What is a business loan?
Business loans are commercial funds qualified businesses can have access to provided by lenders to businesses, offering capital that can be used for various purposes, such as expansion, equipment purchase, or managing cash flow, with specific terms and conditions for repayment.
Steps to getting a small business loan
Here are some steps to take in getting loans for your small business.
1. Determine how the loan can help your Business
Before applying for a business loan, ask about your business “why” and “how” much you need. By answering these questions, you will clearly understand how the funds will be utilized to benefit your business and the approximate amount you will need to achieve the business goals. Most loan institutions usually inquire about the purpose of the fund. To determine how the fund can benefit your business;
- Assess different aspects of your business operations to pinpoint which aspect needs funding to impact significant growth.
- Quantify the amount of funding you require for each aspect of your business. Break down the cost to avoid ambiguity in your cost.
- Prioritize your business goals and state the goals you have for each of them either in the long-term or short-term. This will serve as a roadmap to utilize the funds effectively.
2. Check eligibility for a business loan
Before you can be considered for a loan, loan lenders have certain requirements you have to meet to qualify for the loan financing:
- Credit Score: Loan lenders review your business credit score to consider whether you are credit-worthy. To make it easy, print out your credit score to review it or even improve it before applying for the loan to increase your chances of getting the loan. To build a strong financial portfolio and make you eligible for a business loan, open a business account with Mintyn Bank today!
- Business Revenue and Cash Flow: Your business’s ability to generate revenue and maintain cash flow will be considered for your loan eligibility. To prove this, provide a detailed business financial and revenue statement that shows a high consistent cash flow and how you also intend to maximize the loan the same way.
- Legal Compliance: Ensure your business has fulfilled all its legal compliance and registration. Like General business licenses, sales tax licences and many others. These documents prove your business’s reliability and commitment to the industry regulations. However, if you have any outstanding legal issues, be sure to resolve them before applying for a loan to increase your chances.
3. Write a feasible business plan
Having a well-written feasible business plan not only proves you to be a reliable business but also allows the loan institution to have a comprehensive understanding of how your business operates and how you intend to utilise the funds you intend to borrow. Here are some tips to take into consideration when writing a business plan.
- Be Realistic: Be sure your financial projections are realistic and are what you can achieve within a realistic time frame.
- Give Clarity: While writing your business plan, make sure all information given is comprehensive, focused and well-organized while at the same time providing the essential information.
- Tailor to Lending Institution: While applying for a loan ensure you tailor the business plan to the lender you are applying to. Loan requirements vary from institution to institution and submitting a generic business plan could reduce your chances of getting your loan approved.
4. Decide the refund period
It’s easier applying for a loan and fulfilling the requirement but the hardest part is when you have to create a workable plan on how to refund the loan. Understanding the repayment term is important for managing your financial obligations, and ensuring a positive loan experience for both parties.
But keep in mind that usually, the loan institution determines the refund terms by considering factors like credit history, the type of loan, business revenue – profitability, and business type.
As a business owner, you should understand how your credit history can affect your business, as it shows your attitude towards paying back debt. Understand how timely or delayed repayments can affect your business credit score.
- If you have a positive attitude to paying back it’s equivalent to a good credit score giving you a better edge in getting other loans.
- And a negative attitude is equivalent to a bad credit score making you ineligible to get the loan.
Develop a roadmap to meet repayment deadlines and consistently protect your business credit.
Also, as the business in need of the loan, you should consider factors like
- Interest rate: Review the interest rates included in the loan, ask if they are fixed or inconsistent and understand how they can impact the loan repayment.
- Loan Term Duration: The loan term is the period you are expected to refund the loan. Thoroughly review the offered loan terms and choose a duration (long or short-term) that aligns with your business goals and financial capabilities.
- Repayment frequency: Loan institutions offer different repayment schedule which varies on a monthly, quarterly and even annual basis. Pick whichever schedule you are most comfortable with and also aligns with your business cash flow patterns. That way, you can comfortably meet up with your repayment schedule without any financial strain on your business.
5. Get insight from a financial advisor
Before opting for a loan, seek a professional advisor who mainly specialises in business finance. This professional can assess your financial situation, help you understand the loan options available and provide personalised advice based on your business goals with tailored insight depending on your business circumstances. And help you make informed decisions for a successful loan application and repayment.
6. The type of loan
Choosing the right type of loan is an important decision that should be based on your business-specific needs and financial goals as different types of loans cater to varying business goals and understanding these helps you make an informed decision. There are various types of loans you can explore;
Term Loan
This is the most popular type of business loan for established businesses with steady cash flow. It provides companies that fund significant investments such as expansion or long-term projects. With a term loan, you can borrow a lump sum and repay over a fixed period of five to ten years.
