Answered by
Roderick Wilson
Small Business Lending Product Executive
Bank of America
Simply put, a business loan is a way for companies to borrow funds for business purposes, from bolstering working capital (the money the business has available to cover short-term overhead) to purchasing commercial property. These loans are typically paid back in regular installments with associated fees and interest, depending on the lender and your qualifications.
The specific requirements depend on the lender and the type and size of the loan. But there are core items you should be prepared to provide:
The lender will also typically want to see at least three of the most recent years of financial information, such as:
You may also need to provide:
Beyond that, lenders that require personal guarantees will also require the business owner’s personal credit history and scores along with bank statements, so they can understand what liquid assets the business has on hand and the owner’s ability to repay the debt if the business cannot.
Conventional loans or term loans are better suited for businesses with an established operating history. They’re usually used for construction and the purchase of equipment, real estate or acquiring another business. Because they’re secured with collateral such as real estate, they tend to have higher minimum amounts of $25,000 and up. These loans will be due in a set period or term, generally, anywhere from 18 months to five years, and they may have a fixed or variable interest rate. Typically, there is a monthly or quarterly repayment schedule.
A Small Business Administration (SBA) loan is supported by the U.S. Small Business Administration, which allows lenders to provide business loans with less stringent credit standards for longer periods of time and with lower down payments than conventional loans. This allows companies to preserve their cash for growth or other needs.
Next up are secured business lines of credit. Think of them as flexible, on-demand pools of money that are available when needed and are usually used to smooth cash flow needs or seize an unexpected opportunity. You pay interest on the money you use along with setup fees for some lines of credit.
Finally, there are unsecured lines of credit and unsecured business loans that generally start at $10,000 and are typically for smaller needs. You don’t have to put up collateral but expect stricter terms and higher interest rates.
Collateral is property that a borrower pledges as security toward loan repayment and is a common business loan requirement. If the borrower can’t pay back their loan, the lender takes the property. Lenders will consider each unique situation, but will look at some variation of what’s known as the six C’s of credit to gauge your creditworthiness. Collateral is one of the six C’s. The others are capacity, capital, conditions, character and communication. Many small business owners apply for loans secured by collateral because these loans usually offer lower interest rates than unsecured loans.
It’s a good idea to check in with your small business banker to determine what can be used for collateral. For example, in addition to residential or commercial real estate, collateral could include the assets of the business (including accounts receivable, inventory or cash) or equipment, depending on the loan.
To apply for a business loan, follow these steps:
Typically, the entire process takes anywhere from three or four weeks for a line of credit to possibly a few months for a commercial mortgage. However, unsecured lines and loans, which are generally for small dollar needs, take less time and can be decisioned in about a week. It’s best to come in as soon as you realize you may need funds, so you can start the application process early.
Once you’ve filled out all the forms and the bank has the necessary documents in hand, the loan goes through underwriting. This is where lenders verify your income, assets, debt and details about any property you’ve listed as collateral. Lenders might also examine your personal and business financial histories.
Small business owners are sometimes surprised that their proposed collateral isn’t sufficient for the size loan they want. Lenders look at the loan-to-value ratio, or the loan amount divided by the collateral’s value. All things being equal, the lower the better. It’s a good idea to call your small business banker if you have concerns that your existing collateral can’t meet loan-to-value standards. They may be able to help you identify other assets that can be used to meet the requirements.
There are many occasions when it makes sense to apply for a business loan:
Financial institutions will need the business to demonstrate they have been operating for at least two years. Startups that may need financing often benefit from establishing a deposit relationship with a financial institution before they need credit to build a relationship with their bank.
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