role in whether or not you can obtain certain business loans.
Lenders may also consider your total annual sales revenue when seeking some business loans.
The lender will likely want to know how much money you have on hand to cover operating expenses. They may consider you as high-risk if you don’t have any working capital.
Some lenders won’t process a loan unless it comes with a detailed business plan. By providing this, you’ll help show that you’re working to ensure your business has a strong and successful future, one that’s feasible in the eyes of the lender.
The general idea is that lenders want to gauge the likelihood of you being able to repay the loan. Some may even ask for financial statements and tax returns. Before applying for a loan, it’s good practice to ask a lender about what requirements are in place.
It also helps to have the required documentation handy. Before approaching a lender for a business loan, it’s good practice to have the following items ready to roll:
A helpful lender can shed more light on any additional documentation their financial institution may require, or help guide you on the best loan option for your business.
Just as important as narrowing down which type of business loan is right for you, you should have an actionable and achievable plan to pay it back. Consider factors that could impact your cash flow, such as fluctuating inflation, natural disasters, supply chain disruptions and seasonal slowdowns.
Your lender will help you determine what your monthly business loan payments will be. In the meantime, estimate your payments with this easy calculator:
Calculate a Business Loan Payment
Repayment of a business loan requires that the borrower make a monthly payment back to the lender. That monthly amount includes a partial repayment of the loan principal, plus monthly interest on the outstanding balance. Loan payments are amortized so that your monthly payment remains the same during the repayment period, but during that time, the percentage of the amount that goes towards principal will increase as the outstanding loan balance decreases.
By touching base with a knowledgeable lender who offers the type of financing you’re interested in, you’ll be able to ask questions and get the process started. It helps to go with someone who can serve you from anywhere, as well as provide you with personalized advice along the way.
Remember to talk with your lender about qualifications, interest rates, fees and the term length of your loan. It also helps to know about any unique guidelines that may come with your business loan. Find out how much you’re pre-approved for before moving on to the application process.
Once you’ve addressed all questions with your lender, you can move forward with the loan application. This can usually be done either online or in person, and each lender usually has their own specific application process. (Note: An interview might be part of that process.)
In addition to the documents mentioned previously, be sure to have your Social Security number and tax ID ready, as well as your desired loan amount. Having all these items readily available will likely shorten the time it takes for your application to be processed.
Seek out a lender that’s not only known for completing the loan approval process in as little as a day, but offers potential discounts for existing customers!
Once you submit your loan application, the lender will review it and get back to you with a decision. If the business loan is approved, you’ll receive a loan agreement to sign, then the funds will be made available to you.
It Pays to Know How to Get a Business Loan.
Let’s get your business growing. At Gate City Bank, we understand what drives you and your venture, and we know that securing a loan is a key step to your success. Whether it’s guiding you toward low rates, local support, convenient digital signing options or anything in between, we’re here to help you navigate the waters on your entrepreneurial journey – and create a better way of life in the process.