Running a business is one of the most challenging experiences, albeit a rewarding one as well. Most people would like to transition to business owner, but a quick look at new business statistics can discourage such potential investors. A recent survey by the U.S. Bureau of Labor Statistics shows that 20% of new businesses fail within the first two years of opening.

One of the biggest reasons for small business failure is poor cash flow. Many businesses struggle with inadequate cash in their formative years. With no financial resources, it becomes virtually impossible to sustain growth, innovate or compete.

Luckily, the financial industry has a wide range of financing options for businesses. A small business loan is a godsend when your business needs money to run. Whether you need money to purchase stock, equipment, or for operations, a business loan helps unlock your cash flow issues and guarantee survival for your venture.

The first step to business financing is learning how to apply for a business loan and understand how these loans work. This guide explores in-depth the steps, eligibility, documentation, and everything else you need for a small business loan application.

1. Determine How Much Financing You Need

  • Consider What You Need and What You Can Afford

A good plan is one of the most important considerations before you start your business loan application. The biggest mistake you can make as a business owner is to apply for a loan without a goal in mind.

Start with a needs assessment to determine what and why you need business financing. While there are credit facilities readily available, it’s not advisable to rush to apply without a solid plan. Most businesses need cash injection, but such credit facilities only work if you identify the purpose.

Some common uses of business financing include:

  1. Business expansion ( for example acquiring a new business or opening another branch)
  2. Purchase of equipment
  3. To cover day-to-day expenses
  4. Working capital
  5. Grow your business through marketing and other strategies
  6. Ease cash flow constraints

Depending on your business, there are endless purposes that you might need cash for. Make sure you prioritize those expenses that will boost your business, promote growth and give you a competitive edge. For instance, if you’re in the logistics industry, adding a new truck to your fleet would help grow your business more than renovating your office.

Once you identify your business financing needs, set the amount you need from a potential lender. You need to carry out an evaluation of your business’s financial health. Working with a financial advisor can help you determine how much you can afford.

The worst mistake you can make when you apply for a business loan is to borrow more than you can afford. Look at your financial statements, revenue flow, and revenue projections to determine what amount your business will easily afford.

When you apply for a business loan, make sure you understand the total cost of the loan including any down payment required for asset purchase or business purchase, closing costs, insurance, and other fees. You should also analyze the fees and payback amount and find a loan that won’t strain cash flow.

2.Review Your Business Qualifications

After you determine how much financing you need and assessing your business’s capacity to repay the loan, move to the next step and prepare yourself to meet the loan requirements. One critical step in learning how to get a business loan is to identify the qualifications required and make sure your business meets these.

Every loan has unique requirements, but there are some general qualifications that every borrower should meet. The idea is to learn these qualifications early and prepare yourself as this saves you a lot of time in the loan application process. Here are some of the considerations:

  • Credit Score

Your personal credit may be used by the lender when underwriting the business loan. The personal credit score may assist the lender in indicating how likely it is for the business to repay the loan and how you manage finances.

Most small businesses have little of a history, which means their business credit score might not be used as much by the lender. The goal is to boost your personal credit score before you apply for Small business financing. A credit score of 600 and above gives you a chance to qualify for a high loan amount.

However, the financial market still has financing options for business owners with lower credit scores. If you want to access cheaper business loans, start repairing your credit score by first reviewing your credit card report, disputing any incorrect entries on your credit report, and repaying your bills on time.

  • Time in business

One of the first questions any lender will ask is “how long have you been in business?” If you want to successfully learn how to apply for a business loan, you must know how to address this important question. The longer your business has been in operation, the better.

If your enterprise can survive for a few years before you apply for a business loan the better. Such a strategy will qualify you for higher amounts and more favorable business loan terms. If you’re facing serious cash flow issues in your new business, you may still have funding options.

  • Revenue

Among the crucial documents the lender needs from you is the bank statement accompanied by the balance sheet, tax returns, and profit/loss statements. The reason your financier wants to see these records is to determine the health of your business.

If your business’ revenues are strong, you have a higher chance of qualifying for a loan. The financial statements assure the lender of your ability to repay the amount borrowed. A healthy balance sheet assured the lender that their money is safe in your hands.

