Unlock Your Business Potential with the Right Loan

At O1ne Mortgage, we understand that you have big dreams for your small business. However, achieving those dreams often requires substantial financial backing. If your bank account isn’t quite where it needs to be, a business loan could be the key to unlocking your business’s potential. Here’s a comprehensive guide to help you navigate the process of securing a business loan.

Step 1: Know How You’ll Use the Money

Lenders want to see that you have a well-thought-out plan for using their funds. Common reasons for seeking a business loan include:

• Startup capital for a new business
• Working capital for short-term cash flow needs
• Expanding your business with a new location, market, product, or service
• Purchasing equipment, machinery, real estate, or other assets

Your reason for borrowing will also help you determine the best type of business loan. Short-term needs call for short-term loans, while longer-term goals require longer loan terms.

Step 2: Calculate How Much Money You Need

Based on your plans for the loan, figure out how much you need to borrow. Also, estimate how the impact of the loan will affect your revenues. For example, if you’re borrowing money to expand into a new location, how soon can you expect that location to become profitable? Use cash flow projections to help you estimate the loan payments you can afford.

Step 3: Determine What Types of Loans You Qualify For

There are several different loan options for funding a small business:

Bank Loans

Traditional bank loans are installment loans repaid in fixed monthly payments. Banks offer both short-term loans (generally six to 24 months) and long-term loans (usually three years and up). Bank loans can be secured by collateral, such as equipment or a building, or unsecured. Secured loans usually have lower interest rates than unsecured loans.

SBA-Guaranteed Loans

The Small Business Administration (SBA), a government agency that helps small businesses, guarantees a portion of loans made by its partner lenders. SBA guarantees reduce lenders’ risk, so they’re more willing to take a chance on small businesses.

Microloans

Businesses seeking very small loans can turn to microlenders. Typically nonprofit organizations, microlenders offer business loans ranging from a few hundred dollars to $50,000. Some microlenders offer SBA-guaranteed loans. Others focus on disadvantaged business owners or businesses whose goals align with the nonprofit’s mission.

Equipment Loans

Similar to auto loans, equipment loans use the equipment you’re financing as collateral. Equipment loans are typically repaid in fixed monthly installments and are available from banks, specialized equipment loan companies, or equipment manufacturers.

Business Line of Credit

A business line of credit is often used for working capital needs but can be used for any business purpose you choose. You can borrow against your credit line as needed, up to your credit limit, and pay back only what you borrow. Most business credit lines are revolving credit: As you pay down the loan, funds become available to borrow again, similar to a credit card. If you’re seeking less than $250,000, a business line of credit is often easier to get than a loan.

Invoice Financing

Businesses that invoice customers and wait a long time to get paid can benefit from accounts receivable financing. This type of loan uses your business’s receivables as collateral. The lender advances you money based on the value of your outstanding invoices, so you get cash immediately instead of waiting for customers to pay. When the lender collects payment from your customers, you receive the remaining percentage of the invoice, minus the financing company’s fees and interest.

Step 4: Check Your Credit Scores

Lenders typically consider both business credit scores and personal credit scores when evaluating your business loan application. If your business is a sole proprietorship or is new and doesn’t yet have a business credit history, your personal credit score will weigh more heavily.

In general, higher credit scores mean lower loan interest rates and better loan terms. Before you begin applying for loans, check your business credit report and credit score, as well as your personal credit report and credit score. Addressing any trouble spots you find, such as bringing late accounts current, can help improve your scores, which could make it easier to qualify for a loan.

Step 5: Assess the Value of Your Collateral

Putting up collateral to secure a loan reduces the lender’s risk. If you can’t repay the loan, the lender can take your collateral. You may be able to use business or personal collateral to secure a business loan. Business collateral includes equipment, vehicles, machinery, real estate, inventory, or accounts receivable. Personal collateral can include vehicles, valuables such as fine art or jewelry, savings or retirement accounts, or your home. Be cautious when pledging personal collateral; you should never risk anything you aren’t willing to lose.

Step 6: Gather the Necessary Information

The documentation needed for a business loan application can vary from one lender to another. Banks tend to require the most information and typically want to see the following:

• Your business’s financial statements
• Business tax returns and bank statements
• Business licenses or leases
• Several years’ worth of financial projections

They may also ask for a written business plan. Online lenders usually have less stringent requirements. They may just want to see your business bank statements or connect with your accounting software to review your cash flow.

Step 7: Shop Around and Compare Loan Terms

Your existing business bank is a good place to start looking for a loan, but don’t stop there. Check with several lenders who offer the type of financing you seek. You can typically get prequalified or preapproved to get an idea of the loan terms you may qualify for.

Prequalification usually requires sharing some basic information, such as revenues and desired loan amount. Preapproval generally involves a more in-depth review of your documentation. Neither guarantees your loan request will be approved, but they’ll give you a good idea of the terms different lenders are offering.

As you compare loan terms, consider annual percentage rates (APRs), terms, fees, penalties, how much you can borrow, and how quickly you can receive the funds. Also, review the total cost of the loan and determine whether the payments fit your business budget.

Step 8: Apply for a Business Loan

When you’ve chosen the best loan offer, it’s time to complete an application. Depending on the lender, it can take weeks or even months to get a loan approved. Having the correct documentation ready will speed things up. Be sure to review your application before submitting it to make sure you haven’t left out any essential information.

Frequently Asked Questions

How Hard Is It to Get a Business Loan?

The difficulty of getting a business loan depends on various factors, including your credit score, business history, and the type of loan you’re seeking. Generally, having a solid business plan and good credit scores can improve your chances.

What Credit Score Do I Need for a Business Loan?

Credit score requirements vary by lender and loan type. Generally, higher credit scores result in better loan terms and lower interest rates.

When Should You Get a Business Loan?

You should consider getting a business loan when you have a clear plan for how the funds will be used and how they will benefit your business. It’s also important to ensure that your business can handle the loan repayments.

How Soon Do I Have to Pay Back a Business Loan?

Repayment terms vary depending on the type of loan and the lender. Short-term loans may require repayment within a few months, while long-term loans can have repayment periods of several years.

The Bottom Line

The right small business loan can help your business expand nationwide, purchase critical equipment, or get through a slow season. To boost your odds of success, take time to do your homework, research loan types and lenders, and compare your options. Maintaining a solid business and personal credit score can help increase your chances of getting a loan—and making your business dreams a reality.

At O1ne Mortgage, we are here to help you navigate the complexities of securing a business loan. Call us today at 213-732-3074 for any mortgage service needs. Let us help you turn your business dreams into reality!