If you are thinking of starting a new business, the possibility is you need capital to invest in your venture. This is where a business loan might be a reliable option. However, you know – Banks only approve 13% of business loan applications. This number is proof that securing a business loan is not easy. This is because a business loan is more complex than a personal loan. The complexity of business loans makes it hard to navigate through the business loans, especially if this is your first time.
If you are thinking of financing your business with a business loan, you are at the right place. Here we will discuss what a business loan is all about and share some valuable tips that will help your application to be in that 13%.
What is A Business Loan?
As the name suggests, a business loan is a type of loan taken by a company to feed its business’s financial needs. A business loan works in the same way as a personal loan. The process starts with a business applying for a loan, usually from a bank or private lender. They will go through your requirements and assess the situation where they are able to offer a loan.
After carefully assessing the situation, the lender might come up with a contract and interest rate. You can go through the contract and see whether the terms and conditions are acceptable. Once the contract is agreed upon, you will receive the full amount of the loan.
Once you receive the loan, you are obliged to pay the loan amount with interest over the lifetime of the loan. And if you fail to pay your monthly repayment, you might be charged late or missed repayment fees. Hence, if you are preparing for a business loan application, ensure that you are aware of its shortcomings and things that need to be done.
How Does A Business Loan Work?
As we have already said, a business loan helps provide businesses with the necessary capital to support their businesses. In exchange, the company agrees to pay the loan amount back to the lender with interest. Now there are different types of loans. Depending on the types, the company might be needed to pay back the loan weekly, monthly or yearly.
In addition, business loans are either secured or unsecured.
Secured: the secured loan needs collateral – something valuable that the lender can use as repossessing if the company cannot pay the loan amount.
This includes –
- Real estate properties.
- Equipment.
- Cash.
- Or investment.
Unsecured: The lender does not need any collateral in this type of loan. If you fail to pay the loan amount, you just need to sign a personal guarantee agreeing to accept personal liabilities.
Top Tips For Preparing Your Business Loan Application
Each type of business has its own set of requirements and features. The details might be your business, business structure, financial health, and collaterals. Everything plays an important role in getting a business loan.
While getting a business loan can be a daunting task and complex enough that only 13% of total business loan applications are accepted, there are a few tips that you can use to ensure your business loan application is within that 13%.
1. Educate Yourself on Business Loan
Lenders want to loan money they can trust. So, if they sense that you are not aware of how this whole business loan works, they might not feel the inclination to give you a loan. Before you can pitch a bank to private lenders for the loan, you must educate yourself about the business loans, types, working, interest rates, and all the other necessary aspects.
Demonstrating your knowledge about the loan will help you convince the lender, increasing the odds of getting a business loan.
2. Organize Your Documents
Most business loan applications are denied because of incomplete documentation. Even if there are simple errors or missed out on even small paperwork, business loan applications are denied.
You must know what documents are needed and prepare all the documents before you can actually move forward with a business loan application.
3. Decide A Type of Loan You Need
While you might know a business loan is all about getting the funds for your business, there are different loan types under the business loan umbrella term.
Here are the popular types.
- Term loan
- Short-term loan
- Business credit card
- A business line of credit
- Merchant cash advance
- Account receivable financing
4. Find Collateral
While you might risk getting a loan without actually knowing whether or not you will have enough ROI to give it back, lenders are taking the real risk of giving you their money. If the lenders are not confident about getting their money back, they will never show interest in investing.
This is where collaterals can help you get their confidence in you. In addition, having collateral helps you convince the lenders. Collateral can be anything – a business truck, asset, real estate property, or just about anything monetized.
5. Document Your Business Plan
When you apply for a business loan, lenders want to know who you plan to use the loan. They want to know how you want to spend, invest or what the ROI will be. One cannot give money without knowing whether or not they will get them back. This is where you need a solid business plan. A solid business plan will be able to convince the lenders that you are capable of giving back the loans with interest.
Conclusion
There you have it! The de-jargonized answers to the question – How To Prepare For A Business Loan?
Well, there is no definite guide that can exactly tell you what to do. Preparing for a business loan is a process with many steps. The exact answer will depend on the type of organization and company we are talking about. Because the answer to the question relies heavily on the business type, only you who are applying for the business loan know all the steps associated with it.
The best call to make would be to hire a business lawyer and take their help to file all your paperwork. This will not only help you avoid any mistakes, but you can also rest assured there is some experience enough to deal with any unknown circumstances.