Business Loans

There are three major reasons why businesses need a loan.

 

They are:

  • To cover the expenses incurred when starting a business
  • To help with regular business expenses
  • To expand your business in a new or bigger direction

Startups usually need a significant amount of capital at the beginning. You may need to pay for equipment, supplies, payroll, rent and more. The purchases you make early on can stay with you for years if your business has any success. So most business owners want to start their business well, and that requires a certain degree of investment. The level of capital required will vary based on the business, but the average startup cost is $30,000.

Established businesses may also require a certain level of credit in order to keep functioning. This is not necessarily a sign that a business that is struggling. Some businesses are seasonal, and staying open during the non-profitable periods requires borrowing money until they are able to make a profit again. As well, some businesses simply have high costs. They may make a profit once a sale has completed, but they need to use a line of credit in order to make the sale in the first place.

Sometimes, businesses experience so much success that they need to take out a loan. This happens when there is a larger customer base available than your business can currently handle. This usually requires businesses to expand their space, increase their supplies or hire more workers. Whether you want to open a new site or add a new item or service, you will need capital to make the expansion happen. And you may not want to wait to build up capital before expanding. After all, the opportunity in the market might be filled by someone else. Therefore, you will want a business loan.

Deciding Which Business Loan is Right for You

If you are starting a business, you are probably not eligible for a business loan. This may seem counterintuitive, but business loans are generally given to businesses that already have a proof of cash flow. This assures a lender that you will be able to pay back the money you have borrowed. There are still a variety of options available. Some nonprofit organizations loan to businesses that have a well-thought-out business plan. Additionally, personal loans allow you to borrow as an individual or you could save up the money and wait before starting your business.

If your business is already established, you will have several choices to consider. There are three major types of loans for businesses:

  • Small Business Administration loans are provided by several institutions, and they are backed by the federal government. Because the government promises to pay a large percentage of the loan if you default, the lender has less risk and therefore provides small businesses with good terms, though it often requires a large amount of paperwork to get this sort of loan.
  • Conventional bank loans are harder to get approved for than SBA loans, with larger banks approving less than one in four of the businesses that apply for it. However, they can be a good option for businesses that are too big for SBA loans. Along with SBA loans, their interest rates are some of the lowest you will find for business loans.
  • Alternative Loans can usually be found online. They have much higher interest rates than other loans, with some APRs being as high as 108%, but you will be accepted or denied quickly and they can be obtained by companies with lower credit scores.

Understanding Personal and Business Credit Scores

There are two forms of credit you need to be aware of before you apply for a business loan: personal credit and business credit. Personal credit takes a look at how you have managed loans in your personal life. This requires looking at how much debt you currently have, how many loan payments you have missed, the types of loans you have taken out and so on. You are able to find your personal credit score for free, and the formula for determining your personal credit score is standardized by FICO.

Business credit scores are not as transparent and standardized as personal credit scores. There are three credit bureaus that handle the majority of business credit reports. Unlike with personal credit reports, you have to pay to see your scores. As well, each of the bureaus has its own way of calculating the score, and two of the bureaus use multiple scores that look at different factors, such as the likelihood of your business going under.

It can be incredibly confusing for someone who is not familiar with credit scores, but the two most important factors impacting your score are similar to those that impact your personal credit score. They are:

  • How much debt your business currently has
  • How often you have missed payments on your loans

There are other factors that will impact your score, but they are not as important as those two. So long as you do not overextend your finances and you pay your loans on time, these factors are merely nice add-ons. They are:

  • The size of your business
  • The age of your oldest credit line
  • The amount of credit you have available

It is worth checking your business credit scores to make sure no mistakes have been made. These mistakes are common, with 25 percent of people finding errors in their credit reports. However, these mistakes can usually be fixed by contacting the credit bureau.

Applying for a Business Loan

Once you know which lenders to target and what your credit score is, you are ready to start looking for a business loan. These are the items you will need to present any potential lender:

  • A photo ID
  • A business plan
  • Financial documents
  • Legal documents

Having all of the documentation ready before you talk with a lender will help you look professional. Given the number of businesses that have their loan declined, it is important to ensure that you do your best to stand out and give the lender every reason to give you the loan. This process also allows you to understand your business better. A business plan allows you to see clearly how your business will make money. Keeping track of the financial and legal documents is important for reviewing the details that can make your business run smoothly.

 

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