How to prepare for a business loan

Having the right amount of money coming into the business leads to new products, new services, more personnel, and other critical issues small business owners need. Figuring out how to get a business loan is a valid concern for many business owners, but it doesn’t have to be complicated.

How Does a Business Loan Work?

Small business owners must understand that the average small business loan can take on many forms, especially in terms of the interest rate.

Simply put, a business loan has an interest rate, a total amount, and defined repayment terms. Yet variations abound when it comes to loans. For example, lines of credit vary from fixed-rate loans. Think of it like a giant credit card your business can use for virtually anything.

Most business loans require providing key documentation about the company, including tax returns and cash flow statements. It’s also important to declare the purpose of the loan, such as the desire to buy commercial real estate for the company.

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Understanding the Business Loan and Beyond

According to this survey, the average small business loan interest rate was roughly between 3.02 and 6.85 percent. The higher interest rate loan reflected variable-rate lines of credit, while the lower side of things reflected fixed-rate term loans.

With more flexibility to run the business as the owners see fit comes more responsibility in terms of defining the business, providing hard fundamentals to demonstrate business stability, and more focusing on building for growth and expansion.

How to Get a Loan to Start a Business

According to a joint survey project between Guidant Financial and the Small Business Trends Alliance, over 39% of the business owners surveyed used cash to get their business started.

However, getting a loan to start a business makes a lot more sense in terms of risk. While no company founder wants to imagine losing the business, business is far from a zero-risk venture. Business owners often need to put personal guarantees on their business loans, regardless of their business structure.

Is It Hard to Get a Business Acquisition Loan?

Buying an existing business is very different than starting a business from scratch. Many entrepreneurs find that they want to get a well-defined asset that already has brand recognition and a marketing vehicle behind it.

When looking for a loan, remember that lenders will see the two business activities differently. Buying an existing company can be a less risky proposition compared to getting a completely new business concept off the ground.

Defining the vision for the company is important for the loan acquisition process. According to Babson’s 2018/2019 Global Report, 55% of Americans surveyed indicated that they believe they’re able to start their own business.

How Does a Business Loan Work

Credit: Hassan Pasha

Strategies for the Unsecured Business Loan

Small business loans as a strategy is a key concept for most businesses regardless of size. Indeed, it’s about using the incoming funds to best advantage and minimizing risk. When it comes to risk management for business owners, an unsecured business loan has multiple advantages over a secured business loan.

The primary benefit of the unsecured loan is that it has less risk to the applicant as there’s no need to use any assets as collateral. However, as the risk shifts from applicant to lender, and higher interest rates are often attached to unsecured loans.

Pay close attention to the annual percentage rate in the agreement, as well as looking at what type of term loan is being discussed. The length of the loan is just as important as the interest rate. Get very clear on what the business loan will cost the company, regarding both short-term loans and long-term, will clarify the road ahead.

The Merits of a Secured Business Loan

By definition, secured business loans require collateral. The collateral is used to secure the loan, which means the lender has the right to seize the asset if your company defaults on the loan.

Despite this factor, there are merits to secured business financing. It usually has a lower interest rate than an unsecured loan, which means that there’s less money going out every month to pay the loan back.

Many small business owners use real estate to secure business loans, which is somewhat risky but can be better than not having the incoming cash to get things done.

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What a Business Loan Broker Can Do for Your Company

While the business world is indeed a world where information counts, no business will ever have perfect access to all of the possible information on their own. In order to lower obstacles in the business financing world, getting outside help is a must.

This is where the business loan broker comes in. They are essentially leveraging their own information and resources to make life easier for small business owners looking for business loan leads.

Business decision-makers looking for options should consider a broker for the following reasons:

  • Can often use resources to tackle difficult objectives, such as finding a loan to buy a business. A business acquisition loan can require more strategy as lenders will wish to ensure the money will yield a profitable outcome.
  • Deeper challenges, such as finding the right refinance business loan, are solved by the broker’s network of resources.
  • Brokers help examine which option would be the best for your company’s unique situation. For example, would SBA loans be the best option, or would bank loans be more in line with key business objectives?
  • If current business financing needs are not significant, a loan broker can find difficult to find funding. Some equipment loans, for example, may not be high-dollar enough to attract lender interest.

Hunting for the right loan broker for a business acquisition loan, business loan leads, or just advice on how hard it is to get a business loan can ease a lot of concerns early on for the company’s overall journey.

How to Get a Loan to Start a Business

Credit: Pixabay

The Solo Approach to Business Loan Leads Is Counterproductive

Overall, figuring out how to get a loan to grow your business is only the beginning. The qualitative and quantitative analysis behind these decisions cannot be overlooked.

Going it alone is a losing proposition for the average business owner who may not have the deep network of resources yet to truly maximize getting the right loan, not just any loan.

True financial planning and analysis is the realm of quality CFO consulting, where the consultant can lay out the raw data, draw insights, and help new and existing companies alike put their best foot forward.

Get the right loan with repayment terms that are agreeable and that allow for the best cash flow opportunities for the organization as a whole.

For more information, contact us to get started.

Featured photo credit: Pixabay


Todd Rammler

Todd Rammler is the President and founder of Michigan CFO Associates.  Todd is a Certified Management Accountant (CMA), and holds an MS in Accounting from Walsh College (cum laude), and a BBA in Finance from Western Michigan University.

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