What youâll learn in this article:
- What are the benefits of a business loan?
- Where to get quick business loans?
- What are the approval requirements of a loan?
- What documents are required for a loan application?
Every entrepreneur experiences cash flow concerns at one point or another throughout the life of their small business. Cash flow fluctuations may be seasonal or may occur because revenues were not generated as quickly as predicted in a business model. Working capital may be sufficient to cover current operational expenses, but a business owner may be considering expanding the company and need a fresh influx of cash.
To maintain a positive cash flow or increase working capital, many entrepreneurs turn to business loans for funding. Business financing allows a business owner to cover payroll or hire staff, start a marketing campaign, cover one-time expenses like startup invoices, purchase equipment, or grow the company.
Understanding the benefits of financing and how to get a business loan can help you grow your business, or simply be prepared for the unexpected.
What are the benefits of a business loan?
Small business financing provides access to capital that business owners can use to meet both short-term and long-term needs when regular business cash flow wonât suffice. Letâs look at five benefits of business loans.
- Term Flexibility â There are many options to choose from when shopping for a business loan. Borrowers can secure short-term loans, long-term loans, and even revolving credit lines. They can shop interest rates and repayment terms before deciding on the best fit. When using a loan to secure business funding, owners can opt for flexible financing with different types of loans.
- Working Capital â Taking out a business loan can increase working capital within the business. Borrowed funds can be used when cash flow fluctuates or is lower than expected. A working capital loan allows small business owners to cover operational expenses without having to juggle the timeline of due dates.
- CreditworthinessÂ â Taking out a business loan can increase the creditworthiness of a company. Making payments on a loan will increase the business credit score of the company. A higher credit score and documentation of good payment history will increase the eligibility of the business to receive financing in the future.
- Decision Making â Receiving financing through a traditional bank or online lender allows business owners to retain control of their business. Loans do not require any profit sharing or reassignment of operational control like investors or other types of financing might.
- Tax benefitsÂ â Business owners often do not realize that the interest payable on a business loan may be tax-deductible. To find out how you can write off interest payments check the IRS eligibility requirements or talk to an accountant for more information.
Where to get a fast business loan
Business loans are available through traditional lenders like banks and credit unions and also through alternative or online lenders, like Biz2Credit. While there are benefits to both types of lenders, online lenders are preferred for fast business loans because they can provide quicker application processes, approvals, and funding in as little as a few business days.
Choosing to do business with an online lender has many benefits, including being able to complete the application process from the comfort of your home or office. This eliminates the need for making appointments at local branches and figuring out how to carve time out of your schedule to get to the bank. For many business owners, the most time-consuming part of an online business loan is deciding which online business lender to work with.
When considering a business loan, it is smart to review different online lenders before completing an application. Most online lenders can provide multiple business loan options, but if you are seeking a certain type of loan there may be online lenders better suited for your needs. For example, business owners that are looking for an SBA loan can use the lender matching tool provided by the Small Business Administration.
If you arenât sure what kind of lender is best for your business needs, check out those that have been reviewed by reliable sources. Many online articles will rank lenders based on customer reviews and loan programs, like an article in Business News Daily that rates Biz2Credit as the best online marketplace. Online lenders also frequently include FAQs on their websites which can help to answer some questions you may have when choosing a lender.
What are the approval requirements for a business loan?
Business owners often dismiss the possibility of financing through a loan because they are concerned about qualifying. However, recent times have shown us that the approval rates for business loans are on the rise. The specific approval criteria for business loans vary depending on the type of loan you are seeking, the loan amount, and the lender you are working with. There are some basic factors you should expect to be taken into consideration with your loan application.
A personal credit score or a business credit score is used by lenders to quickly evaluate the credit history of an individual or a business. Ideally, when applying for a loan, both the business credit score and the business ownerâs personal score will be rated as above average. A credit score above 750 for an individual and above 75 for a business is considered excellent. Individuals can check their credit scores once every year for free on websites like AnnualCreditReport.com. Business credit scores can be checked via Dun & Bradstreet, Equifax, or Experian.
While credit scores factor into the approval process for loans, they are not everything when it comes to business financing options. Many individuals or businesses with less than perfect credit are still able to get business financing or equipment financing. Online lenders, like Biz2Credit, offer programs to help clients with bad credit get business loans. For businesses or individuals with low credit scores, a small loan with good payment history is a great way to improve their score for future financing eligibility.
