What You Should Know Before Taking Out a Business Loan

Getting a business loan

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Many people dream of owning their own business or expanding their existing business, but few follow through with those dreams. The biggest obstacle people have is coming up with the cash to get a building, inventory, and more. Unless you’ve been saving for years, then you’ll need a business loan.

A business loan is daunting, and you need to go in prepared. If you don’t, then you’ll be denied, and your dreams of business ownership dashed. We created this guide full of business tips to provide you with all the information you need before applying for a business loan.

When the time finally comes for getting a business loan, you’ll have everything you need. Business ownership will be yours.

Business Loans Are Harder for Start-Ups

You have a great small business idea and you know it will be a hit but be prepared for a tough battle for a business loan. Banks and other lenders take many things into account when providing a business loan and start-ups are a big risk.

You don’t have any experience in running a business and there’s nothing to guarantee it will be a success. You can have plenty of charts and graphs to say otherwise, but if you want a business loan, you need to show you’re less of a risk.

Banks are naturally risk-averse. If you default on the loan, they’re stuck with the balance and need to go through a lengthy legal process to get it back. You can prove you’re less of a risk by having 20 percent or more in capital ready before you start the loan process.

You might have better luck with an online lender and they’re approvals are faster than banks.

Is Getting a Business Loan a Good Idea?

We discussed how it’s hard for startups to get a loan. Instead, consider angel investors, grants, and other methods to gain the capital you need. Many start-ups have investors they pay back with profits from their business.

A business loan is great because it’s a guaranteed amount with a set payment schedule. It’s a popular method of expanding businesses, acquiring the competition, and increasing inventory. Investors don’t have a set payment schedule and you can work with them if it takes longer to pay back their money.

Check Your Credit Score

Don’t think about talking to a bank without checking your credit score. If you’re a start-up, then your personal credit score is under scrutiny. You might think that since it’s a business, then your credit shouldn’t matter, but that’s wrong.

Without a business credit account, the bank has nowhere else to look for creditworthiness. If you already own a business, then the bank looks at both scores. If you or your business don’t have a credit score of 600 or better, then work on improving it before applying for a loan.

Your credit score is an assessment of risk. The lower the score, the higher the risk. Unless you have significant collateral to back up the loan, then pay your bills on time, don’t take out any more loans, and pay down your debt.

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If you have a bankruptcy on your record, wait until it’s gone. If you have civil judgments, take care of them before seeking a loan. The better your score, the better chance of getting a loan and a low interest rate.

Determine the Loan Specifics

Lenders expect you to have all your ducks in a row before you meet them. Determine how much money you need and what it’s for. Are you leasing an office or constructing a building? Do you run the business yourself or do you have employees?

How much can you pay each month? How long do you want the loan term? You need to know this not only for the lender but yourself as well. You don’t want to take on more than you can afford or get a loan that isn’t enough for what you need.

If there are multiple people involved with the business, they’ll need to be part of the loan process as well. Do you need a co-signor for the loan? Co-signors are legally responsible for the loan should you default.

It’s a big responsibility that not everyone wants to take on.

Also, when do you need the funds? The loan process isn’t fast, especially if you must do all the research beforehand. Expect to wait a few weeks before you hear back from the lender, especially if it is a large loan.

If you have a business opportunity and need an answer fast, explain that to them when applying for a loan. Sometimes a competitor is closing, and you want to purchase their excess stock, or a building becomes available that’s perfect for your store.

It may not make a large difference, but the lender can provide proof of loan approval before they release the funds.

Develop A Business Plan

When you apply for a loan, you sit with the lender and explain why you need the loan. If you’re starting your own business, then you need a detailed explanation of what that business is, why now is a good time to start and how you’ll separate yourself from the competition. This is your business plan

The lender wants to know what you spend the money on, and your plan for the next five years. You need growth projections and methodology on how you pay back the loan.

If you’re an existing business, they need to know why you need the money. They’re more likely to provide a loan for an expansion where you can show profitability over the last several years than if you’ve had a business downturn and need the money for past-due bills.

If you want to apply for a loan due to hardship, tell them why you have the hardship, how the money changes that, and how it leads to profitability.

Your business plan, especially for a startup, is the most important part of the loan process. It’s your opportunity to convince them to loan you money despite any credit or other issues you have. It must be complete and thorough.

If it isn’t, then they consider you unprofessional and not fit for a loan. A great business plan can sway a lender’s decision from denied to approved.

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Shop Around for Lenders

Throughout the loan process, it appears the lender has all the power, but that isn’t true. You don’t need to pick one lender and accept what they want in terms of payments and interest rate. Go around to numerous lenders and banks in your area and look at online lenders such as Plenti to find the one with the best offers.

Remember, they give you a loan, but you give them business. A bank or lender isn’t worth much if there is no one to lend to. If a lender wants a higher interest rate, then tell them a competitor offered a lower rate.

Negotiation is part of the loan process, so have plenty of ammo when you see them. You may not think the difference of a percentage point between interest rates is much, but in a 10- or 20-year loan, it can add up to thousands of dollars.  

Keep in mind that some lenders specialize in specific types of businesses. They are more likely to provide you with a loan because they know the business and understand how your business plan works.

It’s also important to avoid lenders that don’t loan to your types of business. Taking a meeting with them is a waste of your time.

Read Before Signing on the Dotted Line

Your loan agreement outlines everything about the loan from start to finish. Once you sign it, it’s legally binding. You want to know about the fine print before you sign anything.

Are there fees for late-payments? Does it contain a balloon payment after a certain amount of time? Is the interest rate set or variable? Do you get punished for paying it off early?

Before signing, take the loan document to a lawyer and have them review it. They are on your side, so they’ll tell you about all the fine print. If it’s not what you want, then go back to the bank and re-negotiate.

Don’t sign a contract that you’re not comfortable with. The lender created it, so it is biased towards its side. Once you have it all hammered out, sign the agreement, and start a business.

Prepare for Getting a Business Loan

Lenders receive many loan requests every day. They decide who gets a meeting and who doesn’t. They decide who gets a business loan and who gets denied. Prepare for your loan, so you can start the business you’ve always dreamed about.

Don’t be discouraged if you’re denied for the first loan or even the second. Use it as a learning opportunity to see what can be done better. You may need to improve your credit or your business plan.

If you want to learn more about owning a business or how business loans work, then please explore our site.

Getting a business loan article and permission to publish here provided by Harry Stark. Originally written for Supply Chain Game Changer and published on June 28, 2021.

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