How to apply for a business loan in 5 simple steps

Small business owners will be faced with cash flow shortages from time to time. Funding might be needed to help pay employees in a tight month or expand an existing store in a period of growth. Knowing how to apply for business loans or any other type of funding is essential for business success.

What is a business loan?

A business loan is a lump sum of money lent to a business by a lender that is paid back over an agreed-upon period of time. The borrower will repay money to the lender with interest. A business loan can help you make the next purchase for your business, fund business expansion, cover short-term losses, and manage cash flow. Before you apply for a business loan there are several things that you need to know to work out which loan will best suit you.

Let’s take Jim, for example, who is a small cafe owner for 2 years. Jim is looking to expand his cafe to a bigger space. He has been approved for the bigger space to lease and he will be committing to a 2-year lease at $900 a week. He also needs to upgrade the cafe and fit it out, and buy another coffee machine. After doing some research on the types of loans available he decides that he should apply for a business loan. From his analysis, it seems as though $50,000 will do the trick and he can repay over a 2-year period.

Jim decides to use an online lender, the application process is seamless and easy, he supplies his ABN, bank details and shows that he is in business for longer than 6 months. When Jim applies for the loan his terms are $50,000 repaid over a 24-month loan at a 12% interest rate. He knows this because he used the online calculator the online lender provided.

Using the loan calculator, Jim can get a view of what those repayments will look like. In summary:

Jim knows he can afford the loan repayments and will profit immensely from being able to have a larger cafe to provide service to more customers.

What are the types of business loans?

When you apply for a business loan it is best to research what is on offer. Below is a detailed list of some of the loan types offered by most lenders today.

• Traditional bank loan: Going to the bank for a loan is usually one of the first places most borrowers go to borrow money. They offer lump sums of cash at a fixed repayment schedule, these loans are normally secured. When you apply for business loans through a traditional bank there is a lot of documentation required and quite a lengthy process in place.
   
• Secured loan: A secured loan is one that is guaranteed by an asset such as property or equipment. This is a way for the lender to minimize their risk. When loan amounts become higher, usually above $150,000, a lender may ask for some sort of collateral to secure the loan. Meaning if you default on repaying the loan they could essentially seize the asset you have tied your loan to such as the property or expensive piece of equipment.
   
• Short-term loans: These are the go-to loans offered by most online lenders. They are best for smaller amounts of money (typically up to $300,000) and have faster application processes. This also means that the repayment term will be shorter. When you apply for business loans through an online lender you can be sure the application process is much simpler and much more automated than through a traditional bank thanks to their proprietary technology.
   
• Unsecured loans: An unsecured loan usually has the fastest application process. This is because the loan amounts are smaller and there is no collateral needed to be assessed when borrowing the money. Unsecured loans are offered by most online lenders for amounts of up to $150,000. These loans can be beneficial to small business owners as they are less risky.

What to do to apply for a business loan?

1. Understand your needs

Before you apply for a business loan it is necessary to determine the amount of money you need to borrow and know the purpose that you are borrowing the money for. Clearly defining where the money is needed will ensure that you are not over committing or taking a bigger loan than you might actually need.

2. Prepare the paperwork

Get all your documentation ready in advance. It is a good idea to have your ABN, your financial documents, and your business information so that you don’t have to look for it when you apply for a business loan.

3. Research lenders

Research your lenders and find a lender that supports your unique business needs. You can look up multiple lenders online and ask your business friends for their preferred lenders. It makes a huge difference to have a supportive lender when you apply for business loans. If you choose an online lender and an unsecured loan you will most likely be able to borrow up to $150,000 with a repayment period of up to 36 months. Online lenders are speedy and if you are approved you can have access to the money within 24 - 48 hours.

4. Calculate your repayments

Using an online calculator works out your repayments in advance. This can help you feel confident knowing your terms as you apply for a business loan. When you do this you can also calculate your repayments so that you can be certain you are able to repay them.

5. Get familiar with your credit score

You can find out what your credit score is online using a credit score finder. Online lenders and banks use your credit score when you apply for a loan. When you find out what your credit score is, if it isn’t great, don’t panic. Online lenders and banks can use additional criteria to help you with your application, simply reach out to their customer support team for more information. You can improve your score by making regular bill repayments on time and by making regular repayments on your business loan. Knowledge is power and knowing what your score is means you can work on improving it.