So, you have just established a business and want to expand it to broader level; that is why you need to borrow some amount of money. The first thing to come to mind is to get a bank loan, but then there are also other options of the non-bank loan. If it comes to business funding, it is crucial to consider all the loan options available. There are lots of loan lenders which also competing each other and offer various loan features. Finding the right one is indeed a challenging task.
When looking for loan lenders, the most important features to consider is the loan features. You have to make the lists of the feature from different loan and relate if they give you benefits to your business and finance position. After that, you need to make priority list from the features according to the benefits it gives to you. The more benefits of the features should be placed in a higher rank. Once you complete the lists, you have a handful type of loan features and choose one that suits your needs.
In general, there are some types of funding loan but two most popular are bank loan and non-bank loan. If you are still not sure which one to choose, here are some simple comparison between a bank loan and non-bank loan.
Why should Choose Bank Loan?
When people need a source of funding, the first thing that comes to mind is the bank loan. Bank loan provides cash to fund college tuition, home improvement, finance business, and more. If you run a small business, bank loan can give you a line of credit or personal loan. For a larger business, you may need to use inventory or real estate for collateral in order to secure the loan. The main reason why people tend to choose bank loan is due to the lower rates. As aforementioned that among loan lenders, be it a bank or non-bank, there is a kind of competition against each other to attract more customers. Common non-bank lenders charge customers for example 10% or more rates. Banks see this as an opportunity to win the customer’s heart by charging slightly lower rate for about 9% or 9.5%. This is why most people go to the bank when they need cash fund.
However, the lower rates come with a price as banks employ strict guidelines. This means not everyone can get the loan. Bank considers your credit history, business background, and stuff to make sure that you are eligible for the loan. If you cannot get the loan for some reasons, then, you need to find another funding source.
Why should choose Non-bank Loan?
If the bank loan does not work for you, there are still some funding sources available. Even though it is not that much, the non-bank loan can be a savior for your business and life. There are some private lenders which provide small, medium, and also big loans. The non-bank loan usually does not require high credit scores. It is a good option if you need immediate finance fund with less hassle for administration. Even though, borrow money from non-bank institutions is easy and fast, but it mostly offers smaller amount in short term loan span than a bank loan.
People with low credit scores may be rejected from getting a loan from the bank. Unlike bank loans, getting a loan from non-bank is easy, simple and straightforward as fast as two days only. This is because a non-bank loan may not too critical about the money plan, but you can just use it for the business fund, buy a car, and much more.
Advantage and Disadvantage of Bank Loan
Lower Rate – people choose bank loan mainly for the lower rate. Giving out lower rate is bank’s strategy to attract customers in the competition over other loan lenders. The rate can be one or two percent compared to non-bank loan. This is because banks have other ways to make money instead from the interest rate.
Credits – bank loan may affect your credit history in a negative way especially if you have a big loan or make minimum payments. In case you fail to repay the loan will definitely ruin the credit history and even prevent you from filing bankruptcy. In another hand, if you repay the loan on time and never miss any payments; the bank loan may increase the credit history.
Difficulties – getting a bank loan is not that easy. There will be administration requirements as the bank has strict credit standards. The loan validation may take days in which you need to answer several questions related to the plan for the money. The strict regulations are required to protect the bank’s deposit money as well as tie customers’ hands when requesting for a loan. In addition, banks also cost you during the loan process such as reporting requirements, administration fees, covenants, and much more. This kind of costs is not included in the loan, so, you have to pay for it separately.
Advantage and Disadvantage of Non-bank Loan
No credit needed – non-bank loan requires no credit history. No wonder if many people choose non-bank loan if they have a lower credit score. Bank may not qualify or even reject you from taking out a loan if you have low credit. In addition, banks are always critical about your plan to use the money, but the non-bank loan does not.
Easy Loan – getting a non-bank loan is easy and fast. The approval possibility is also high without many requirements to fulfill. There will be no complicated administration requirements or specific restrictions. It is a great solution if you are in need of instant money for the business.
Higher Rate – getting an easy loan from the non-bank institution is kind of double-edged sword. Easy money with quick process comes with higher rates while the cheap money is kind of hard to get. However, the choice is all about priority. If you cannot get a bank loan, you can still make a way out to grow the business from non-bank institutions.
Documents Needed for a Business Loan
Securing a business loan can be a pivotal step in the growth and sustainability of any enterprise. To facilitate the process, lenders require a variety of documents that demonstrate the viability and creditworthiness of the business. Understanding these requirements can streamline the application process and increase the likelihood of approval. Below is a comprehensive overview of the essential documents needed for a business loan.
