How to Apply for a Business Loan in 2024
Applying for a business loan the right way could mean the difference between securing a loan quickly and waiting around for months with no response. The process is significant and you don’t want to miss any crucial steps along the way.
I’ve studied the application process in and out to understand the best practices, and researched some of the top lenders in the business. Now, I’m here to take you through the loan application procedure step by step, to give you a better understanding of how to successfully secure a business loan.
I’ll also include some of my own personal tips and tell you about the best lenders for business loans.
5 Steps to Apply For a Business Loan
A business loan can help you get your firm off the ground or keep it running smoothly, but you want to make sure you apply the right way. Let’s take a look at some pointers.
1. Understanding the Factors of Creditworthiness
Financial institutions have a list of factors to consider before approving your business loan. The three most important factors, which help lenders determine the probability of a borrower defaulting on their debts, are known as the Three Cs. It’s a good idea to have an understanding of the Three Cs before you apply for a loan.
- Capacity: A borrower’s capacity is determined by their ability to repay the amount of loan within the stated time frame. The lender forecasts the expected revenue by reviewing your business’s cash flow statements as well as existing debt obligations you may have.
- Capital: Lenders also inspect the business’s capital level to determine its creditworthiness. Capital refers to your personal investments into the firm, retained earnings, or other assets owned by the business. It is used to evaluate a borrower’s ability to repay the debt if future revenue were to be interrupted.
- Character: This refers to your integrity in handling money. Do you pay your bills on time? Do you have a lot of other loans that still need payment? Lenders will look at your credit history and more to see how trustworthy you are. If you have a bad portfolio, there’s a lesser chance that your business loan will pull through.
2. Deciding What Type of Loan to Apply For
As a business owner, it’s best to be aware of your options, as different loans address different needs.
A term loan is your best option when you want to finance business expansions or large purchases in your business. A business term loan provides you with a predetermined amount of money and a fixed interest rate that must be repaid over a specified period of time.
Term loans can be short, medium, or long-term, lasting anywhere between 1 to 10 years, but some can last even longer. The application process for a term loan may be long and grueling, as lenders require extensive supporting documents and credit checks to ensure the borrower is able to repay such a huge amount of debt in the future.
Working capital loans, on the other hand, are short-term business loans used to solve a shortfall of cash in day-to-day expenses like advertising, payroll, and inventory purchases. These loans usually have a repayment period of less than 12 months and involve less paperwork compared to a term loan. Working capital loans are also easier to obtain for firms that have good credit history.
Small Business Administration (SBA) loans are private-sector loans for small enterprises, backed by the government. These are secured loans, which means you must put up your business or personal assets as collateral.
3. Choosing a Lender
When deciding on a lender, it is crucial to look at the features or terms it offers. It’s always a good idea to compare several lenders to decide which lender is best suited to your business needs.
The lender’s credibility is crucial. Customer satisfaction is a useful technique to identify a trusted and reliable lender. Below you’ll find a list of lenders I personally trust. Each one with its own strengths, these are some of the best in the industry.
A simple and streamlined application process also increases the efficiency of your business loan applications as fewer documents are required. Compared to traditional bank loans, online lenders require less paperwork, which simplifies and speeds up your access to funding.
4. Gathering the Documents Needed for Application
Always be ready with your documents when applying for a loan. Without these documents, getting a loan is next to impossible. Here are some of the most common documents requested during a business loan application process:
- Historical and current financial statements
- Tax returns (to verify your income statements)
- List of assets owned by the business
- Legal documents (e.g., land titles, business registration, etc.)
- Business plans and future project plans
- Revenue forecasts reports
- Growth trend reports
Keep in mind that lenders may not have much knowledge in your area of business. It’s important to help them understand how the business is able to generate revenue in the future and repay the debt.
It always paints a more compelling picture if you can provide simple charts or graphs that summarize the performance of your business, instead of providing only raw data for lenders to interpret.
5. Things to Consider Before Accepting a Loan Offer
You should always understand the terms stated in a proposed loan offer before accepting one. The two main factors to consider are the total repayment amount and the ease of repayment.
The total repayment amount represents the principal borrowing amount as well as the finance cost which includes, but is not limited to:
- Interest fees
- Origination fees
- Credit reporting fees
- Application fees
Knowing the total repayment amount allows you to decide whether the cost of a loan matches your company’s budget. Costs other than interest fees are often negotiable depending on the lender.
The ease of repayment is also noteworthy. It is common to set up automatic payments for convenience. However, some lenders require you to set up a special process for repayment.
The Best Business Lenders
I researched some of the top lending platforms and tested their application processes. These are the three I recommend.
LendingTree is a free, third-party service that allows you to compare competing quotes from different lenders under one platform. This enables you to shop for the best loan offer to suit your business goals.
The system asks you a series of questions relating to the type of business, amount of loan, the purpose of the loan, etc. LendingTree then submits this information to their lender network. Within seconds, you’ll be able to see competing offers. Once you have decided on a loan offer, you can apply online.
LendingTree earns a referral fee from lenders when a customer successfully applies for a loan. Lenders also need to pay a fee to join the lender network. Since none of these expenses are charged to you, there are no hidden fees when you apply for a loan through this platform.
Rapid Finance is a small business funder. This lender provides a variety of short-term business financing options, including merchant cash advances and short-term loans.
Despite its higher rates and shorter durations, Rapid Finance is considered one of the most reputable lenders for small businesses. Many users report receiving the funding within 24 hours after approval of the application.
Unfortunately, you won’t find the borrower qualifications for all Rapid Finance’s financing products on its website. You’ll need to enquire about the borrower requirements for specific products, as they do vary depending on the product.
Rapid Finance has a fast application and approval process. You can either make a call or fill out an online application form. You’ll just need to provide some kind of documentation to verify your identity as well as the business revenue.
Biz2Credit is an alternative lending platform that provides small businesses with a variety of financing options. This lending platform is a direct funder, but if its products do not suit your business, Biz2Credit can also connect you with another lender from its network of partners.
To qualify for Biz2Credit funding, you must have been in business for at least six months and have a steady stream of revenue. Biz2Credit is a realistic alternative for many young enterprises, but isn’t easily accessible for recent startups.
Biz2credit has an easy application process as well. You can simply start your application through the chat feature on the site. Within seconds, an assistant will respond and begin collecting the required information.
After that, Biz2Credit will suggest several funding products that match the information given. You will be able to find out how much the business is able to borrow.
Another cool feature that Biz2Credit offers is the BizAnalyzer. BizAnalyzer is a virtual financial assistant that assesses you your company’s current financial health and gives you advice on how to improve it. You can also compare your creditworthiness to other small businesses in your industry using your BizAnalyzer scorecard.
The Bottom Line
These days, there are reputable online lenders who let you apply for various loan offers, but the probability of your loan being approved is all on you. Aim to be creditworthy and make sure your business is well-documented.
Lastly, maintain good relationships with your lenders so you’ll always have ways to secure a business loan that is both reasonable and affordable for your company.