4 Things You Need to Know Before Applying for Your First Business Loan

You had an idea and you turned that idea into a new business. Congratulations! But as you work to get your dream off the ground or grow in new areas, you find yourself in need of valuable capital.

This is where a business loan comes in. And if you need funding, you’re not alone. According to the SBA, new companies receive about 75 percent of their funds through bank loans, lines of credit and credit cards,

But applying for a business loan can be a daunting process that could scare away even the savviest business owner. Before you apply for your first business loan, take some time to learn the ins and outs and prepare yourself for the process ahead.

Here, we’ve laid out four key things you should know before you apply:

Documents you’ll need

Before they dole out the money, lenders will closely examine your financials in order to determine if you’re in a position to take out a loan. That means looking at the following documents:

  • Bank statements: By calculating your average account balance and seeing your cash flow in action, lenders can figure out if you have enough money to pay back the loan and keep the business running.
  • Balance sheet: A balance sheet shows your assets and liabilities (i.e. what you have/own and what you owe). This can shed light on your ability to keep operations going and meet repayment terms.
  • Profit and loss (P&L) statement: Also known as an income statement, a P&L statement shows your company’s net income. This highlights your cash flow and the overall strength of your business.
  • Business plan: Common with traditional term loans from banks and financial institutions, a business plan answers key questions about your company, the market you serve, the need you solve for (and how you do it), your leadership and experience, and your financial planning.

Additionally, lenders may ask to see your payroll records and collateral documentation, such as real estate or vehicles. You may also be asked to provide proof your business is registered and you have all required permits and licenses.

If you don’t already have these documents on hand and organized, gathering them ahead of time will definitely make the process a little smoother.  

Related: 5 Startup Business Loan Options for Entrepreneurs

What affects your chances

There are several crucial data points lenders consider when reviewing an application. These include:

  • Time in business: The longer you’ve been operating successfully, the easier it is to secure a loan with desirable rates and terms. For example, SBA loans, which generally have lower APRs than most other loan options, are usually reserved for businesses that have been around for two or more years.
  • Use of the loan: With traditional term loans from banks, you typically must have a clearly defined use of the funds. With other financing options, such as a line of credit, how you plan to use the loan isn’t as important.
  • Personal credit score: As the owner, your ability to pay back debt is important to lenders, so expect your personal credit score to be scrutinized. Before you apply, check your credit score with one of the three major credit bureaus.
  • Annual revenue: The higher your revenue, the more options you should have, but lenders will want to ensure you’re not spending too much. That means revenue is often considered in combination with net profit.

Loan options to consider

Term loans

With the rise of online lending, business owners have more options than ever before when it comes to securing capital.

One of the most popular ways to secure working capital is through a term loan. With a term loan, you get a lump sum of cash upfront, which you pay back over time, along with interest. Whether you decide to apply for a term loan through a traditional bank or head to an online lender, this is the loan product you probably consider when you think of funding options.

If you meet the requirements, SBA loans are worth exploring. They’re long-term loans that often offer the lowest interest rates and most favorable terms of any product.

A business line of credit

A business line of credit works like a credit card, but you get access to cash. It’s revolving capital, meaning you get a credit limit to withdraw from, and that limit replenishes when you pay back what you’ve previously used.

The main advantage of a business line of credit is its flexibility. Since you can access cash immediately, it can solve for short-term cash flow needs, such as seasonal purchases or payroll issues. Interest rates range from 7 percent to 25 percent, which is competitive with traditional term loans when it comes to cost.

Equipment financing

Equipment financing  is a great option if you need to buy items such as machinery, computers, or kitchen equipment. Since the equipment itself serves as collateral, financing companies aren’t as strict when it comes to other qualifications. That means you’re more likely to gain approval.

Ranging from 8 percent to 30 percent, interest rates for this type of financing are reasonable compared to other options, so it’s worth considering if you need equipment fast.

Business credit card

If you don’t have a business credit card, it may be time to open one. Not only will a credit card allow you to purchase equipment or other goods when needed, many also come with great signup offers and bonuses that make them attractive to new businesses.

Specifically, business credit cards with 0 percent intro APRs are a great idea for your first business “loan,” which won’t incur interest for anywhere from 12 to 18 months. This gives you some time to grow your business without having to pay costly interest charges.

Sign Up: Receive the StartupNation newsletter!

Calculate the true cost of a loan

Always read the fine print. Some loans may have fees associated with them, such as origination fees, underwriting fees, closing costs and more. Before you sign, make sure you’re familiar with everything that goes into your total cost.

Your loan also includes interest, which is what you’ll pay the lender on top of your principal amount. Understanding your APR and how it’s calculated will give you a clearer picture into what you’ll pay back in the end.

As with most things in life, securing the best loan possible may require you to do a little shopping. Consider how much money you really need and calculate what you can actually afford. Then, compare your options and see what makes the most financial sense based on your qualifications.

Making your first loan work for you

By knowing the application process, what affects your loan approval, and all the loan options you have, you can pinpoint suitable financing products for your business. While applying, be thorough by crunching the numbers and reading over all the details. This will ensure you know what you’re getting into before signing the dotted line.

If you do all of that, you can get the right first loan for your business. Then, you’ll be in a position to put that money to work for you. Be responsible and strategic with it, and the sky won’t even be the limit for your company.

Leave a Reply
Related Posts
Read More

How to Start a Loyalty Program in 5 Easy Steps

One of the best ways to grow your startup business it to create a loyalty program. Rewards programs remain one of the most efficient methods for startups to reward existing customers and keep them coming...