Businesses need capital to grow and expand. A loan from a bank or financial institution is the easiest and most cost-effective way for a small business owner to obtain money. But what if you’re a smaller business that doesn’t have enough cash on hand to cover your business expenses? What if you don’t have creditworthy employees to help run your business and pay your loans? Like many small businesses, you may not know how to get a loan from a bank or financial institution. That’s because banks and other financial institutions may be reluctant to give out personal loans to small business owners in certain situations. Before giving into temptation and applying for that big loan, here are some things you should know about getting a business loan.
What Is a Business Loan?
A business loan is a loan from a business-related entity. This could be a bank, a credit union, or an investment firm. The purpose of a business loan is to help finance the purchase of equipment or the start-up of a new business. The amount of a business loan can depend on several factors, including the type of business, the loan’s duration, and the borrower’s creditworthiness.
How To Get A Business Loan
To get a business loan, you must first apply for one with the financial institution you’ll borrow from. When you apply, you’ll have to provide information such as your business plans, financial reports, and copies of tax filings. This is to help the financial institution determine if you qualify for a business loan. After applying, you may be required to sign a contract outlining the conditions of the loan and ancillary services such as payroll deductions or access to funds in case of a cash-flow problem.
Should You Get a Business Loan?
Many people wonder whether or not they should get a business loan. After all, unlike a personal loan, which banks and financial institutions are generally willing to give out, you won’t be able to get a business loan if you don’t have one. You should get a business loan because it will smooth out the path to getting a personal loan and make the application process less painful. If you don’t need the money now and can wait until you’re profitable, you may be able to get a personal loan, but in most cases, a business loan is the only option. You should apply for a business loan if you’re starting a new business soon and don’t have the capital to get started.
What Types of Businesses Can Get a Business Loan?
1. Small businesses
2. Micro small businesses
3. Medium businesses
Advantages Of Getting a Business Loan
1. You can get a business loan to start a new business or expand your existing one.
2. You can get a business loan to purchase equipment to help you run your business.
3. You can get a business loan if you need capital to open a new branch office or purchase inventory for a new product line.
4. You can get a business loan to pay for your business expenses such as office rent, payroll, advertising, legal fees, and travel.
Steps Involved in Obtaining a Personal Loan
1. Research the lender. Before you begin the process of applying for a personal loan, it’s important to do some research on the lender. This will help you to get a better understanding of the fees and interest rates that will be associated with your loan.
2. Apply for your loan. Once you have researched the lender, it’s time to go through the application process and submit an application.
3. Wait for approval. Once your application is reviewed and approved, you will be notified by the lender via email or phone call.
4. Make payment arrangements with the lender. Once you receive notification of your approval, it’s time to make payment arrangements with your lender.
What is the Difference Between A Business Loan and a Personal Loan?
A business loan is expected to be repaid. You will have to pay back the loan as agreed upon when you borrowed it. On the other hand, a personal loan is not expected to be repaid. A business loan is often an equity loan, while a personal loan may be a loan with interest.
Mistakes Businesses Make and Should Avoid When Getting a Loan
1. Not having a business plan
To plan will help you outline how and where your business will grow and your future goals. It would be best to consider your company’s creditworthiness and financial stability to receive funding.
2. Not taking out loans long enough
A loan that’s only meant for two years may seem like a good idea, but it’s not. Taking out too many loans too quickly can be detrimental to your finances. It’s best to take out small loans in increments of 3-5 years at a time to pay them off in full over time.
3. Not having enough cash on hand
One problem small business face is not having enough cash to cover their expenses. For example, suppose you don’t have money for payroll or rent. In that case, it’ll be harder for the bank or financial institution to understand how much money is available to repay the loan. If your business doesn’t have enough money, then make sure that at least half of the loan is used for working capital purposes.
4. Not taking into consideration interest rates
Interest rates change every year; therefore, it’s important to consider interest rates when you apply for a loan. For example, if the interest rate is low right now, you should apply for a loan to access it. But if the interest rate is high, it’s better to wait a while before applying for a loan.
5. Not being able to pay back loans on time
Small businesses often fail to repay their loans on time because they only use a small portion of their loan funds. The result is that they are left with no money available for business expenses and cannot pay back any more loans on time. Take note of this when applying for loans, so you don’t end up in the same situation again.
6. Not knowing how much money is available for business expenses
The amount of money you can use from your company will vary from person to person, depending on your income and financial situation. For example, an individual who makes $70k/year can use $70k from their company when applying for loans. In contrast, someone who makes $300k/year may be unable to use or pay off all of their business’s money because they have other debts. Therefore, if you have other debt obligations like mortgage or credit card payments, make sure you have enough money left over after covering these debts.
7. Being too comfortable with debt
Many small businesses continue to borrow money because they are too comfortable with debt. For example, for a small business owner who owns a $500k business, it’s very easy to borrow $500k from the bank because they don’t have enough personal income to cover all their expenses. Therefore, it’s important for you to be aware of your income and that you can afford to pay back the loan on time.
Getting a business loan can seem like an impossible feat. You may not know where to start, and you may not know how to get a business loan. An important thing to consider when applying for a loan is how much money is available in your company so that you can apply for the right payable amount.