Are you planning to make your entrepreneurial dreams a reality and start a business?
Well, a business loan can help you achieve your goal, whether it is to start a new business or expand an existing one. Read on to learn more about these types of loans and how you can qualify for one that suits the needs of your business.
Overview: Getting a Business Loan
To get a business loan that suits your needs, you’ll have to meet certain criteria, which may vary depending on the lender.
Commercial loans can be as small as $1,000 and as large as $5 million, but it’s not as easy to qualify for a loan on the higher end of that spectrum. Plus, you may not even want to take out a huge loan if your business doesn’t require it since it’ll also mean you need to pay more in interest.
For the best results, you’ll have to be very clear about exactly what you need – including the loan amount and the loan terms that’ll be right for you.
So, the question you must now be asking yourself is – how much business loan can I get? Well, that’ll depend on a number of factors, so let’s dive straight in and find out.
Factors Affecting How Much Business Loan You Can Get
Some of the most essential factors that can affect the loan amount you qualify for – and the amount the lender offers you – are as follows:
Credit Scores
To get a large business loan, your personal and business credit scores should both be excellent. If you’re a first-time entrepreneur and don’t have a business credit score, then your personal credit score should be anywhere between 640 and 700 in order to qualify for a substantial loan from any traditional lender.
Lenders typically offer large loan amounts only to business owners with good to excellent credit since they represent a lower credit risk and have a history of responsible credit management. However, if you have a low credit score, you can still qualify for a business loan (at a higher interest rate) from online or non-traditional lenders.
Collateral
If you want to qualify for a larger loan amount with a lower interest rate and favorable terms, then borrowing against collateral might be a good idea. A collateral is simply an asset – such as real estate, equipment, or inventory – that you provide to the lender as security against the business loan.
In other words, the lender can sell the collateral to cover their losses if you’re unable to repay the loan.
Hence, collateral helps lower the lender’s risk, making it more likely that they’ll offer you a substantial loan amount. If the collateral isn’t available, you can take out an unsecured loan with a higher interest rate, but the amount you qualify for might be smaller.
Debt-to-Income Ratio
Your debt-to-income (DTI) ratio is the percentage of your monthly income that goes toward your monthly debt payments. If your DTI ratio is 50%, for instance, that means you only have half your paycheck left over after making your debt payments every month.
This would, in turn, affect your budget and make it hard for you to make the additional monthly payments on the new business loan you’re planning to take out.
Therefore, most lenders prefer borrowers with a DTI ratio of 35% or less. On the other hand, the lender may offer you a lower loan amount if your DTI ratio is higher than that.
Business Revenue
Your business revenue is the amount of money (before subtracting expenses) that your business brings in over the course of a month or year. The higher the revenue, the larger will be the loan amount that you can qualify for.
Many traditional lenders might only offer you one-tenth the amount of your annual revenue if you’re applying for an unsecured business loan without collateral. More lenient online lenders may offer a loan of about 30% of your annual revenue.
Time in Business
If your business has been around for a long time, traditional lenders will be more willing to extend you a larger loan amount. But unfortunately, many new companies and businesses fail each year, with over 50% of small businesses failing within five years of launch.
Therefore, lenders are more willing to extend a loan to an entity that has stayed in business for longer than five years since the risk of failure goes down with each additional year the company has survived.
Down Payment
If you’re taking out a business loan to purchase an expensive piece of equipment or real estate for your business, you can improve your chances of getting approved by making a sizeable downpayment on the purchase.
The downpayment proves that you’re committed to your decision (since you’re willing to risk your own money on it) and are serious about repaying the loan. Usually, lenders will be willing to approve a larger loan amount if you’re making a substantial downpayment.
Your Industry
The industry your business operates in will also affect the loan amount you can hope to be approved for.
If the industry is considered risky, prone to cashflow problems, or socially controversial – such as online gambling, cannabis, or adult entertainment – then you might have a hard time getting approved for a large loan amount from traditional lenders.
If you have a strong revenue, then you can still get approved for a substantial loan with low-interest rates from alternative or online lenders.
Types of Business Loans You Can Apply for
Now that you know some of the factors that can affect the amount of business loan you’re approved for, it’s time to look at the characteristics of the different types of business loans you can get.
Short-Term Loans
These loans typically have a relatively short repayment period – ranging from three to eighteen months. Due to this, loan amounts are usually smaller (under $250k), and interest rates are high, with larger loans requiring collateral.
Equipment Loans
Business owners take out this type of loan to purchase necessary equipment for their firm. For instance, a restaurant owner might apply for an equipment loan to buy refrigerators, ovens, commercial-grade stoves, and deep fryers. At the same time, an IT company may use the equipment loan to buy computers, printers, servers, etc. The piece of equipment bought with the loan usually serves as the collateral.
