Small businesses make up almost half of the private workforce in the United States. If you’re a small business owner, securing a business loan can help you start or grow your business, purchase necessary equipment or finance working capital needs. Understanding how business loans work can help you find the right loan for your business, which can be a lifeline when used responsibly.
Commercial loan requirements vary depending on your company's type of business, the lender advancing the loan, and the purpose of the loan. Commercial loans help you secure the company's future by ensuring that your business does not suffer cash flow issues and allows it to accelerate its growth instead. This Union Commercial Capital blog post looks at the essential commercial loan requirements you need to know.
Reasons To Apply for a Commercial Loan
Although there are plenty of reasons why commercial loans are important, here are some of the most essential ones.
Expansion
Expanding a business is another common reason to get a business loan. Whether you're looking to open a new location or add to your existing space, a loan can provide the financing you need to make your expansion plans a reality.
There are many different types of loans available for business expansion, so it's essential to do your research and choose the option that makes the most sense for your company.
Cover Unexpected Costs
Another common reason to get a business loan is to cover unexpected expenses. Whether it's an unexpected bill or an emergency expense, having funds available can help keep your business running smoothly.
There are a few things to consider when considering a business loan for unexpected expenses. First, be sure to estimate how much you will need and compare that to the amount you can afford to repay. Also, be sure to research different lenders and compare interest rates.
Protection of Finances
Many small business owners use a personal credit card to pay for business expenses. That leads to blurred lines between personal and business finances, which may negatively impact your private and business finances. A commercial loan helps businesses avoid this pitfall and allows you to keep your business accounts separate from your personal.
Liquidity
When your business is approved for a loan, whenever the need arises, you will consistently be able to pay bills on time and reaffirm trust from your partners. Liquidity through business financing may be through a lump sum loan or a line of credit to help you maintain a healthy cash flow and pay for your company’s recurrent expenditure when the need arises. It gives you the freedom to focus on more pressing matters, such as how to improve your products and service delivery to boost the company’s bottom line.
Commercial Loan Requirements
Business loan requirements can differ depending on your specific lender and how you plan to use the funds. The type of loan you are seeking also plays a factor in the qualification criteria a lender may require before it will approve a new application for funding. Before approving an application for a commercial loan, some lenders may ask for the following information.
Intended Use of the Loan
Although some lenders may not require you to give details on the loan’s intended use, others may ask for the details of your operation and the intent for requiring financing. You may have to specify whether the commercial loan is for business expansion, purchasing equipment, bill payment, bridging receivables, or something else.
Business Plan
Some lenders may ask for a business plan to gauge your business needs and determine the loan limit for which your business is eligible. Business plans are a roadmap detailing your company’s current position and its projected timeline for success.
Time in Business
Businesses that have been in operation for longer have a greater chance of loan approval. In general, lenders typically require a business to be in operation for at least one to two years. For some types of financing, businesses that have been in operation for at least six months are eligible.
Creditworthiness
In some instances, banks and other financial institutions run credit checks to determine the creditworthiness of your enterprise. Ensure you have financial records available to provide to the lender when asked.
Personal Guarantee
Some lenders and loan types require a personal guarantee, which protects the lender in the case of a default. If your business doesn’t honor its loan agreement, the lender will require you to repay the debt with your personal funds.
Company’s Financial Forecast
Your company’s financial status is another crucial consideration that lenders bear in mind. That includes the company’s balance sheets, tax returns, bank account balances, profit and loss accounts, and other pertinent financial indicators. Some lenders may want to see a minimum amount of annual business revenue before you'll be eligible for financing. This helps show your business can support future debt payments.
Lenders may also review your debt-to-income ratio and debt-service coverage ratio. Your DTI weighs your monthly personal debt against your gross income while your DSCR measures your business' annual net operating income in relation to its total annual debt
In Conclusion
Regardless of the exact reason you're considering a business loan, the point is this: If, when all costs are factored in, taking out the loan is likely to improve your bottom line -- go for it. If the connection between financing and a revenue increase is hazy, take a second look at whether taking out a loan is your best choice.
You want to be confident in your ability to pay back a business loan over time and to see your business succeed. Every business decision involves taking a risk. Ultimately, only you can decide whether that risk is worthwhile.
Union Commercial Capital provides a fast and easy commercial loan application process so you can secure financing of up to $500,000. Contact Union Commercial Capital to learn more about your commercial loan options or apply online today.
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