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How to get a business loan: Everything you need to know

Getting a business loan can be intimidating. Here's what you need to know when locking in a loan for your growing business.

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While small businesses face many challenges in today's economy, intrepid founders are still pursuing their dreams of ownership and growth. Even amid the chaos of 2020, thousands of new ventures found success out of the gate, especially online. 

Starting a business from scratch requires a mix of talent, smarts, and grit, but that's just part of the equation. Regardless of industry, all companies need capital to set the wheels in motion and get things off the ground. 

If you're like most ambitious entrepreneurs -- without tall mounds of cash on reserve -- you'll need a loan to establish your operations and start turning a profit ASAP. Luckily, in the modern era, you've got choices. There is a broad array of services and products available to you, complete with conditions, pros, cons, and considerations. 

We're here to walk you through the various types of business loans you might want to consider, and help you decide which ones are best suited for your needs based on your plan of attack. Let's begin.

Why would you need a business loan?

Business loans aren't just for the disadvantaged. No matter where your business is at in its life cycle, you might need a loan to take things to the next level, expand your operations to new territory, grow your staff, or just navigate through some rocky times. 

Every business owner comes from a different position in life, each with unique challenges, limitations, and advantages. This is why there are so many different kinds of business loans available, and why you should do substantial research and groundwork before pursuing a certain financing option.

What types of business loans are available?

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If you've got a clear idea of what your business needs to move forward from a financial standpoint, we're here to help you make the right call. 

Here are the most popular types of business loans on the modern market, as well as a few lesser-known options that might fit the bill for you.

Term loans

The most simple, straightforward, and established type of small business financing is the term loan, and you're likely aware of the concept from media, news, and maybe even personal experience. 

Whether you go to a bank or a specialized lender, the term loan format is generally set in stone, with a few variations. You get a predetermined amount of money (also known as a lump sum) which you will be obligated to repay over a set period with interest. 

Term loans can land you a significant sum of money upfront, and relatively quickly. Online lenders are known for fast turnaround times and decent interest rates, depending on your credit and reputation. 

Just be aware of conditions that might require collateral or other constraints on your end -- a general rule for loans of all kinds.

Small Business Administration (SBA) loan

After the events of 2020, SBA loans have seen a lot of attention (and scrutiny) from the media and small business community. 

These are guaranteed loans from the federal government offered by banks and other private lenders. SBA loans are in high demand, as they offer the potential for substantial sums, low interest rates, and long repayment terms. 

However, these loans are notoriously difficult to qualify for, and the application process is known to be tedious at best. If time is essential for your business, you might want to seek a more efficient funding method.

Equipment loan

For contractors, restaurants, and brick-and-mortar operations, equipment is an upfront necessity to get cash flowing fast. If you're in that boat and you need the gear to get to work, an equipment loan might be for you. 

The advantage is full ownership of the equipment you purchase, and rates are often more competitive than term loan alternatives. Downsides of equipment loans include a possible down payment and the off-chance that your equipment is rendered obsolete in your industry faster than you anticipate.

Invoice financing and factoring

For businesses that operate via invoice collection, capital is at a premium in the crucial first months of opening. Invoice financing and factoring allow you to leverage those invoices to get cash quickly and keep the lights on. 

While invoice financing uses your invoices as collateral for cash payment, invoice factoring takes responsibility for those invoices and must collect from the customers themselves. This is considered a riskier method of financing and is comparatively costly to other forms of loans. 

It also requires some extra transparency on your end to ensure that all bases are covered with customers. Proceed with caution when pursuing either route.

Other uncommon loan types

Here are some lesser-known approaches that you might consider:

  • Business lines of credit: A flexible and popular financing tool that typically requires no collateral. Ideal for seasonal businesses, short-term needs, and unexpected events.
  • Merchant cash advances: Get money fast, but expect to pay some very steep borrowing costs. Best for businesses that need unsecured financing immediately.
  • Personal loans: Smaller borrowing amounts and high costs can limit your personal loan capacity, but this method can help you get something started in a pinch.
  • Microloans: Low cost, smaller loans typically offered through non-profits and mission-based lenders. Most businesses will not qualify, however.
  • Business credit cards: A classic approach to securing funds with the advantage of points and rewards accumulation. Watch out for fees, fines, and variable rates that rise.

What do you need to get started?

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If you know which loan matches your needs, it's time to get to work. Be sure to read the fine print from top to bottom, no matter how much assurance, experience, and confidence you might have in your business. 

When in doubt, be over-prepared. Here's a list of the factors that matter most when applying for business loans or other forms of financing:

Credit scores

Your personal and business credit scores will come into play when securing financing for your business, especially if you're starting a smaller operation. Do everything in your power to improve your credit scores by disputing inaccuracies or clearing up any existing issues looming overhead. Keep public records clean and establish trade lines if possible, and retain those good habits as your business progresses.

Documentation

Reports, returns, licenses, resources, and statements of all types are going to be essential for obtaining financing for your business. If you're wondering whether or not to include a certain document in your presentation, just add it to the pile to cover all your bases.

Business plan

Inevitably, you'll be asked this pivotal question: How are you going to pay this money back? A detailed business plan should already be in the works for your company, and you'll need it to be clean, concise, and complete for banks and lenders to look over. 

Be prepared to answer questions and seek legal consultation if you're not 100% sure about specific issues or liabilities.

Collateral (sometimes)

Depending on your financing method, you might be asked to hand over some collateral to add another layer of security to the transaction. Real estate, vehicles, equipment, or other assets will usually be suitable, but always know how much is expected of you, along with other parameters. 

If this conflicts in any way with your plan, figure out an alternative approach or go back to the drawing board altogether.

Which is the right loan for your business?

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We've mapped out the main points you need to know when finding and applying for business financing, but we'll include some other miscellaneous wisdom and reminders here:

Know your exact needs

Just like with consumer credit cards, it's easy to be mesmerized by big sums and bite off more than you can chew with business loans. Avoid this common mistake and only finance as much as you need to move the dial.

Have a game plan for payment

Be sure that you can generate the cash flow necessary to pay back the money you owe without overloading your staff or sending yourself into a frenzy. It's sometimes better to move more conservatively with your first loan to protect your credit and reputation.

Think three steps ahead (future loans)

This might not be your first loan, and it likely won't be your last. Think like a chess grandmaster and plan your moves out long in advance. 

The top companies in the world have business plans that extend for decades, so emulate that strategic thinking yourself.

Be smart, stay protected, and prosper

Remember: if a loan offer looks too good to be true, it probably is. Don't get in over your head, and take your time comparing before making a final call. You can always return to the table once your business has stabilized and your vision is clear.