Your role as a business owner is to ensure you have all financial statements. Good bookkeeping can make all the difference when you apply for your loan. The records allow the lender to track your company’s performance and determine if the cash injection will make a difference.

3. Compare Business Loan Options

Now that you have determined what your business needs to qualify for a loan, the next step in learning how to apply for a business loan is to identify different Small business financing options. The financial market has grown beyond traditional banks and credit unions.

With most small businesses struggling to access credit from traditional sources, alternative business loans have come in handy. Whatever your business financing needs, the following are top business loan options to consider:

  • Term Loan

A term loan is a type of small business loan which comes with fixed-term and regular payments. The loans can be short-term, intermediate, or long-term. The term can range from four months to 25 years, depending on the business.

If you have large expenses planned for the future, and your business has sound performance, a term loan can help with such expenses. From equipment purchases, new business acquisitions to working capital, a term loan guarantees you have the cash needed for your business to continue growing.

If your business is in the manufacturing sector and you need an expensive machine, a lender gives an evaluation of your business to determine how much they can offer. You might need to make a down payment for such a purchase if there’s no 100% financing.

For a term loan, a good personal/business credit score is important, as is impressive business performance. Traditional lenders require collateral for such funding but also offer longer repayment terms and favorable terms.

To apply, you need your financial statements, proof of registration, and credit rating information.

To better understand term loans, assume you talk to your bank and you qualify for a term loan of $150,000 with a 2 year repayment period. Such a loan may come with costs including an origination fee . The total costs are used to determine your monthly repayments.

The best thing is that you know what you pay throughout the term of the loan and you can easily plan for this in your monthly expenses.

  • Line of Credit

One of the most overlooked Small business loan options is the line of credit (LOC). As you learn how to apply for a business loan, this is one of the lesser-known financing options you discover and it can make all the difference for your business. Learning what is a business line of credit could make all the difference for your business.

This is a flexible form of financing where the bank or other financing company evaluates your business and offers a defined amount of money that you can access whenever the need arises. You can access such money quickly to offset any business expenses that arise and repay it immediately or gradually.

There’s a limit to the line of credit offered and a draw period which is the time within which you should use the available funds. Once you borrow and repay, the line of credit becomes available once more, and the cycle continues.

If your business is cash-intensive and you always have bills to pay daily, this is the perfect way to overcome any cash flow challenges. You have access to money on demand which is a dream come true for a small business owner.

For the line of credit, you only pay credit only when you utilize the funds, and assessed a fee only for the amounts borrowed. Whether you want to address cash flow issues, emergencies, boost your working capital, or cash in on a business opportunity, your LOC comes in handy.

Some requirements when you apply for a line of credit include business financial statements, personal/business tax returns, bank statements, and your credit score information. A good credit score qualifies you for a higher amount and better terms for your LOC.

Take for instance if your business qualifies for a LOC of $30,000. If you borrow $15,000, you still have $15,000 more available any time you need more cash. The fees only apply to the $15,000 you have borrowed. Now, if you repay the borrowed amount plus fees, your line of credit is revived and you have $30,000 available for your business.

  • Asset-Based Loan

If you have been in business for some time and have acquired some assets along the way, an asset-based loan is an ideal option for business financing. This is a loan secured through inventory, plant, and equipment (PP&E), vehicles, accounts receivables, marketable securities, buildings, or other assets whose value is quantifiable.

This is a popular form of financing by small businesses to cover cash shortfalls. It is an alternative to a line of credit or term loan if you don’t have a good credit score or cash flow.

The collateral boosts your chances of accessing enough cash due to the reduced exposure to risk for the lender. The fees are also more favorable for collateralized financing. The more liquid the asset, the less risky the loan is to the lender, and the better the loan terms for your business.

If you need quick cash and your business has assets, you can unlock financing through an asset-based loan. You need the asset, financial statements, and identity validation documents. The more stable your business, the easier it is to access an asset-based loan.

In the qualification process, the lender assesses the assets’ value to determine the amount to loan. They ensure the cash advanced can be recouped by selling the asset in case of default. It’s good to understand that you stand to lose the collateral if you default or can’t repay the loan.

