Did you know that less than 50% of small businesses have met their financial needs? Nearly half of the companies applied for a loan last year, but a small percentage of small businesses got accepted.
If you want to apply for business loans for startups, it is essential to follow the proper steps. Otherwise, you may be one of the small businesses failing due to a lack of funds.
Here are 15 things you need to know about business loans and how to secure the best for your company.
Table of Contents
Why Business Loans for Startups?
In the first few months of starting a business, most people say that they can finance their companies. However, only a handful of startup founders were able to secure business loans within the first 3 months.
It is important to note that business loans, lines of credit history, and credit cards typically account for 75% of new company funding. These funding sources are popular since they are relatively easy to access and are widely available.
But it would help if you had more than elbow grease and grit to secure the best loans for businesses. Do you need loans for startup businesses, or can you handle it all yourself?
The most telltale sign that you need a loan is that your company has poor cash flow. This means that you may not have enough working capital to pay for basic operating expenses and inventory. Then a business loan can work for you.
1. Costs to Consider
If you have expensive equipment costs, your business will need loans to fund this costly equipment. Advertising fees can also be a pain for every small business.
These expenses can skyrocket if you are not careful, which is why you could rely on a business credit card or bank loan to pay these fees. You may be surprised at how quickly costs can accumulate if you are unprepared.
Therefore, it may be wise to start your loan hunt well in advance. Then you can have some funds set aside to keep up with your business costs and loan repayments.
2. Loans for Hiring
Businesses must also have funds to hire strong team players who can contribute to the company’s culture, success, and operations. However, staff members are not easy or inexpensive to hire.
If you want proper talent, you will need to splurge for it. So, loans for startup businesses can help you hire the right people to grow your organization.
3. Emergency Planning
Businesses should also set aside emergency funds. You never know when an unexpected situation can occur. There can also be natural disasters and equipment failures.
You should find suitable business loans for your firm to keep your business running smoothly.
4. Calculate Your Needs
Before applying for a business loan, you should get your hands on the nearest calculator. This will help you figure out how much funding you need to obtain.
For instance, if you need a few thousand dollars, you will not need to apply for a multi-million-dollar business loan. Consider what you want your loan money for to know how much money you need.
According to the Federal Reserve Bank of New York, most companies take business loans for expansion, operating expenses, and loan refinancing.
5. Determine the Type of Business
If you want to run a small catering business, think about the structure of the company and where you want to set it up.
For instance, if you open a brick-and-mortar location for your catering business to sell baked goods, you should know that installing kitchen equipment alone can cost you several thousand dollars.
When estimating how much funding you want, you should think of costs beyond your initial investments. Besides your kitchen equipment cost, you must consider utility, commercial insurance, and maintenance costs.
Stop focusing on the sticker price of your hardware because you have a lot of other things to consider.
Think about profitability and your margin because these are factors that affect how you can meet your loan repayment obligations. Click here for more tips on starting a business.
6. Create Business Plans
Most business loans offered may only be processed if you go with your application with a detailed business plan. It is essential to have a solid business plan because it acts as a road map for the future.
If you do not have one, prospective lenders cannot decide and check if your business idea is profitable.
However, in the last few years, many online lenders emerged, so a lot of businesses did not need to include a formal plan as part of their loan application process.
Always check with your lender and find out their requirements to see if you need to draft a business plan as part of your application. Another way to get out of dealing with a formal business plan is to go for short-term loans that have higher percentage rates.
Higher APRs mean that a large part of your loan repayments will go towards the interest payment rather than your principal. Remember that APRs can typically start from 24% or be higher depending on your credit score.
7. Repayment Terms
When you apply for business loans, you need to be realistic about how much you can pay back every month. You must always consider external factors that can delay payments, like social changes, seasonal lulls, or even supply chain interruptions.
Your lender will determine your monthly payments based on factors like profitability, credit history, business owner income, business type, and loan type.
8. Fix Your Credit Score
Remember that your credit history will show how responsible you are when it comes to paying back your debts. This can also have a direct impact on your interest rates.
If your credit history is positive, you will most likely get a lower interest rate on your business loan. This can mean good news if you worry about repayments with high rates that do not even go toward the principal amount.
However, if your credit history is poor, you can expect your monthly payments to be significantly higher. There is always a risk that you may only qualify for a loan if you have a decent credit history.
