A business loan can help you turn your goals for your business into a reality. But before you apply for a business loan, it’s crucial to do your homework.
6 things to know before you apply for a business loan
From common terms to lender types, let’s explore the key information you’ll need to make a more informed borrowing decision.
1. Your funding needs
Whether you’re seeking a loan to expand your business or to cover immediate day-to-day expenses, clarity is key.
Lenders want to know exactly how much money you want to borrow and why. Creating a well-defined plan for how the funds will be used does more than improve your chances of approval, though. It also makes you more prepared to manage your funds – and loan payments – effectively.
2. Types of lenders
You can apply for a business loan from many different types of lenders. Each one offers a unique set of potential benefits and drawbacks, and the right decision ultimately depends on your preferences and business needs.
- Non-bank & online lenders may offer less stringent eligibility criteria. Funding may be available more quickly than from traditional banks.
- Business loan brokers match your business with suitable lenders, which may make the loan application process more convenient. However, they often charge a fee for this service.
- Marketplaces & lending platforms serve to connect businesses with multiple potential lenders.
- Small Business Association (SBA) lenders offer government backed loans which may include longer repayment terms and lower interest rates.
- Traditional banks & credit unions: May offer online applications for loans, but eligibility requirements are often more rigid. Approval processes tend to be longer.
What to consider when choosing a lender
As you shop for potential lenders, don’t be afraid to ask questions, such as:
- Does my company currently satisfy the lender’s qualification criteria?
- What financing options does the lender provide? Can I choose from various products like fixed-term loans, revolving credit lines, or accounts receivable financing?
- How are loan payments usually structured?
- How clear and upfront is the lender about their loan terms, conditions, and fees?
- Do I have to use the borrowed funds only as explained?
- What’s the typical timeline for loan approval? Once approved, how soon can I expect to receive the money?
- Is there support available to assist me in choosing the most suitable loan product for my company’s needs?
3. Required documentation
If you want to streamline the application process, gathering the required legal documents ahead of time may help.
Consider creating an organized folder containing digital copies of these documents before you apply for a business loan online.
- At least three to six months’ worth of bank statements
- Recent business tax returns
- Your business plan
- Any legal documentation that may be relevant, such as your business license
4. Eligibility requirements
Eligibility criteria vary by lender and loan type. Many lenders set minimum thresholds for personal or business credit scores. Others might also consider other aspects, such as your business’s annual revenue, time in business.
If your business doesn’t meet the lender’s eligibility requirements at the moment, consider working on your creditworthiness and trying again in a few months.
5. Your capacity to repay the loan
By carefully determining how much funding you can afford to repay, you can protect your business from the potential strain of ongoing, unmanageable debt.
Evaluating your current revenue, projections for future revenue, and ongoing financial obligations can help you decide what size monthly payment is manageable.
6. What to look for when comparing loan options
As you begin comparing loan offers, take time to read the fine print. Borrowing costs can vary dramatically between lenders.
Look closely at any mention of annual percentage rates, fees, and repayment terms and conditions. Is any penalty for early repayment?
By thoroughly reviewing all terms and conditions, including any early repayment penalties, you’ll be better equipped to choose a loan that aligns with your long-term financial goals and repayment capabilities.
Applying with confidence
By laying the groundwork before you apply for a business loan, you can feel confident that you’re making a smart financial decision to support your business’s future.
Remember, the ideal loan should align well with your other financial obligations and support your business’s growth without putting excessive strain on your operations.