Lenders will consider a businessâ cash flow and revenues during a loan application review. A business that can provide evidence of regular, positive cash flow shows lenders that they are able to take on a monthly loan payment. The financial health of any organization is often evaluated using cash flow reports. Lenders then rate the risk level associated with providing a business a loan based on these reports.
Some businesses, especially those that deal with a lot of invoices, do not have cash flow figures that tell the whole story because of delayed payments. For these businesses, a financing option like invoice factoring is often a better option than a small business loan. Invoice factoring, aka invoice financing, allows the business to sell unpaid invoices to a third-party lender so that they can cover daily expenses. Invoice factoring is a great way for new businesses to get fast funding for their company.
When applying for a business loan, lenders will consider the length of time a business has been operating. Lenders use the dates that the company has had a business checking account open, not the amount of time since the business owner registered the legal entity. Businesses that have been operating for less than one year are considered high-risk and may have trouble getting financing at a bank or with some online lenders.
New businesses that are looking for financing may not qualify for a traditional type of business loan. However, alternative lenders, like Biz2Credit, may still be able to help you secure funding through invoice factoring, a merchant cash advance (MCA), secured loans, or personal financing. Another great option for new businesses wishing to secure financing is to provide a personal guarantee.
Lenders will look at the debt-to-income ratio when considering the creditworthiness of a small business. The number of loans a business is already obliged to make payments on helps lenders determine the risk level of the application. A debt-to-income ratio of less than 50% is ideal for borrowers, although the type of debt making up the total debt is factored into this calculation. Commercial real estate loans do not weigh as heavily on the ratio as credit cards or other high-interest debt.
To strengthen the debt-to-income ratio of your business, keep unsecured debt balances and monthly payments low. The available balance on business credit cards and business lines of credit should exceed 75% at most times, so be aware of balances that may be reaching the credit limit. Avoid high-interest borrowing whenever possible. The total debt of the company is recorded on the balance sheet, so keeping up with monthly financials is a great way to make sure you are aware of the overall financial position of the business.
What documents are required for a loan application?
The documents required by a lender to process a business loan application will vary from lender to lender. Alternative lenders offer online applications and will require the borrower to upload supporting documents. The lender will provide you with a list of documents that they require or update you throughout the application process with any additional paperwork requests.
When applying for a fast business loan online it is best to proactively gather some standard loan support documents, so that the approval process is not delayed while you search for some paperwork. Weâve listed some commonly requested documents here to help expedite your loan application process.
A business plan is a detailed account of the organizationâs goals with the courses of action necessary to meet those goals. The business plan includes a description of the business, marketing strategies, revenue goals, and financial forecasts. Many lenders will request a copy of the business plan when reviewing loan applications for small businesses.
It is a good idea to have both a personal credit report and the business credit report (if available) before applying for a loan. While lenders will often run their own credit reports, understanding your scores and the contributing factors will help you choose the best lender and type of loan.
Financial reports indicate the overall financial health of an entity. Lenders may ask for a copy of a recent balance sheet, income statement, and supporting bank statements. These reports will give information about annual revenue, debt, and cash flow. Be sure to have the banks reconciled and the most recent copy of the reports on hand.
Income Tax Returns
Some lenders require two years of income tax returns to process an application. Other lenders donât require these reports at all. They help lenders and underwriters analyze the adjusted gross income (AGI) of the company or individual. Having the last couple of yearsâ returns for the business and the business owner on hand will avoid holding up the application.
For a complete list of required documents, it is best to check with your lender. However, some other documents you may want to consider preparing are incorporation documents, proof of collateral value for a piece of equipment or real estate, bank account information, and accounts receivable details.
Whether your business needs call for a term loan to provide a lump sum payment upfront, invoice factoring, an equipment loan, or a line of credit, online lenders, like Biz2Credit, can help you get fast financing for your company.
If you are still not sure if fast business financing is the right option for you, take a look at Rajesh Jiwaniâs story. Biz2Credit was able to help this gas station owner secure $100,000 for working capital and expansion, a premium cash advance of $50,000, and a $50,000 small business loan. After being turned away by traditional lenders, Biz2Credit was able to help finance Mr. Jiwaniâs business dreams.