Building and obtaining the capital necessary to pay for the goods to operate of the business can be difficult.
But these and many other expenses must be covered for you to be able to start and maintain your own business. However, you have several options to obtain quick cash flows necessary to cover your expenses and grow your business. While some credit card options for business may be convenient, you should consider applying for a business loan as it is an easier alternative.
These loans are also known as commercial loans, and they come from banks and other lending institutions. The purpose of these loans is to help business owners like you to build up your business. You should learn the basics of these loans and how to go about them before you apply for funds. Read more about the basics of business loans to grow your business in a quick and responsible way with this informative guide.
Understanding Business Loans
These types of loans are very different from others in terms of the flexibility that they offer their applicants. You can apply for a business loan for a short term cash influx or if you need to make a bigger one-time purchase. Other loans also offer renewal options that may help you cover your seasonal needs. Lending institutions consider the following:
- Business’ accreditation
- The credit score of your business
- Your business type qualifies for the loan from the lending institution
The business loan that you apply for may be secured or unsecured. If it is secured, you must provide a collateral for the loan, and you will be at risk of losing your home, car or other properties if you fail to pay back for the funds that you request. Otherwise, unsecured loans offer you access to funds without any collaterals to obtain them.
The lending institution will provide a time frame that you must pay the loan back in when you apply for funds. You will also receive the loan APR information that you must pay every month along with the payments you make towards the loan’s principal amount. You should be aware of the amount of interest rate a lender offers you as these are often tricky or have hidden fees.
Why to Consider Applying for a Business Loan
As a business owner, you might consider applying for a business loan for several reasons. For instance, you might be running low on capital to cover orders or need a boost to supply a growing demand for your goods and services. Business loans help you cover the costs to obtain goods, cover manufacturing costs and maintain your business operations. You can use the funds to cover some of the following:
- Materials and manufacturing costs
- Advertising and marketing costs
- Real estate and costs for facilities where your business operates
- Refinancing for your business unpaid receivable accounts
- Creating a safety cushion for unforeseen costs
You may need to use the funds from the loan to cover other costs different from the ones listed above. Additionally, you should set the costs that you will cover with the funds from the loan. Some lenders will not approve your loan application if the purpose of your application is not clear. You should explain to the lending institution what you will be using your loan for. By doing so, you are more likely that the lender approves your application.
Finding the Right Business Loan
Once you determine that a business loan is what you need to grow your business, you should consider the type of loan and the loan provider. Keep in mind that loans work different from grants, so you must repay them along with the interest rates that lenders charge for it. For that reason, you should aim to apply for a loan that offers you a low APR. You must pay this rate monthly for the period of the loan, so choosing a low-interest rate should be your top priority.
It may be hard for you to find exactly the type of loan you are looking for. For instance, you may be a first-year business owner, and you may not have had the chance to build solid business credit. Moreover, the lack of higher amounts of revenue may make it difficult for you to apply for a more convenient loan in terms of APR. For this reason, you should start building a strong business credit from the beginning. Consider getting a credit card, crowdfunding or getting a personal loan to start building business credit. You can refinance the initial funds later on with the business loans that you request in the future. When you reach good credit by employing these practices, you will have access to more and better loan options.
Furthermore, you should consider that different business loans have different uses. These loans also have different types of coverage and interest rates. For example, you have the option of applying for long-term loans that offer high amounts of cash at low interest rates. On the other hand, merchant cash advances are the fasted way to obtain funds, but they come with a high APR. Your situation and needs may be different from someone else, so it is best for you to talk to a specific lender to understand which type of business loan is best for you. Keep in mind the terms you are willing to commit to once you obtain any loan, and this will help you make a better, more informed decision.
Preparing and Applying for a Business Loan
You should prepare the specific requirements to apply once you have picked out the right loan for you. Consider the following pieces of information to complete your application adequately:
- Documents to verify your identity
- Your business’ balance sheets & financial projects as well as your business license
- Both business bank statements & personal bank statements
- W-2 employment information, you resume and tax returns
- Clear outline of how you plan to use the loan’s funds
However, not all lenders will ask you for this information. Online lenders may not ask for information regarding tax and income. But having this information at hand before you apply will save you time that can be valuable depending on your needs.
When you complete the information that the lender requires you to provide, you can submit it for its review. Some lenders ask that you present them with your plan for the funds and how you will use the loan to grow and improve your business operations. You must persuade them to grant you the loan in case they need additional clarification. Keep your loan presentation clear and informative as possible to impress the lenders and have them approve your loan. Once the lender approves your application, you may have access to the funds in a short period. The lending institution will inform you about how to begin paying for the funds and other details about your loan agreement.