All businesses have an urge to grow. To promote any business growth, you must infuse cash into it, for which you need capital. Capital helps keep the business smooth.
The only problem here is finding a way to get that capital. One of the best solutions for this would be to get a business loan. Business loans cover the expenses of the organization and help keep the business afloat.
Getting a business loan isn’t complicated, though. These days, you can also get an instant business loan online. However, there are a few things you should keep in mind when you apply for one.
For starters, it would help to know the different types of business loans.
1. Know the Different Types of Business Loans
When it comes to a business loan, you have various types. Besides term loans, line of credit, merchant cash advances, and invoice factoring, there are other types of loans that you can get for your business. These may include working capital loans, bank loans, equipment loans, and business credit cards.
Likewise, here are a few types of loans that can help you finance your business.
Also Read: 5 Best And Fast Small-Business Loans
a. Term Loans
Most term loans last between one and ten years. You may need to take out term loans when you are about to make significant investments. Term loans can also help in expanding your business or purchasing new equipment.
To avail of term loans, your lenders may check for things like your bank account statements, how your business is doing, your ability to repay the loan, your creditworthiness, and collateral.
b. Line of Credit
With a business credit line, you can gain access to funds on behalf of your organization as and when required. However, you can only withdraw up to a specific limit at any given time. A line of credit covers any unexpected expenses incurred and keeps the business running smoothly.
There is a fee to set up a credit line, but you don’t need to pay any interest unless you withdraw the funds.
Credit lines renew every year, and you may need to pay some fee for this renewal. If you choose not to do it each year, you may need to pay the full amount at renewal.
c. Merchant Cash Advance
Unlike term loans, you don’t need collateral to get a merchant cash advance. You can also borrow it against any future earnings. The processing time for these loans is quick, and you can get them in less than 24 hours of applying.
However, merchant cash advances are primarily for start-ups. So, most other types of businesses cannot avail of them.
d. Invoice Factoring
Invoice factoring is one of the best financing options for businesses. In this case, there is no debt involved since you are not taking out a loan. The process is also quick, and you don’t need to provide your bank account statements to the lender, unlike in term loans or credit lines.
So, these are four ways to fund your business. However, knowing the types of loans alone isn’t enough. You must know about the various lenders too.
2. Research Lenders
Most business owners do their homework about the different types of loans available to fund their organization. However, they forget to research the lenders.
You can take out a loan from different lenders depending on the type of business. Some popular kinds of lenders that most businesspeople go to for loans are:
a. Direct Online Lenders
Direct online lenders are financial institutions through which you can take out a loan rather than avail them through banks or other such traditional ways.
Taking out a business loan from a bank is commonplace for any businessperson. However, do note that the bank will ask you for a set of documents, including your business plan.
Likewise, there are other prominent factors at play when getting a business loan from a bank. Besides your business plan and the amount, you should also state how you plan to spend the money disbursed.
Other factors that may influence a bank’s business loan include your credit score and credit report. Banks usually check for these to see if you are eligible for the loan and whether you can repay it in time.
Though there are various other types of lenders, such as peer-to-peer lenders, these are the two most popular ways businesspeople and entrepreneurs borrow money for their start-ups or organizations.
3. Know how your Lender will Assess your Credit Risk Profile
When you apply for a business loan, your lender will also assess your credit risk. One of the few aspects that Your credit risk shows is your failure to repay the loan. So, to compensate for such losses, banks, and other such financial institutions levy interests.
By determining a borrower’s credit risk profile, lenders can know if that borrower will be able to repay the loan.
For assessing the credit risk profile, your lenders consider factors like:
a. Credit Score
Most lenders consider your credit score when they loan you money for starting a business. Ideally, you should have a credit score that ranges between 600 and 700 to be eligible to get a business loan.
b. Outstanding Loans
Another aspect that most lenders check when processing your business loan is whether you have any outstanding loans. Although you are already in debt, you can still take out a business loan. Many lenders would be willing to provide you with one to get your business going despite your debts.
c. Business Assets
When you apply for a business loan, you must provide some collateral which is most likely an asset that you will pledge. If you default, the lender can sell that asset and recover the money.
d. Time in Business
Most lenders also check for how long you have been in business to know whether you are generating enough revenue to repay the loan.
Your lender may also consider whether you have any investors for your business to ascertain how your business is doing and whether you will be able to repay the loan.
f. Financial Statements
Lenders may also check for your business bank accounts and other financial statements to see how you have enough money to repay the loan.
So, these are a few things that your lender will consider when assessing your credit risk profile.
4. Get your Documents Ready
Before you apply for a business loan, you should ensure that you have all the necessary documents. You must produce four sets of documents to get your loan disbursed.
a. Bank Statements
Your lender will ask you for your bank statements to verify your sources of income.
b. Tax Returns
You may also need to produce your income tax returns.
c. Business Documents
Business documents are a must for availing of a business loan as it helps the lender check whether such a business exists.
You also need to provide collateral for getting a business loan. The collateral may be one of the business assets that the lender can sell off to recover the money if you default.
Last Few Words
When taking out a quick business loan, remember to check for the different types and lenders. It would also help if you knew how your lender would assess your credit score and risk profile before applying. Don’t forget to have all the necessary documents ready before applying for a business loan.