Whether you’re just getting your business off the ground or getting it over an unexpected financial hurdle, there may come a time when you need help with funding. After a year of unprecedented financial upheaval, businesses are being formed at a rapid rate, while others struggle to dig out of a lingering economic downturn. Whichever type of business owner you are – just starting out or starting to recover – you may find that a business loan is the boost you need to get your business moving in the right direction.
First-time business loan applicants have numerous considerations to make, including the best type of loan, how to prepare your application for approval and how to manage the loan once you’ve got it secured. We’ve got all the tips first-timers need to make borrowing money easy and hassle-free.
First-Time Business Loan Considerations
If borrowing money for your business is new to you, it may feel like an overwhelming prospect. But business loans exist to help owners like you succeed, whether that’s giving you funding to launch your startup or coming to your aid in the midst of a financial crisis. When you’re considering applying for a business loan for the first time, here’s what you need to ask yourself:
Why do I need a loan?
What are your goals for your business, and how will a loan help you achieve them? Are you using a loan to pay off debt you’ve already accrued, or will you direct it into your business operations right away? Are you launching a new product or service line? Most importantly, have you done your homework to understand if the ROI will be worth it? Taking on debt is a big decision, and you need to be sure your financials are in order before you commit. Can you manage the monthly payments? Will the interest negate any growth you may see in the business? Consider all of these questions when answering why you want to apply for a business loan, as the answers could have an impact on your ultimate decision.
What do I plan to do with the money?
The way you spend the money you’re borrowing will influence the type of loan you take out. For instance, if you need funds to start your business and you don’t yet have any “business cred,” you may want to think about a personal loan or funding options designed for startups. If you need financial support to continue current operations, a business line of credit is a flexible option that allows you to take out cash as needed. And if you’re looking to grow your business, a more traditional fixed loan is likely your best bet.
How much can I afford to pay back?
Note that the question isn’t “how much can I get approved for?” This is a key distinction, as you may well be approved for more than you need. It’s tempting to take out the full loan amount, but you need to have a clear understanding of how much and how long you’ll be paying it back. Debt is a burden, and you don’t want it to outlive your business. Be sure you can make payments on time, in the full amount, in the timeline agreed upon. House hunters who’ve gotten in over their heads by accepting a large home loan know what it means to be “house poor.” You don’t want to find out what it’s like to be “business poor.”
Options for Small Business Loans
When it comes to funding for your small business, there are a variety of options to suit nearly any need. But the right type of loan will be driven by a number of factors, including the type of business, your current financials and your ability to repay the debt. Here are some of the top types of business loans:
Traditional Bank Loans: If your business is established and has a good track record, a traditional bank loan can offer lower interest rates and flexible repayment options. The application process is lengthy though, so if you need cash now, it’s not your best bet.
Small Business Administration Loans: SBA loans offer long repayment windows, the lowest interest rates and larger loan amounts. They are great for refinancing existing debt, but can be difficult to get approval. If your business isn’t well-established with a good credit score and documentation of ability to repay, you’ll have a hard time getting SBA funding.
Startup Loans: These are targeted to new business owners who don’t have established business credit. It can be a quick way to get the cash you need to get going, but it depends heavily on your personal credit and may put your personal assets at risk. Interest rates are also typically higher, and you’ll need to be prepared to defend your business plan to get approval.
Business Line of Credit: If your business costs vary month-to-month and you aren’t looking for a long-term fixed loan, a business line of credit is a great option for flexible borrowing. Draw down only what you need, and only pay interest on that amount. However, those interest charges can be high, and there may be recurring fees every time you take money out.
Alternative Funding: There are many ways to get funding for your business outside of these options, including online loans, merchant cash advances or accounts receivable financing. Check out the comprehensive list of loan options for 2021 to find the one that’s best for you.
How to Apply for a First-Time Small Business Loan
Finding the right loan takes time, and the application and approval process can take even longer. But when you have all the pieces in place, you’ll cut down on the hassle and have a more seamless experience. Here are the steps you need to take to apply for a first-time business loan:
1. Check Your Business Credit
No, you don’t have to have perfect credit to start a business or even to secure funding, but it is a key consideration. Understanding your personal and business credit scores will help you make important decisions about the types of loans that will work best for your needs, and the ones you’re most likely to be approved for.
2. Gather Your Documentation
No matter what type of loan you choose, the one thing that remains consistent is paperwork. Compiling all the relevant details now will save you time when you’re ready to apply. Be sure to gather bank statements, tax returns, financial reports and legal documents that show proof of formation, business licenses and permits. If you’re seeking funding for a startup, you’ll also want to have a fully developed business plan.
3. Legitimize Your Business
Established businesses usually get quicker approval and lower interest rates on loans. But if you’re just starting out, or are off to a slow start after this last year, there are ways to give your business more credibility so it will be more appealing to lenders. First, if you haven’t legally formed your business, do so now. Having an EIN, business address and business bank account will help with the approval process. Also consider other steps, like creating your business website and getting a dedicated business phone line. Some lenders may even turn to social media to establish credibility, so be sure your brand has a presence.
The application has been filed…now what? Here’s what you need to do to make your first borrowing experience a success — for you and your business.
Don’t let denials get you down: If your loan application is rejected, it isn’t the end of the road. It could be that you chose a loan type that didn’t suit your business type or needs. Or it could be that you didn’t go through the steps above to button up your application. Go back to the drawing board and look at other loan options, then retrace the steps you took during the application to find out where you can make adjustments next time.
Pay on time, all the time: It should go without saying, but making payments by the deadline is a must when you’re repaying a business loan. Not doing so can result in exorbitant fees and late charges and could put your collateral or even your personal property at risk. If you’re having trouble making payments, contact your lender immediately to talk through solutions. If you’re able, you may choose to make additional payments toward the principal, which can cut down on repayment time and reduce interest. Understand your loan amortization schedule to make more informed decisions on repayment.
Manage your debt: Taking on debt just to pay off old debt is a risk, but sometimes it’s unavoidable. However, it’s important to cut down on accruing new debt as much as possible. Talk to your lender about refinancing and consolidation options that may lower your payments, reduce interest and put you on a more steady pace to repayment.
Talk to an expert: If you’re struggling to repay your loan or have questions about how to make smart borrowing decisions for your business, it’s time to consult an expert. There are many resources for business owners in need of assistance and support.
Ready to take the leap and apply for your first business loan to achieve growth? Our business loan partner, Kabbage, makes the process quick and easy, so you can get your money and get on your way to success.
Wendi is a freelance writer based in Indianapolis, IN, with over a decade of experience writing for a variety of industries from healthcare to manufacturing to nonprofit. When she isn't working on solutions for her clients, she can be found spending time with her kids and husband, working in the garden or doing more writing (of the fiction variety).