A business loan may be the money you need to expand your operations, pay for day-to-day expenses or purchase inventory and equipment. You might not know where to start or what documents you need if you have never applied for a loan.
This simple guide will walk you through evaluating your options and preparing a business loan application.
Determine Why you need financing.
Small business loans come in many different types. You can choose the best loan by determining why you require financing. Here are some common scenarios.
- Equipment loans are available from some lenders. This loan type is intended to assist you in purchasing business equipment, such as machinery or office furnishings. The equipment is used as collateral for the loan, and the lender may seize it if you do not repay it.
- Borrow small amounts of money. Consider applying for a Microloan if you only need to borrow small amounts. The U.S. Small Business Administration’s Microloan Program allows applicants who meet specific criteria to borrow up to $50,000. Some non-profits, such as Kiva or the Women’s Microfinance Initiative, offer microloans.
- Establish a business. Finding a lender that will give you a start-up loan for your new business can be challenging since most lenders require a minimum amount of time in the industry. You may need to apply for credit cards or microloans to start your business. It may be easier for you to qualify for a credit card than other business loan types since the approval is based on your credit score.
- Paying for daily operations. Working capital loans, short-term loans that cover expenses such as rent and payroll, can help you solve temporary cash flow issues.
- Borrow as needed. A line of credit is a good choice if you need to know how much you will need to borrow. You can use a business line of credit to borrow up to a specified amount for your business and pay only interest.
Check Your Eligibility
When reviewing your small-business loan, lenders will likely consider four factors:
- Credit Score. A lender will examine your credit score and business rating when you apply for a loan. The lender can use them to determine whether you will repay the loan. The higher your credit rating, the better your chances are of getting a loan and a low rate.
- Personal guarantee and collateral. Some lenders require you to pledge collateral–something of value, such as equipment or inventory–it can seize if you default on the loan. Some lenders will also ask for a personal guarantee. You must secure the loan using personal assets such as savings, a home, or other valuable possessions.
- Duration of business. Online lenders usually only require one year of business experience. A traditional bank will typically ask for two years. Don’t be discouraged if you have been in business for less than a year. Online lenders are willing to approve applicants with only six months of business experience.
- Revenue. Also, your total annual sales will be considered. Ask a lender about the requirements and check your finances to ensure you meet them.
Compare business lending options.
You can find small business loans in several places. Three of the most popular types of lenders are listed below.
Online Lenders
Online lenders provide a range of loan products for small businesses, including merchant cash advances (MCAs), lines of credit, and microloans. Loan approval rates were higher for online lenders than traditional banks as of 2019–80% versus 74%, respectively–according to a 2019 Small Business Credit Survey by the Federal Reserve.
Online lenders have less strict requirements than traditional banks. You can obtain a business loan from an online lender even if your credit is less than stellar. Online lenders are also known to have a much quicker turnaround time. Some may even issue funds on the very same day.
The interest rates charged by online lenders are often higher than those of a traditional bank.
Traditional Banks
Online lenders and traditional banks offer many of the same types of loans. Applying for a small-business loan through a bank is better than an online lender.
A bank’s eligibility requirements for business loans are often more strict. If your credit rating is low, you may have trouble qualifying for a business loan without a cosigner (FICO score below 580).
A 2019 SBCS study found that applicants were frustrated most by the long waiting times. For example, SBA loans from a bank can take weeks or even months to be processed.
Microlenders
Microlenders are non-profit organizations that provide microloans of up to $50,000 for qualified applicants. This is often done to help business owners not qualify for traditional business loans. Microlenders have less strict eligibility requirements.
Kiva, for example, does not require a minimum score. It approves applicants instead based on the “social capital” of their community.
Collect the required documents.
Gather the necessary documents once you have a good understanding of your loan options. You can expect to be asked for the following items by a lender:
- Tax returns for individuals and businesses
- Business Licenses
- Articles of incorporation
- Bank statements for personal and business accounts
- Profit and Loss Statements
- Financial statements
- Business Plan
- Building Lease
Submit Your Application
- Final step: Submit your application for a small business loan. You can do this in person or online, depending on the lender you have chosen to work with.
- Here are some of the information that a lender may ask for:
- Your name
- Business name
- Social Security Number (SSN).
- Loan amount desired
- Loans for any purpose
- Business Tax ID
- Annual Revenue
- After you submit your loan application, you must wait for a decision. You will be sent a loan contract to sign by the lender before you receive your funds.
How to Choose the Best Business Finance?
- Comparing loans and deciding which is right for you will help you choose the best loan. Consider these loan factors when comparing multiple loans.
- Annual percentage rates (APR). A loan’s APR represents the annualized base cost, including interest and fees. Comparing APRs will give you a good idea of which loans are the most affordable and the least.
- Fees. Some lenders may charge a fee upfront to process a loan application. You can compare costs by projecting these fees into the equation and adding them to your calculations.
- Repayment Terms. Business loans have terms ranging from 1 year to 25 years. A long-term loan can reduce your monthly payments but increase the interest rate you pay over time. Your goals and ability to pay in installments will determine the correct loan term.
- Funding Speed. While significant banks may offer competitive rates to borrowers with good credit, the application can be lengthy. Online lenders can provide quicker funding if funding speed is essential.
How to Get a Bank Business Loan
- The procedure for obtaining business credit from a financial institution can differ. Some banks offer online applications that allow you to enter information about your business and yourself. You may have to go to a branch in some cases to apply.
- You may need to provide information such as your business name, date of establishment, gross annual income, and household income for all owners. Brick-and-mortar banks have stricter eligibility requirements than online lenders. Strong credit and financials are often required to qualify.