## 1. Business Plan
A well-crafted business plan is fundamental when applying for a business loan. It serves as a roadmap for your business and outlines your goals, strategies, and operational plans. A typical business plan should include:
Executive Summary: A brief overview of the business, its mission, and the purpose of the loan.
Market Analysis: Data on market trends, target customers, and competitive analysis.
Organization and Management: Information about the business structure and key team members.
Products or Services: Detailed descriptions of the offerings and their market demand.
Financial Projections: Forecasts for revenues, expenses, and profitability over the next three to five years.
A comprehensive business plan not only helps lenders assess the potential for success but also provides clarity to the business owner.
## 2. Personal Credit Reports
Lenders often evaluate the personal credit history of business owners, especially for small businesses or startups. A personal credit report provides insight into an individual’s creditworthiness. Key elements include:
Credit Score: A numerical representation of creditworthiness based on credit history.
Credit History: Details of past credit accounts, payment history, and any delinquencies.
Business owners should review their credit reports for accuracy and address any discrepancies before submitting a loan application. A stronger personal credit score can enhance the chances of loan approval.
## 3. Business Credit Reports
Similar to a personal credit report, a business credit report reflects the creditworthiness of the business itself. It includes information such as:
Payment History: Records of timely payments to creditors.
Credit Utilization: The ratio of credit used compared to the total credit available.
Public Records: Any bankruptcies, liens, or judgments against the business.
Lenders use this information to assess the risk of lending to a particular business. Maintaining a positive business credit profile is crucial for future financing.
## 4. Financial Statements
Lenders require up-to-date financial statements to evaluate the financial health of the business. The key documents include:
Balance Sheet: A snapshot of the business’s assets, liabilities, and equity at a given point in time.
Income Statement: A summary of revenues, costs, and expenses over a specific period, reflecting the business’s profitability.
Cash Flow Statement: An overview of cash inflows and outflows, highlighting the business’s liquidity position.
These documents provide lenders with insights into the business’s operational efficiency and financial stability.
## 5. Tax Returns
Business tax returns for the past two to three years are essential for lenders to verify income and assess financial stability. These documents include:
Personal Tax Returns: For business owners who report business income on their personal tax returns.
Business Tax Returns: For corporations, partnerships, or LLCs, showing the business’s earnings and tax obligations.
Tax returns help lenders confirm the accuracy of the financial statements and provide a historical context for the business’s performance.
## 6. Legal Documents
Legal documents establish the legitimacy of the business and its operations. Key documents include:
Business License: Proof that the business is authorized to operate in its specific industry and location.
Articles of Incorporation or Organization: Documents filed with the state to formally establish the business entity.
Operating Agreement or Bylaws: Guidelines for the business’s operations and management structure.
Contracts: Any agreements with suppliers, clients, or partners that may impact the business’s financial commitments.
These documents assure lenders that the business is compliant with legal requirements and operates within established frameworks.
## 7. Collateral Documentation
Many lenders require collateral as security against the loan. Collateral can be any asset that the lender can claim if the borrower defaults. Common forms of collateral include:
Real Estate: Property owned by the business or the owner.
Inventory: Goods held for sale that can be liquidated.
Equipment: Machinery or tools used in the business operations.
Documentation proving ownership and value of the collateral is necessary to support the loan application.
## 8. Bank Statements
Recent bank statements provide lenders with insights into the business’s cash flow and financial management. Typically, lenders will ask for:
Personal Bank Statements: For sole proprietors or owners who manage business finances through personal accounts.
Business Bank Statements: For businesses with dedicated accounts, reflecting deposits, withdrawals, and overall financial activity.
These statements help lenders assess the business’s ability to manage funds and meet repayment obligations.
## 9. Business Debt Schedule
A business debt schedule outlines all current debts and obligations, including loans, lines of credit, and outstanding invoices. This document should include:
Creditor Names: The lenders or institutions to whom the business owes money.
Outstanding Balances: The current amount owed for each debt.
Payment Terms: Information on interest rates, monthly payments, and repayment schedules.
This schedule helps lenders understand the business’s existing financial commitments and overall debt load.
## 10. Identification Documents
Personal identification documents are often required to verify the identity of the business owners and key stakeholders. Commonly requested documents include:
Government-Issued ID: Such as a driver’s license or passport.
Social Security Number: For individuals applying for loans.
These documents support the application by confirming the identities of those responsible for managing the business.
## 11. Additional Documentation
Depending on the lender and the type of loan, additional documents may be required. These can include:
Resumes of Key Management: To demonstrate the qualifications and experience of the business leadership.
Marketing Plans: To show how the business plans to attract and retain customers.
Insurance Policies: Proof of business insurance to mitigate risks.
These supplementary documents can further strengthen the loan application by providing context and credibility.