Merchant Cash Advance
This is a system whereby a business owner can borrow cash for working capital against their future debit and credit card sales. It’s an advance on projected revenue which is repaid with a percentage of future sales (about 15%), along with a fee. That percentage (15 cents per dollar) is deducted directly from daily card transactions until the cash advance has been repaid in full.
Business Lines of Credit
This is a type of revolving credit that can be used when you need flexible access to capital and are not sure of the exact amount of money you might need to borrow. Business lines of credit usually have a credit limit of up to $100,000, although you may be able to negotiate a higher limit if you have an excellent credit score. You can use and repay the credit as needed and don’t need to use the entire approved amount.
SBA Loans
This is one of the best available loan options for small business owners. An SBA loan is one which is partially guaranteed by the U.S. Small Business Administration (SBA), meaning that if you (the borrower) are unable to pay back the loan, then the government will repay at least a portion of the loan amount to the lender. This guarantee, offered by the government, reduces the risk for lenders and encourages them to offer larger loan amounts and more favorable terms to small business owners.
Asset-based Loans
These are essentially secured loans where the borrower provides the lender with some collateral – such as real estate, equipment, or inventory – to qualify for a loan. If the borrower defaults, the lender can seize the collateral and sell it to cover the loan amount. The loan amount usually depends on the appraised value of the assets being offered as collateral.
Franchise Financing
This type of loan is designed specifically to help aspiring franchisees cover the costs associated with setting up or operating a franchise outlet. These costs might include equipment, inventory, franchise fees, marketing expenses, etc. Lenders who offer this type of financing typically understand the unique needs of franchise businesses, particularly the risks and benefits associated with this business model.
Business Credit Cards
Of all the loan options mentioned here, a business credit card might be one of the easiest to qualify for. Furthermore, a business credit card will help you earn rewards on your commercial purchases, such as cashback and travel points. While most business credit cards have relatively low credit limits, some cards do come with no pre-set spending limit, meaning that the limit will be determined by your individual spending habits and ability to pay off your balance.
Startup Loans
This is a financial product designed specifically to help new businesses access the capital they need to get off the ground and fund the early stages of their growth. You can apply for a startup loan from traditional banks, online lenders, credit unions, etc. Once approved, you can use the loan amount to purchase equipment, inventory, or office space for your new business, as well as for hiring employees.
How to Maximize the Amount You Can Get
Whichever type of business loan you decide to apply for, here are a few steps you can take to maximize the loan amount you potentially qualify for:
Assess Your Business Needs
The first step is to make sure you’re not seeking a larger loan amount than you actually need, as a bigger business loan will also entail more interest and more fees. Next, think carefully about why you want to take out a business loan and exactly how much capital you’ll need to accomplish that goal.
Draw up a detailed budget clearly outlining your plans for how you’re going to allocate the amount you plan to borrow in order to maximize business growth. This detailed plan will help you convince lenders to approve a larger loan amount if needed.
Determine Your Eligibility
Make sure your credit scores (both personal and business) are in the good to excellent range. Get a free copy of your credit reports and check your credit history. If you find any erroneous or outdated information that could potentially harm your credit score, then dispute it immediately with the credit bureaus.
Start paying all your bills on time, at least a few months before applying for the business loan. A better credit score and credit history will definitely help you get a larger loan with better repayment terms and a lower interest rate.
Research and Shop Around
Don’t accept the first business loan that you’re offered. Instead, research different lenders – both traditional and online – and talk to them about the different financial products they offer, including business credit cards, lines of credit, etc.
Shopping around in this way will allow you to form a clear idea of what’s available, enabling you to choose the financing option with the best repayment terms and the highest loan amount.
Fulfill Documentation and Requirements
The documentation needed to apply for a business loan might vary from one lender to another. Typically, established lenders (both online and offline) will require all or most of the following documents:
- A business plan
- Balance sheets and other financial statements of your business
- Articles of incorporation
- Tax returns
- Bank statements of the business bank account
- Business license or permit (if applicable)
- Personal identification documents of the business owner
- Collateral documentation (for secured loans)
Having all of your documentation well-organized and ready for assessment will help you build trust with potential lenders. This will, in turn, boost your chances of being approved for a larger loan amount.
Final Thoughts
Depending on the lender and the type of loan, you can get a business loan ranging anywhere from $1,000 to $5 million – although the actual amount will probably be closer to the $10k-$100k range. The exact amount you get approved for will depend on your credit score, your business’s annual revenue, as well as the type of financing you’re applying for.
For the best results, you should apply for a loan from multiple small business lenders. This will allow you to gain a better understanding of the average interest rates, repayment terms, and loan amounts available.