Pros and Cons of Term Loan
| Pros | Cons |
| Ease of access: You can access term loans through traditional banks or online lenders. | You may be required to bring a personal guarantee/collateral for this type of loan if at any point your business is unable to fund the repayment. |
| A faster application rate: Your loan application can get approved within two weeks to two months after you have applied. | You may incur more interest if your business is a start-up or isn’t established. |
Lines of Credit
Lines of Credit is a loan that works like a credit card. It is a flexible form of business financing that provides a pre-determined amount of money known as a credit limit that a business can borrow from. Unlike term loans where you receive the fund upfront, a line of credit allows you to access funds on an as-needed basis up to the decided limit. A line of credit starts with a set credit limit which represent the maximum amount of money your business can represents the maximum amount of money a business can borrow.
Pros and Cons of Lines of Credit
| Pros | Cons |
| Flexibility. Using the line of credit, you can borrow as much as needed up to the credit-specified limit and make repayments based on how much you spend. | Some businesses may be tempted to overborrow due to the flexibility of lines of credit and ease of accessing the funds. |
| Revolving Credit. As you pay the borrowed amount, the credit becomes available for you to use again. | Varying Interest Rate. A fluctuating interest rate can lead to a higher borrowing cost making it difficult for businesses to manage their financial strains. |
| Interest is charged on the amount you borrowed not the entire credit limit. |
Invoice Factoring
Invoice factoring is a financial arrangement whereby a business sells its unpaid invoices (amount due from customers) to a third party (lending institutions), In exchange for an upfront lump sum percentage usually between 70-90% of the total invoice sold. Then after the customer pays the invoice, the remaining percentage minus fees is paid to the business. This type of loan can be used if your business has bad credit or finds it difficult to get a loan. However, keep in mind that the fees can be more expensive than usual loan fees.
Pros and Cons of Invoice Factoring
| Pros | Cons |
| You can access the loan without worrying about your credit score. It only asses your customer’s credit score. | Cost and Fees: Fees like service charges, discount fees and others can reduce the profit a business receives from the invoices. If you are not in a pressing situation for cash it may be advisable not to opt for it. |
| Easy access to quick cash | No credit-worthy customer, No loan. This is because they only assess your customer’s creditworthiness |
Merchant Cash Advance
This is a short-term financing option whereby a business receives some amount upfront in exchange for a percentage of its daily credit card sales. This type of loan can be accessed based on your credit card sales instead of your credit score. For a merchant cash advance loan, it charges at a factor rate instead of the usual interest rate which is at a higher fee meaning you may incur more debt than your business cash flow issue.
Pros and Cons of Merchant Cash Advance
| Pros | Cons |
| Quick access to funds | High cost and fees |
| No fixed Monthly repayments | This could lead to a cycle of debt. |
Invoice Financing
Unlike invoice factoring, invoice financing allows you to take ownership of the invoices instead of selling it to a third party. In invoice financing, you make use of your invoice (money owed by your customers) as collateral to secure an advance from a lending institution. With invoice financing, you get an advance of 85% instead of the 70% like invoice factoring”. And once your customer pays, you make repayment plus the charges involved.
Pros and Cons of Invoice Financing
| Pros | Cons |
| Charges may depend on the advance payment | Lumpsum is usually 85% of the invoice or less. |
| It has improved cash flow. | Dependence on customers’ repayments |
While our emphasis is on business financing, we have curated specialized financing like our Crunch Loan which is available to cater to the unique needs of individual customers. The Crunch Loan is a testament to our commitment to providing accessible and efficient financial support with features tailored for salary earners which include a flexible repayment structure and low interest rate.
7. Apply for the loan
After you have thoroughly carried out your research and gathered the necessary documents, the next step to carry out is to submit a well-prepared loan application. This process involves looking out for potential lenders while at the same time demonstrating why your business is a credit-worthy of business financing.
- Choose a suitable lender
Identify lenders that align with your business’s financial needs and are ready to fulfil them. This may include traditional banks, online lenders, credit unions, or government-backed loans. You should also consider factors like interest rates, terms and eligibility. Overall, choose a lending institution that has the loan you are looking for and pay out the loan within your cash flow needs.
- Review the Application Requirements
After deciding on the lender to apply with and completing the necessary application process, ensure to review the lender application requirements as each lender’s requirements vary. Review the application carefully and ensure you can adhere to all necessary documents and information needed.
- Attach necessary Documents. These documents may include; information about your business like your business name, address, tax ID and business plan.
- Business Financial Statement: This includes income statement(profit and loss), balance sheet(show your business assets, equity, and liability, tax returns, cash flow statements, personal financial statements, and profitability ratio.
- Business owner information
8. Submit your application
Once you have selected a suitable loan offer, ensure you understand all the terms and conditions involved, and then apply. While submitting your application, take note of the process. For a seamless loan disbursement process;
- Engage in a follow-up communication: By following up with the loan application with the institution, you can actively request any additional information or respond to any information requests easily throughout the process. This will allow you to show the lending institution your commitment.
