It seems like you can’t turn on your TV or read a news story without hearing about a new business startup raking in millions of dollars. In fact, it’s never been easier to start a business thanks to a wide-range of online resources including incorporation documents, website analytics, freelancers, drop-shipping providers, and affiliate marketing.

However, most people just don’t have the cash to start their first business, which prompts many to borrow business loans in order to get their first businesses off the ground.

While borrowing a business loan can seem intimidating, in truth it is a straightforward process. Here’s how it works.

Shopping for a Lender

First, a borrower needs to decide where to borrow a business loan from. There are banks, credit unions, investors, and even crowd funding options to choose from when it comes to picking the right lender.

Peter Burns, Founder and Chairman of B3 Funding Partners, feels that banks are no longer desirable for entrepreneurs looking for financing.

“Only Alternate Lenders, Private Money sources will be able to assist the start-up entrepreneur,” said Burns in an email.

While banks have certainly seen better days, not all of them are in dire straits. Local and community banks are often more than willing to discuss a business loan with an enterprising long-time customer. Traditional lenders aside, the Information Age has spawned a new form of lending.

Crowdfunding, the latest trend in business startup financing, is the pooling of investor funds into a new type of business loan, which is then given to an aspiring entrepreneur.

But this new type of business loan isn’t a “loan” in the traditional sense. Instead of paying these investors back with money, the crowdfunding entrepreneur repays them with certain product perks that scale in size with the investment.

Alexander Cohen, CEO of Liberty SBF, and Alex Prombaum, VP of Credit and Underwriting at Liberty SBF, discussed the benefits of crowdfunding while also cautioning potential borrowers.

“Crowd funding has proved to be an innovative source of funding for early stage businesses,” said Cohen and Prombaum. “Any entrepreneur who elects to utilize crowd funding must be aware of the different rules and regulations that each different crowd funding company has, and any strings attached to the money.”

As seen with this innovative approach to acquiring capital, business lending has changed in recent years; a fact that new entrepreneurs should be well aware of when trying to borrow their first business loans.

Not Your Daddy’s Business Environment

“Commercial banks were once the primary source of lending for small businesses; however, in the wake of the Great Recession, which began in 2007, many banks were forced to drastically reduce their lending operations in order to deal with problem loans,” said Cohen and Prombaum. “This has opened the door for a number of new finance companies to enter the market and provide the liquidity on which small businesses rely.”

Entrepreneurs are now able to borrow business loans in an increasingly automated business lending environment.

“This saves the borrower an incredible amount of time and effort and puts him/her in touch only with a bank or other lender that is likely to give a loan,” said Rohit Arora, CEO and co-founder of Biz2Credit, in an email. “You don’t have to walk into a bank, fill out mountains of paperwork (with no guarantee of success).”

Putting Pen to Paper

Once a borrower has found the right lender, then they need to gather their paperwork.

Burns explained that while each business lender has their own requirements for applying for a business loan, in the end there is basic information virtually all lenders require: an executive summary of the business, copy of the principals’ credit report, repayment plans, and more.

“For starters, a new company needs to have a professional business plan that outlines what the business will be, what industry it will compete, the competitive landscape of the industry and geographic area,” said Arora.

He explained that the business plan should outline the business’ competitive advantage along with why the business owner thinks it will succeed. Financial documents, such as tax returns, must also be included in an application.

After reviewing the collateral, business plan, borrower’s personal financial information, and repayment terms, the lender will approve the business loan and the borrower will then be able to fund their first business.

Unfortunately, not everyone receives approval for a business loan.

Don’t be a Reject

Aside from incomplete applications, there are a number of problems that can disqualify business loan applicants.

“A recent (2 years or less) bankruptcy or unsatisfied liens and judgment will derail any application for funding, even from private sources,” said Burns.

He continued to explain that an inability to plan repayment, along with a lack of collateral, were also common reasons for disqualification.

Arora agreed that credit was very important to an application’s rate of success.

“If a borrower has a very poor credit history, that naturally hurts the chances of securing funding,” he said.
A nonsensical or illogical business plan would also be a red flag in the eyes of loan officers. Burns suggested that partnering up with a seasoned entrepreneur could make a huge difference in being approved for a loan.

“Experience does count,” he said. “Credit and assets are important but having a co-borrower or established businessperson attached to your effort will certainly help ‘the cause.’”

Rejection aside, even if a borrower is approved for a business loan, he or she had best remember that is must be repaid. Failing to repay a business loan can endanger the livelihood of not just a business, but of the borrower.

Payback is a Cinch

“One key thing is to pay on time,” said Arora. “You want to establish a good credit rating at the very start of the company's business operations.”

However, even the best laid plans can fall victim to unforeseen problems. No matter how well written a business plan is or how great a product is, sometimes accidents can cause a massive delay in achieving a profit.

“Provisions should be made to extend the payment terms with the lender, should the plans for the expected repayment terms be interrupted for any reason,” said Burns. “Negotiating for this before the loan is funded is key. Once a pattern of borrowing and repaying on time and in full is established with a lender, larger amounts and better terms will follow.”

No one wants to be in debt, but borrowing a business loan to start a new business can be the best choice many new entrepreneurs ever took. Aside from making money for the business owner, it can lead to creating jobs and growth in the community. Borrowing a business loan shouldn’t be taken lightly, but it can be the best step towards building a business empire.

Author's Bio: 

Isaac Juarez is a financial journalist for loans.org, an online lending authority that covers news, articles, and frequently asked questions on financing. Loans.org offers quick loan applications and approval for all your business, personal, mortgage, student, car, and payday loan needs. Isaac can be reached at 909-784-2467 or via email at Isaac@loans.org.