How to Finance Your Small Business with a Bank Loan

You’ll probably need a small business loan to help you launch or expand your enterprise unless it is entirely self-funded or supported by investors. Business loans are frequently provided by banks and provide a much-needed boost of capital to help with most expenses; nevertheless, many small business owners struggle to get accepted. The following details and advice should be kept in mind when applying for a business loan from a bank in order to increase your chances of approval.

Business term loan

This loan is a conventional bank term loan option offered by a financial institution; in certain ways, it functions like a personal loan. When a firm needs money for significant acquisitions, improvements, investments, or other purposes, it frequently turns to this kind of loan.

These loans typically have fixed interest rates and a monthly or quarterly payment schedule required by the lender, depending on the specifics of the arrangement. These loans also have set durations: long-term loans last 10 years or more, and intermediate-term loans last three years or less.

Line of credit

Consider a company line of credit similarly to how you would a credit card. Your small business can borrow from the bank up to a specific amount of money if it is approved. You only pay interest on the money you have used up to this point as you accumulate debt.

This option gives you far more choice in how you utilize the money, so long as you stay under the credit limit. Small firms who can provide assets as collateral, have a good credit history, and a consistent stream of revenue might consider this option. [See related reading: What Is a Revolving Credit Line?]

Commercial mortgage

You need a commercial mortgage loan if your company is trying to expand and wants to buy a space. Like a home mortgage, a commercial mortgage is backed by a lien on a commercial property.

Let’s say you have a bad credit history or none at all. In that scenario, a bank may demand that the proprietor of the company or any principals personally guarantee the loan, agreeing to pay the debt in the event that the company fails. Commercial mortgages are far shorter than residential mortgages, which normally last 30 years.

Equipment lease

An equipment lease distributes the expense of a significant equipment purchase over a predetermined period of time, much like renting a car. For a lease, most lessors don’t require a sizable down payment.

You have the option to return the equipment at the end of the lease. As an alternative, you can pay the remaining balance of the equipment’s worth during the term of the lease and as the item in issue appreciates in value. Even though the monthly payments will be less than the total cost of buying the equipment up front, interest will increase the final cost.

Letter of credit

A letter of credit is a bank’s assurance to a seller that the right payment will be made on schedule. There are two varieties of the guarantee available: buyer protection and vendor protection. In the former scenario, which is typically provided for foreign transactions, the bank guarantees to reimburse the seller in the event that the buyer defaults on their payments.

Sometimes the buyer provides the money up ahead in a form of escrow for this kind of letter. Buyer protection is provided to the seller in the form of a fine, similar to a refund. Businesses who apply for one and have the necessary collateral or credit history are given these letters by banks.

Unsecured business loan

The borrower of an unsecured business loan is not required to pledge any collateral as security for the loan amount. Compared to a loan backed by collateral, the lender charges a substantially higher interest rate because it is more accommodating to the borrower than the bank. Online or alternative lenders are the most popular sources for this type of loan, while traditional banks have been known to issue unsecured loans to clients who already have a relationship with the company.

Unsecured business loans are typically far more difficult to get than secured loans as they don’t have any guarantees in the form of collateral. An unsecured loan will typically be issued as a short-term loan in order to reduce the lender’s risk due to the inherent risk involved.

To select the best lender, do your homework

Compare the top business loans side by side based on a number of criteria to get the one that best suits your requirements. Important elements consist of:

Rate of interest
Regulations and specifications, including origination costs
Qualification standards, including annual sales volume and credit scores
Requirements for collateral
The speed with which you can obtain funding
Extra documentation needs

Organize your finances

Find out from the bank what details, according to the kind of loan you’re looking for and the amount of the request, it will require during the application process. In order to achieve this, you should, if at all feasible, aim to have three years’ worth of personal and business tax returns, together with balance sheets, year-to-date profit and loss statistics, accounts receivable aging reports, and inventory breakdowns.

Create a business plan

Having a business plan in place is essential if you’re a startup looking for funding. There are several free resources available if you haven’t put that in writing yet, such as SCORE, Economic Development Centers, and local Small Business Development Centers.

Calculate how much you will require

It’s also crucial to have estimates for the work or purchase ready to present to the loan officer if you require a loan for a one-time purchase or another kind of financing.

According to small company content writer Karen Axelton, “lenders want to see that you’ve carefully thought through your business goals, know how much you need to achieve them, and have a specific plan to use the money wisely.” Do the math to determine how much it will cost you to buy new machinery or open a second site. Compute the impact loan repayments will have on your company’s future budget as well.

Examine the loan offer in its entirety

Upon approval of your loan application, the bank will draft a customized loan agreement for your company. Make sure everything looks correct by carefully reviewing this final loan offer. Every clause of the contract pertaining to collateral, interest rate, term duration, and fees should be in line with the earlier discussions you had with the bank. Once everything is in order, you can sign the document.

Credit score

A strong credit score demonstrates your dependability in terms of debt repayment. Not only may a strong credit score make or fail your application, but it also influences the interest rate and length of the loan that the bank extends to you.

Purpose of the loan

Certain loans have requirements about their utilization. For example, a mortgage is typically used for the acquisition of real estate, but a lease is typically used to acquire equipment.

Accessible collateral

Some lenders can make an exemption if you can put up some valuable assets (typically property) as collateral in case your credit score isn’t high enough. You may lose that collateral to the bank if you don’t follow the terms of the agreement about repayment; the bank will probably sell the concerned assets to make up part of its losses.

Cash flow

Banks want to be sure you have a reliable source of income. If you don’t have a steady stream of income, traditional lenders could be hesitant to approve your loan. Before even taking this into account, many lenders have requirements regarding the amount of revenue.

Financials

Before issuing a loan, the bank will want to see certain types of documents, including cash flow histories. Additionally, you will have to present thoroughly studied financial forecasts for your company.

Business plan

Your business plan may be requested by any kind of lender prior to an application being reviewed. You can find a wealth of information to assist you in starting to draft a successful business plan for your company.

Capital

The amount of money that a business has available to pay for ongoing expenses is referred to as working capital. If you don’t have any working capital, you can be viewed as a risky investment.