The Ultimate Guide to Applying for a Business Loan

Business Loans

If your business has reached a point where it needs an infusion of funds in order to grow, you may be in the market for a business loan. A business loan can help a struggling small business establish itself better, or help a thriving company expand its line of products, open an additional location, move to a larger site, hire new team members or purchase expensive equipment.

Here’s all you need to know about applying for a business loan:

Make sure your credit is in order

Before applying for a business loan, check your personal and business credit health.

A personal credit score is measured in the hundreds, with scores ranging from 300-850. A score that falls from 580-669 is considered fair, 670-739 is good, 740-799 is very good, and 800-850 is considered exceptional. You can check your personal credit report once a year at no cost from AnnualCreditReport.com. Review your score for any inaccuracies or fraudulent charges and be sure to dispute these immediately through any of the credit bureau websites: ExperianEquifax or TransUnion.

Business credit scores are measured differently.

Experian uses Intelliscore Plus as its credit scoring model, with scores ranging between 1 and 100.

Equifax assigns each business three different scores: a payment index score, which assesses the company’s payment history with the score ranging between 0 and 100; a credit-risk score evaluating how likely it is the business will not meet on-time payments with the score ranging between 100 and 992; and a business failure score measuring how likely a business will fail, with the score ranging between 1,000 and 1,880.

Business credit scores are also measured by the Dun & Bradstreet Corporation. The D&B score range is 0 to 100 and the key factor it considers is the timeliness of payments made to previous creditors. In order to receive a D&B score, a business must file for a free DUNS number and information about the company’s borrowing habits must be provided by a minimum of four lenders or suppliers.

Finally, the FICO Small Business Scoring Service (SBSS) score ranges from 0 to 300 and considers variables, such as the business owner’s personal credit score, the company’s payment history, number of employees and the age of the business.

If your personal and/or business credit scores are low, work on improving your credit before applying for a loan by meeting your monthly payments on time and keeping credit utilization low.

Update your business plan

Be sure to have a fully crafted business plan to show a prospective lender before applying for a loan. The plan should include details about how the company intends to use the funds from the loan, the anticipated increase in revenue and plans for repaying the loan.

Consider arranging supplemental collateral

Lenders generally prefer to reduce the risk of a borrower defaulting on a loan by securing collateral for the loan. For business loans, this usually takes the form of the company’s accounts receivable, equipment or other valuable assets. The lender can seize the collateral if the business fails and the borrower cannot repay the loan.

When applying for a business loan, you can offer additional collateral to the lender, such as personal assets, like real estate or other valuables. This will make you more likely to qualify for the loan and may bring down the interest rate on your loan as well.

Organize your personal and business documents

You’ll need the following documents and identifying paperwork to apply for a business loan:

  • Photo ID
  • Accurate monthly financial statements from the past two years
  • Business license
  • Any commercial leases
  • Business insurance plans
  • Payroll records
  • Incorporation documents
  • Current financial obligations
  • 3 months of bank statements
  • Personal and business tax returns
  • Collateral, if required

Research potential lenders

It’s best to take some time researching potential lenders before applying for a loan. Learn about each lender’s eligibility criteria so you can anticipate whether or not you will qualify for a loan. Look up average loan interest rates for each lender, as well.

As you complete this step, choose a general source for your loan.

Startups may not qualify for a large loan and can be better off pursuing a microloan, or a small, short-term loan offered by a nonprofit lender. These loans can often be applied for online.

If you need a larger loan, consider applying for a business loan through a credit union. A credit union will offer you personalized service, looser qualifying criteria and a competitive interest rate that will help you keep more money in your business throughout the life of the loan.

Freedom FCU’s business loans offer generous terms and competitive rates. Call, click, or stop by today to apply.

Submit your application

Once you’ve gotten all of your paperwork in order and you’ve chosen a lender, you’re ready to apply for a loan. Depending on your lender, you may be able to begin and/or complete the application process online. Be patient; loans can take anywhere from one day to several months from application to funding. With luck, you’ll soon have the funds you need to take your business to the next level.

About Freedom Federal Credit Union

Freedom serves and is open to anyone who lives, works, worships, attends school, volunteers, or has family in Harford or Baltimore County, MD. As a credit union, we are committed to putting you first, not shareholders, and helping you achieve your financial goals. Learn more at freedomfcu.org or call us 800-440-4120 to see how we can help.

Your Turn: What are your best tips for taking out a business loan?  Tell us about it on Facebook, Twitter, or Instagram. @FreedomFedCU

IS NOW A GOOD TIME TO OPEN A HELOC?

Is a HELOC a good idea

If you’re looking to fund a home improvement project, or if the economic devastation of COVID-19 has left you in need of cash, consider tapping into your home’s equity with a home equity line of credit, or ‘HELOC’.

What is a HELOC?

A HELOC is a revolving credit line allowing homeowners to borrow money against the equity of their home. Borrowers can withdraw money as needed during a set amount of time known as the “draw period,” which generally lasts 10 years. Some lenders place restrictions on HELOCs and require borrowers to withdraw a minimum amount of money each time they make a withdrawal, regardless of need. Other restrictions include the requirements to keep a fixed amount of money outstanding or to withdraw a specific sum when the HELOC is first established; however, borrowers are typically free to spend the money however they please.

Most homeowners are eligible for a HELOC with a debt-to-income ratio that is 40% or less, a credit score of 620 or higher and a home assessment that stands at a minimum of 15% more than what is owed.

How do I repay my HELOC?

Repayment of HELOCs varies but is generally flexible.

Many lenders collect interest-only payments during the draw period, with principal payments being strictly optional. Others require ongoing monthly payment toward both principal and interest.

When the draw period ends, some lenders require borrowers to pay back the entire loan “balloon” amount. Others allow borrowers to pay back the loan in monthly installments over a new time period, known as the “repayment period.” Repayment periods are generous, lasting as long as 20 years.

What are the disadvantages of a HELOC?

A HELOC places your home at risk of foreclosure if not repaid. Before opening a HELOC, it’s a good idea to run the numbers to ensure you can easily meet the payments.

Also, many lenders require the full payment of the HELOC after the draw period is over. This can prove to be challenging for many borrowers.

Finally, if you don’t plan to stay in your home for long, a HELOC may not be the right choice for you. When you sell your home, you’ll need to pay the full balance of the HELOC.

A HELOC can be a great option now

HELOCs have variable interest rates, which means the interest on the loan fluctuates along with the general interest rate, sometimes dramatically.

The economic fallout of COVID-19 has generated historically low interest rates. The average APR for fixed 30-year mortgages has hovered at the low 3% for months now, and experts predict it will continue falling. The low rates make it an excellent time to take out a HELOC with manageable payback terms.

The economic uncertainty the pandemic has generated also makes it a prime time to have extra cash available for any need that may arise.

Now may be the perfect time for you to refinance your current mortgage, from another loan provider, into a lower rate from Freedom Federal Credit Union! We offer a wide range of programs with low rates and great terms. Contact us about a refinance option that meet your needs today.

About Freedom Federal Credit Union

Freedom serves and is open to anyone who lives, works, worships, attends school, volunteers, or has family in Harford or Baltimore County, MD. As a credit union, we are committed to putting you first, not shareholders, and helping you achieve your financial goals. Learn more at freedomfcu.org or call us 800-440-4120 to see how we can help.

Your Turn: Are you looking to sell your home? Tell us about it on Facebook, Twitter, or Instagram. @FreedomFedCU