If, for instance, your business needs $200,000 to buy a new business and you can’t qualify for a term loan, the lender can consider any assets you have. Your current business property can serve as collateral. The lender gets a valuation of the property and offers about 50% of the value. For more liquid assets such as marketable securities, the loan offer can go up to 85% because these are easier to sell and recoup the costs.

The asset-based loan provider doesn’t offer 100% of the face value of your asset because they consider the cost of selling the asset and any potential loss of value loss in the market.

  • SBA Loan 

The Small Business Administration (SBA) has some of the best small business financing options. The loans guaranteed by SBA come with better terms including lower rates. The loans are available through SBA-approved lenders. With the government guarantee, it becomes easier for business owners who can’t qualify for traditional business financing to access the much-needed cash to grow their businesses.

Whether you need working capital, capital for equipment purchase, busies expansion, debt refinancing or any other needs, an SBA loan suits the purpose. You enjoy longer repayment terms than you get from banks and lower rates. The only downside is the lengthy application process.

The most popular SBA business financing options include the SBA 7(a) Loan Program, CDC/504 Loan Program, and Micro-loan Program. The loan amount ranges from $50,000 for micro loans to $5 million for the 7(a) Loan Program. The loan term extends from 1 year up to 25 years.

The SBA loan requirements include identification documents, bank statements, balance sheets, personal and business tax returns, and a business plan. A good credit score is crucial for easier access to credit through most SBA financing programs also consider businesses with bad credit.

4. Choose Between a Traditional Lender or an Alternative Lender

One step that many business owners overlook when learning how to apply for a business loan is the choice of the lender. After assessing your business needs, determining the amount you need, and choosing the best financing option, consider which lender best suits your needs. You can go with traditional lenders such as banks or alternative lenders such as online private financing companies.

  • Pros and Cons of Using a Traditional Lender

Some advantages of using a traditional lender include:

  1. Widest variety of business loans: Banks offer the broadest variety of business loans including a line of credit (LOC), term loans, business credit cards, equipment financing, and more
  2. Better rates: To borrow from a bank, you must have built a strong relationship and this may allow for lower rates
  3. Longer repayments: Your relationship with the traditional lender and excellent business performance can get you a longer loan repayment period
  4. Fixed rates allow for easier budgeting

Traditional lenders have some drawbacks:

  1. Lengthy loan application/qualification process
  2. Banks are averse to risk which means your business must be doing well
  3. Collateral is a key requirement that disqualifies many small businesses
  4. Hidden fees/charges

  • Pros and Cons of Using an Alternative Lender

Alternative lenders include online loan companies and they have multiple benefits such as:

  1. Faster loan processing
  2. Less stringent requirements for loan qualifications
  3. Wide variety of tailored business loan products
  4. Funding for any type of business
  5. A flat origination or processing fee
  6. Availability of loans with poor credit

Some cons of alternative lenders include:

  1. Shorter loan terms
  2. Smaller loan amounts compared to banks
  3. Frequent payments are required by some lenders

5. Gather the Required Documentation

Now that you understand how to get a business loan, the next critical step is the actual application. For this stage, you need essential documents that include:

  • A business banking account
  • 3 months of bank statements
  • Business license
  • Legal contracts and agreements
  • Legal documents
  • Financial statements (Annual revenue and profits, Profit & loss statements)
  • Tax returns
  • Business plan (if required)
  • Collateral details (if required)

The documents required can vary from one lender to the other and the type of loan also determines what the lender might ask for. You should enquire about the documentation early enough to start the preparations and avoid delay in approvals for your business loan.

6. Submit Your Application

Most business loan applications are now online. You only need to scan your documents and upload them on the lender’s online platform. In some cases, the officer dealing with your account provides an email account for the submission of the application.

After evaluation of the loan application, you receive a loan offer with the terms which you should read carefully. You can opt to sign or continue your search for the best small business loan.

Summary and Conclusion

Do you need cash to boost your business? If so, you need to learn how to apply for a business loan. A business loan unlocks your cash flow issues and helps you meet your financial obligations. It’s advisable to understand the different loan options on the market and how they work before you apply for financing. You should also compare different lenders to identify the best for you.

With this guide, you now have invaluable information to help you get the right small business loan. Ultimately, the financing will give you a competitive edge in the increasingly volatile business environment.