9. Speak to Financial Advisors
It is crucial to always speak to a financial advisor before choosing loans for startup businesses. They are experts that have a lot of insight into the numerous financial institutions in your area and the loan programs offered.
It always helps to get personalized advice when choosing financing options to suit your business. You can also use their help to devise a plan to stay profitable in the long run while repaying any debt you take on.
10. Type of Loan
If you have made up your mind and set your heart on getting a loan, think about what kind of financing is right for your growth and business goals. This is because you will come across numerous kinds of business loans for startups.
For instance, you may come across term loans that are best for businesses with large financing needs. This is the most common type of loan for businesses, and it can be repaid over a period of years.
Term loans are very reliable and are a popular way of financing a company. However, to get approved for a term loan, your business needs to operate for at least two years with a demonstrated history of profitability.
Some private lenders prefer to service larger loans, so small ventures may not make the cut.
11. Online Loans
Not all is lost for businesses with bad credit. There is a lot of competition online thanks to online loans that have become increasingly popular in the last few years.
This is because entrepreneurs have gone against traditional business financing to find more readily available options without strict rules. However, it is essential to remember that many of these loans are unsecured.
You may not need many assets or any collateral to get a loan. Borrowers with low credit scores can also benefit from online loans, especially since many consider a score between 500 and 600.
If your company has only been operating for a year, you can also be eligible for an online loan if you cannot get one from a traditional lender. Many online lenders also require lower annual revenue to qualify.
The catch is that these loans come with really high APRs, like 99% in most extreme cases.
12. Factoring Invoices
Invoice factoring is a less conventional kind of business loan. It relies on invoices for payment, and companies usually have to wait a long time for invoices to be paid.
Sometimes, an invoice may take up to 90 days to get paid. These delays can harm your company’s operations, especially if you are a small business that cannot wait long to clear outstanding invoices.
Therefore, you can find lenders that can buy your unpaid invoices, which are also known as purchasing accounts receivable. Nowadays, businesses do not wait for overdue invoices to get cleared by their clients.
They sell those invoices to an invoice-factoring company to get funds a lot faster. Consider that invoice-factoring companies will usually pay 70% of your outstanding invoice if you have less creditworthy clients.
If your clients have good credit, then the invoice-factoring company can pay up to 95%. But this may not work if your business relies on high volumes of smaller invoices because the service fee will not be worth it.
13. Choosing Lenders
You will have no issues choosing traditional lenders for a business loan if you have an excellent credit score. This will also save time because you do not need to go through the internet looking for less conventional loan providers.
Try your best to stay away from any merchant offering cash advances because their interest rates will be extremely high.
It can be challenging to pick a financial institution that has the loan you want and will pay it out within your requested timeframe. But it helps to shop around and meet with some traditional lenders to ensure you have what it takes to qualify for their loans.
14. Getting Documents Ready
Each lender should give a list of specific materials they need to process your business loan application. Some of the details about your business they will need may be a business plan, a tax ID, and your address.
Then they will need business-related financial statements like lease agreements, balance sheets, bank statements, and tax returns. Lenders may also want to know about the business owners
. They can reach out to ask for personal details about anyone who owns a significant stake in your company.
15. Submitting Your Application
It is necessary to discuss submission policies with your business loan lenders. This is because they will have their own process and instructions for submitting an application.
Sometimes, you may also be required to go in for an interview. This can be done by visiting your bank branch or chatting with them over the phone.
Always follow your lenders’ instructions to ensure you do not get rejected or have your loan application delayed for silly reasons that could have been avoided.
It also helps to have a list of questions to ask your lender during the interview. Start by asking them how long it usually takes for them to process loan applications and when you should expect a response.
This way, you can follow up with your lender to check up on your application without expecting a poor outcome.
Start a Business Today
Now that you know the top 15 things about business loans for startups, it’s time to get all your paperwork ready. Remember that even though many online lenders can give a loan to those with a poor credit score, it is rarely worth paying such high-interest fees.
Take your time to research the top lenders in your area and set up a meeting to discuss their requirements for qualifying. Then get all your documents together to prove how you can keep up with the repayments without causing any hiccups throughout your loan term.
If you enjoyed reading this startup financial guide, check out some of our other posts.
