As a small business owner, your plans for the future rely, at least in part, on your ability to acquire funding. Investing your personal finances in the business is typically not sustainable in the long term, so seeking out external sources of funding can provide the capital your business needs to grow and thrive.
A business loan is one way to fund your business’ growth and expansion. By providing capital, a loan can help you purchase new equipment or supplies, hire seasonal employees or carry out other activities to grow your business.
However, it is important to research the requirements for, and process of, obtaining a business loan to ensure the application process is as quick and smooth as possible. As you prepare to apply for a business loan, it's important to understand the following:
What is a business loan?
A business loan provides capital you can use to cover your business’ operating expenses and grow your business. Business loans are sometimes used to cover larger expenses that would take a long time to pay off, such as equipment or property. However, different types of business loans may be best suited to different needs.
Types of business loans
When you start researching business loans, you'll discover you have several options. Some business loan types that may interest you include:
- Bank loans: Bank loans provide funding to help you grow your business and achieve your short- or long-term goals.
- Working capital lines of credit: In general, working capital lines of credit supply financing to cover shorter-term cash flow needs, such as payroll expenses and pay-out bonuses. The funds in a line of credit may be re-borrowed.
- Term loans: Broadly, term loans provide capital to cover a business’ longer-term investments, such as purchasing equipment, buying out a partner, obtaining property and building or renovating an office, medical practice or storefront.
- Small Business Administration (SBA) loans: SBA loans are guaranteed by the U.S. Small Business Administration and supplied by participating banks. They may be a good option for younger businesses with less credit history who don’t qualify for a bank loan.
- Paycheck Protection Program (PPP) loans: Backed by the SBA, PPP loans provide security for your team. These loans ensure your employees continue to receive payment during the COVID-19 crisis.
- SBA Disaster loans: Disaster loans secure your business in the case of a declared emergency, such as natural disaster. They also provide funding in case of economic emergencies, such as the COVID-19 pandemic.
Finalize your business goals as you plan your loan application; those goals should guide your decision regarding what type of business loan to choose.
How do business loans work?
Business loans provide capital to help you grow your business, whether you seek to cover your day-to-day expenses or need funding for longer-term investments. After you're approved for a business loan, lenders release to you a lump sum payment for the amount of the loan. Then, you’ll repay the loan in regular payments for a set period of time.
The type of loan you get may influence how you’re able to use the money, so examine your business goals to pick the most appropriate business loan before you apply.
How do business lines of credit work?
After you’re approved for a business line of credit, lenders provide you with access to the full line of credit commitment, which you can use as-needed, up to the limit. Amounts borrowed are generally repaid via receivables, allowing you to re-borrow the money over and over.
How do I qualify for a business loan?
Qualifying for a business loan requires making your business attractive to lenders. You should have:
- Excellent credit: This shows lenders you’re likely to pay back your loan and may help you secure better interest rates.
- A thorough and up-to-date business plan: This proves you have a well-thought-out strategy for how to use the money.
- Financial statements: These can demonstrate the financial success of your business.
- Collateral: Items with concrete value — such as property, inventory or intellectual property — that can minimize your risk as a borrower.
The qualifications for a business loan may vary depending on the type of loan and the lender. Ensure you research your loan of interest thoroughly before you apply.
How to apply for a business loan
Getting a business loan starts with solid preparation; understanding the requirements and necessary steps for applying for a loan can set you up for success.
Follow these steps as you prepare to apply for a business loan:
Determine how you plan to use the business loan. Ensure you have an updated business plan, with a strategy for how to use the money.
Evaluate your credit score and history. Strong credit may improve your likelihood of securing a business loan at a lower rate, while businesses with less credit history may be more likely to qualify for an SBA loan.
Gather the required materials. These may vary by lender, but often include a business plan, credit history, balance sheet, budget and financial projections and financial statements.
Choose a type of business loan. Review your business goals and your business’ credit and financial history to decide which loan best suits your needs.
Choose a lender. Find an institution that offers the type of loan you need, and familiarize yourself with their application process and required materials.
Complete and submit your loan application. The approval process may take from a few minutes to a month or more, depending on the lender and type of loan.
Once your business loan has been approved, the funds will be released for you to use to grow your business.
Ensure you make timely payments on your business loan according to the terms of your agreement to help build your business’ credit history. You should also maintain the financial strength of your business by practicing good record keeping, and strategize for the future by updating your business plan as needed.
Finally, stay connected with your lender and reach out when you need advice or support. At First Republic, you have a dedicated banker you can contact directly by phone or email. Contact us to learn more about your business loan options and how we can help you accomplish your goals.
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