What Are The Steps To Getting A Small Business Bank Loan?

What Are the Steps to Getting a Small Business Bank Loan

There are a lot of factors to consider before launching a small business venture. One of the most important aspects that one must think about has to do with finances.

Forming and running a business, no matter the size, comes with expenses. That is why you have to figure out early on how and where to get the proper funding to support the company.

Understanding All the Options

Aside from using personal savings as capital, you can choose to give business loans a try. Getting a loan from a bank is a good financing option for a small business. It comes with safety nets that often come with traditional banking.

Most bank products that are available offer assurances, unlike loans coming from non-traditional or online lenders. Generally, the interest rates in bank loans are also lower compared to those from online lenders.

As a business owner, realize that there are various options when it comes to business financing. Each type comes with requirements and qualifications.

Once it is decided that the company can benefit from a business bank loan, you have to choose the right type of loan depending on the needs and circumstances of the organization. To help get started, here are some of the most common types that a business owner may encounter:

  • Business Term Loan – This type is suitable for companies that are looking for funds for major investments, acquisitions, business upgrades, and other similar purposes. In most cases, it features a fixed interest rate and a specific end date. The lender requires a monthly or quarterly payment schedule. 
  • Line of Credit – If this is an option for the business, you can borrow up to a certain amount from the bank as long as it is within the limit. The company will only have to pay interest on the amount of debt that is accumulated.
  • Commercial Mortgage – Commercial mortgages are suitable for companies that are looking to expand to a new location. This type is similar to a home mortgage but are more likely to have shorter terms. 
  • Equipment Lease – This loan spreads out the cost of purchasing major equipment over a certain amount of time. Most lenders do not require a large amount of down payment and allow the return of the equipment after the lease ends. 
  • Letter of Credit – Banks offer this guarantee to ensure that a seller receives payment on time. You may need to have a good credit history or collateral.
  • Unsecured Business Loan – This type does not require provided collateral. However, lenders often charge higher interest rates for this loan. While you may find more alternative lenders offering this loan, some banks also offer unsecured loans to certain clients.

Knowing What Banks Look For

Getting a bank loan requires a small business to meet certain qualifications. The application forms, requirements, and methods of applying vary depending on the bank. 

Among the factors that banks often check are the following:

  • Credit Score
  • Purpose Of The Loan
  • Available Collateral
  • Cash Flow

Steps to Take

After finding a suitable loan for the small business, the business owner will have to apply to a bank. Here are the major steps that may need to be taken for a smoother application process:

Step 1: Get the company’s financials in order. 

Ask the bank what type of information they will need for the application. This will depend on the type and size of the loan. Generally, the company must have 3 or more years’ worth of tax returns on hand. You may also have to prepare documents showing the business’ year-to-date profits and losses, balance sheets, and inventory among others. Ask the company’s accountant to help prepare these.

Step 2: Prepare a business plan.

If you own a startup, then a copy of the business plan will need to be submitted. Make sure it contains important information such as the company’s goals and the business-related expenses that are expected. 

Step 3: Estimate the amount the company will need.

Before getting a loan, as the business owner you should have an idea as to how much is needed. Make sure to estimate based on research. The loan officer who will review the application has to understand how much the company needs and why it requires that amount.

Aside from those basic steps, the bank may also require you to complete additional requirements. Make sure to discuss them with the loan officer to avoid any mistakes that could lead to the rejection of the loan application.