Even the big and well-established businesses require loans once in a while to keep their business running smoothly. Nonetheless, Small and start-up businesses face the most problems of shortage of finances more often than their well-established counterparts.
Small and start-up businesses in most cases rely on loans to kick start operations and grow their company. In a nutshell, it is very difficult to survive as a start-up without sufficient funding. Although the means to access business loans abound, not many business owners know how to go about it.
While traditional lenders remain the main source of accessing loans for small and start-up businesses, there are also alternative lenders available for the same purpose. One of the main challenges facing start-ups and small business establishments is how to get a business loan to boost their business.
The goal of this article is to enlighten small and start-up businesses on how to get a small business loan. Below are the ten effective steps to get a business loan in 2022.
10 Effective Steps To Get A Business Loan In 2022
#1. Study and have a clear understanding of the different types of loans available for small businesses
There are many options for accessing business loans and the options differ depending on your business needs. Therefore, understanding these loan types and how they function is essential for every business owner.
It is one thing to know how to get a small business loan and another to understand the different types of loans available and their uses.
Some of the available types of business loans small and start-up businesses can leverage on are:
a. Paycheck Protection Program (PPP) Loans.
The program allows qualified small businesses to access business loans. If the finances are put to the right use following the loan agreement, the loan will be pardoned. Some of the eligibility criteria for PPP loans include:
The business must provide evidence of at least a 25% decrease in annual gross revenue within any quarter in 2020 in comparison to 2019.
Business must be an existing business before the 15th of February 2020.
The business must be one with no more than 300 employees
For businesses that had already obtained a PPP in the past, the full amount must have been utilized before the application for a new one
There are certain types of businesses that are not eligible for the program. They include think tanks, lobby and political advocacy establishments, and publicly traded industries.
PPP loan is useful for the renewal of rent, offsetting payroll costs, settling utility bills, and augmenting operational expenses. PPP loans can also serve the purpose of purchasing employee protection materials like facemasks and sanitizers.
It can also help to take care of some of the cost of property damage that is not covered by your insurance company.
b. SBA Loans.
SBA loans are small government-backed loans that help to support small businesses. The SBA loans do not come with prepayment penalties. However, the loans are not forgivable. The payment of the SBA loan is also different for the first year. Though, it attracts interest.
c. Business Line of Credit
This is another form of business loan that small and start-up businesses can access. There is usually a cap on the total amount of funds a company can access through this method.
A business line of credit is useful for supporting a company’s cash flow and taking care of unexpected expenses. A business line of credit attracts monthly interest and may require annual renewal.
For a business line of credit that is not renewed, full payment will be required.
d. An equipment loan
It is another kind of loan designed to help small and start-up businesses secure the equipment, vehicles, and software for their businesses.
e. Small business term loans
These are accessible funds for business operations, business growth, and capital expenses.
Small business term loan attracts monthly interests and the principal fund is repayable after six months to three years (some lenders allow small businesses more years).
g. Account receivable funding
This allows a company to access quick funds depending on the level of the company’s eligibility. The interest rate for this kind of funding is variable.
e. The working capital loan
Working capital loan is used to finance the day-to-day operation and manage the revenue instabilities of a company.
A working capital loan is also effective for managing expenses as a result of seasonal changes and other unforeseen circumstances that may arise in business.
f. A small business credit card
It can also serve the purpose of short-term financing for start-up businesses. However, when using small business credit cards, ensure that you pay up as quickly as possible.
Over time, debts on small business credit cards can amount to real-time huge expenditure due to heavy interest rates.
#2. Scout for available lenders
There are both traditional lenders and alternative lenders available that are willing to assist small businesses to grow. You can find them via an online search or local listings.
Types of lenders include:
- Direct online lenders
- Big commercial banks
- Local community banks
- Peer-to-Peer commercial lending site
- SBA-backed bank lenders
#3. Think of the lender’s opinion about your risk and credit profile
Lenders make the decision to either accept your loan application or not based on their discretion.
Some factors influence their decision and they include:
- The credit report or credit score of a company
- The level of cash flow and the company’s loan history
- The value of assets in the business
- The number of years the applying company have been operational in business
- The strength of the company’s financial statement
- The key investors in the company
It is essential to ensure that the above factors are in line with the recommendations of a lender before applying for a loan. For example, some lenders may require you to be over one year in business to be eligible to apply for a loan.
#4. Ensure your financial statements are correct
Most lenders go through financial statements and account records critically before approving a loan application.
Therefore, it is essential to ensure that these records are accurate and up to date when applying for a loan. Having your account statement audited by a certified public accountant (CPA) is an added advantage.
However, many lenders overlook the idea of an audited account statement and just request an accurate document.
#5. Ensure you have all the required details, information, and documents required by a lender before applying for a loan
To increase your chances of getting approval for a loan application, be sure that you have all the documents the lender requires.
Therefore, it is essential to read through the lender’s requirements and ensure you understand all the requirements.
Prepare the business documents specified by the lender and upload them according to the lender’s specifications. Not that the specification may vary from one lender to another.
#6. Ensure you specify the amount of loan you require and what you intend to use the loan for when to receive it
One of the information a lender will request from a company applying for a small business loan is the amount and the purpose of the fund. Whether you want to purchase new equipment, expand your business, or just need running capital for business, ensure to specify it.
It will help the lender know if you truly understand the type of loan you are applying to obtain.
Some lenders also assign you an expert depending on your application to help you understand and choose the most suitable type of loan for your business.
#7. Think of the kind of guarantee or security you can provide for your loan amount
The primary concern of many lenders is to ensure that the borrower can pay back the loaned amount.
Therefore, some lenders will require a security interest in the form of property, account receivables, or equipment. Providing security will also increase a company’s chances of accessing loans for the business.
In some cases, the lender may request that the principal owner of the business provide a personal guarantee.
However, it is essential to avoid this arrangement as it puts the principal’s private assets in danger in case of any unforeseen occurrences resulting from the loan.
#8. Ensure to go through and scrutinize the terms of the loan before applying for it
It is important to ensure that the proposed business loan contributes positively to your business before applying.
Scrutinize the key terms and compare different terms from various lenders before making your decision.
Some of the factors to consider include interest rates, the duration of the loan, other fees (e.g. Processing fees) that may apply, the kind of security or collateral attached to a loan, circumstances amounting to loan default, and what happens if the loan is repaid before the due time of the principal.
#9. Evaluate and scrutinize your online profile and the contents you post
It is now more than a tradition for lenders to perform due diligence on businesses and their principals before granting a loan request. Due diligence includes reviewing the business and the principal’s online profile.
Therefore, you need to evaluate your profile first, take out what you need to, and make the necessary adjustments to it in anticipation of your loan application.
Ensure to get rid of any material or posts that may hinder your chances of accessing loans.
#10. Get further information about how to get a small business loan
The more information you have about how to get small business loans and their processes, the better your chances of success when applying for a loan.
You can rely on the internet for more information about business loans and how they work.
There are many useful pieces of information online that can be of assistance to you. Getting enough preparation is better than getting turned down several times because of poor preparation.
There are numerous opportunities for small businesses to assess loans from many lending options and lenders. Lending options usually vary according to business needs and many lenders tailor their loan options toward certain business requirements.
The process can also be a bit competitive, especially for government-backed loans. Therefore, it is essential to prepare well before applying for loans, to reduce your chances of being turned down. Knowing how to get business loans is essential before your application.
Funds are the fuel for driving small businesses from the ground to the next level of growth.
Therefore, the earlier you access funds as a small business, the faster your business takes off the ground and begins to achieve the results you desire.