How to Secure a Business Loan

Business loans have been an alternative measure for business owners with little or no capital. And if you would agree with me, capital lays the groundwork for starting new businesses and to kick the ball rolling. Business loan is a financial assistance rendered to commercial businesses for growing, scaling, and sustaining a business.

It is a means of borrowing money that would be paid with interest within a specified period in agreement with its terms and conditions. Some of which include an interest rate, repayment schedule, and collateral, which are mainly negotiated between the bank or a private company and the business owner before the funds are disbursed. So, if you are a small business owner or a startup aiming to secure a business loan, this article will be helpful.

Types of Business Loans Available for Small Businesses

The type of business loan you can apply for as a business owner depends on your business’s objectives, your company’s financial situation, and your business history and records. The range of business loans available is tailored to suit the unique features of each type of business. The common types of business loans include:

1. Term/Periodic Loans

Term loans are among the oldest and most opt-for business loan types. It is a fixed amount borrowed from a bank in the company’s name and repaid within a stipulated period. It usually lasts between one to ten years and, in rare cases, thirty years. It is the best option for you to secure a company vehicle or new space.

2. Equipment Loans

Equipment loans are bank loans provided to business owners to purchase, repair, or upgrade machinery or other equipment used in business. Businesses such as dental practices, private clinics, and related businesses can leverage equipment loan to secure tangible asset. However, failure to repay the loan when due may result in the foreclosure of the equipment.

3. Commercial Credit

Commercial loans are another option for small business owners. These loans are usually used to finance the establishment of business outlets, such as warehouses, shops, and showrooms. Commercial loans are given for a long period of time, and similar to equipment loans, the bank can recover the buildings if the loan is not paid.

4. Line of Credit Loans

A line of credit loan is often used as a backup fund for emergencies and unplanned expenses. Unlike other financial institution rules, lines of credit permit you to get a loan and pay interest on only the amount used from the total amount acquired. It is an agreement between the bank and the borrower on an agreed specific loan limit. So, if your loan limit is $400, you can only borrow up to your limit. And if you borrow $200, your interest rate will be based on $200, not $400.

Read Also: 12 Best Online Loans for Your Business

5. Secured Loans

A secured loan is backed by collateral or secured with specific collateral such as vehicles, liquid assets or various properties. It has a low-interest rate due to the collateral tendered. You may consider this option if you have assets equivalent to the loan value.  

6. Commercial Advance Loans

A commercial advance loan is designed for businesses that use bank card transactions extensively. Once a company borrows from a bank, the loan is repaid when each customer makes a card transaction to the business bank account; in other words, the bank withdraws a certain amount from each transaction until the loan is paid in full.

Read Also: How to Get Loans Without a Salary Account or Collateral for your Startup

7. Invoice finance loan

Obtaining an invoice finance loan permits you to borrow up to 90% of the total amount your client owes you. However, you must show your customer’s invoice as collateral.

Six Criteria for Applying for a Business Loan as an SME

1. Prepare Documentation

Most banks will require you to submit several documents before they will consider your business loan application. Your business documents will be a testament to the viability and accomplishments of your business. These documents include business plans, tax returns, bank statements, and financial records. Ensure your business plans are detailed and organized, as they are essential documents that any financial institution would consider.

2. Know How Much Money You Need 

It is essential to analyze your business needs thoroughly. This will help you know what your business finance needs are. A bank wants to see if you have a budget. By thoroughly analyzing why you need a loan, you will better consider whether it is worth it.

3. Know Your Credit Score

A credit score is used to rate a customer’s creditworthiness. It varies in amount and is a determinant of obtaining a business loan. It is an indicator of whether you will be able to repay the loan on time. 

4. Consider Your Credit Rating

Some banks and loans require collateral that will serve as security for the duration of the loan. Before applying for a business loan, ensure you have considered which assets you can use as collateral.

5. Determine the bank and loan

Now that you are sure you have all the documentation a bank will likely ask for, consider the types of loans, banks, and their terms and conditions and see what works best for you.

6. Write and submit an application

After carefully verifying the business loan you want to apply for, write an application to the bank with all the necessary documents. Then, you submit your application and wait for a positive response.

Read Also: How to Write a Loan Application Letter in Nigeria

How to Apply for a Bank Loan Without Any Collateral

A collateral-free business loan can be obtained through careful planning and a strategic placement option. To improve your chances of getting the financing you need to support business growth and accomplish your goals, establish a solid credit history, write a comprehensive business plan, show cash income and output, review government-sponsored programs, and have good relations with banks. Listed below are the steps required to do so:

1. A Snapshot of Your Credit History

Check your corporate and personal credit scores. When it comes down to this, try to raise your credit history by paying bills on time, paying off existing debts, and correcting any mistakes in your credit history.

2. Develop a Comprehensive Business Plan

Create a comprehensive business plan describing your company’s goals, target markets, products and services, competitive landscape, business outlook, forecasted finances, and profit. This chart will serve as a guide for your company and an essential tool for banks to assess your business’s viability.

3. Consolidate your Financial Records

 Financial records are monetary documents banks use to assess your company’s economic stability and ability to repay debt. They include cash flow statements, balance sheets, profit and loss statements, bank accounts, and tax returns.

4. Explore Bank Loan Options and Prepare your Application

Each loan program has different requirements, terms, and application processes. So, do your homework and determine which best suits your company’s needs. Next, ensure your application is complete, structured, and tailored to the lender’s needs.

5. Submit a Loan Application

If necessary, submit your loan application in person at a bank. 

6. Negotiate Terms with the Bank

If your loan application is accepted by the bank, you will need to review the conditions of the loan offer carefully. These might include repayment terms, interest rates, and many other conditions that are not favorable or confusing.

Conclusion

Securing a business loan is crucial for starting, scaling, and sustaining a business. Several loan options exist, each catering to specific needs. Carefully analyze your requirements before applying. Robust documentation, a solid business plan, and a good credit history increase your chances of approval. Consider collateral-free options if needed, but remember meticulous planning and strategic positioning are essential. Following these steps, you can secure the vital funding to propel your business forward.

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