What You Need to Know About Business Loans

 

Securing a loan to finance your small business can be a formidable task—especially if you are running a relatively new venture. It’s not as straightforward as preparing a business plan and walking into your neighborhood bank.

Business loan complexity can be attributed to most lenders’ risk aversion. It’s easier for a banker to say “no” than take a chance on what they view as a shaky investment. Before you get that rare approval, traditional lenders typically request reams of paperwork and supporting documents to establish your creditworthiness.

Conversely, banks seem only willing to lend you money when you don’t need it. As your financial position improves, bankers take notice and start loosening their purse strings. So how do you avoid this catch-22?

The first step is to learn everything you can about business loans before you apply. Start here by learning what you need to know about business loans to improve your chances of success.

Components of a Business Loan

If you’ve borrowed money to buy a house or a car, you might think you’re already prepared to enter the business financing arena. However, applying for a business loan is different than applying for a personal loan. Here are a few business loan components get familiar with before heading to the bank:

A Personal Guarantee

A personal guarantee is your pledge to repay the money if your company defaults. It is a contingency built into most small business loans and requires you to:

• Sign an agreement—The lender will ask you to sign a declaration stating you are personally obligated to pay back the business’s loan.
• Submit to a credit check—The bank will use your social security number to run a hard inquiry on your consumer credit report.
• Provide your non-business financial information—This usually includes details regarding your net worth as an individual, current debts from credit cards and other loans, and assets like the equity on your home or your retirement accounts.

A Form of Collateral

To offset their risk, lenders will often require your business to offer up some form of collateral—an asset that the bank can repossess if you default on the loan. Common assets used as collateral for business loans include:

• Real estate—Since real estate value tends to rise over time; banks often prefer its use as collateral. You can put up personal or business properties, including your primary residence. However, be sure that you can handle the debt since the bank will place a lien on your property and foreclose on it if your loan defaults.
• Stocks and bonds—Since these assets fluctuate in value, the bank will only accept a portion of your holdings to back the loan. For example, if you have $50,000 invested in the stock market, the bank might only lend you $25,000 based on that collateral.
• Equipment, receivables, and inventory—If you use these assets as collateral, you can expect the lender to examine them in detail to determine their actual value. This scrutiny could involve taking a hard look at your documentation or inspecting the physical assets in person.

Future Ratio Agreements

When you accept a business loan, you may need to agree to future ratio limits. You promise the lender that you will maintain certain key business ratios like your debt-to-equity ratio within the pre-defined parameters during the loan’s life. This pledge prevents you from acquiring additional debt unless a comparable asset offsets the new liability.

Professionalism Matters

A large portion of the business loan process is handled virtually through online applications and phone calls. However, if you do have a face-to-face meeting, be sure to dress professionally and carry yourself with confidence.

Gather Your Documents Ahead of Time

Most lenders will need the same details to process your application, so you can gather the paperwork ahead of time to have it accessible. Not only will this speed up the process, but it will give the lender a positive impression of you as a prepared business owner. Commonly requested information includes:

• Your business plan
• Bank statements
• Accounts receivable and accounts payable account details
• Proof of assets
• Terms of other outstanding debts
• The latest balance sheet
• Profit and loss statements
• Insurance declarations
• Recent tax returns

Choosing the Right Lender for Your Needs

There are many lenders out there, each with its pros and cons to weigh for your specific situation.

• Large banks often have lower interest rates and other favorable terms, but the bar for qualification is relatively high. If you haven’t been in business for at least two years, or if your credit score is low, your odds of approval are much lower with the larger banks.
• Small banks and credit unions offer a more personal touch and usually have higher approval rates. However, these banks will often require you to do all of your banking with them to acquire a loan. If you already do your banking elsewhere, it may not be worth the time and trouble to transfer all of your accounts.
• SBA 7(a) lenders are sanctioned by the Small Business Administration (SBA) to offer SBA-backed loans. The application process can be time-consuming for these loans, and approval criteria are often stringent. These lenders also provide SBA emergency loans like the Paycheck Protection Program (PPP), which provides forgivable loans to small businesses impacted by the COVID-19 shutdowns.

A new round of PPP loan funding was approved by Congress and signed by the president. You can be one of the first to apply by contacting Revenued today. Apply using our simple-to-use online form. And please fill out our PPP survey if you received funds as part of the 2020 round of financing.