A small business loan can be the lifeline your company needs to cover daily expenses, purchase inventory, invest in equipment, or even expand with a franchise. Applying for a business loan might seem daunting, but with these five easy steps, you’ll be well on your way to securing the financing you need.
1. Decide what type of business loan you need
Finding the right small business loan depends on various factors such as whether you need one-time or ongoing funding, how quickly you require the funds, and your business’s credit profile. Here are some common types of small business loans to consider:
- SBA loans: Ideal for general business expenses like hiring staff, purchasing inventory, equipment, and real estate.
- Short-term loans: Perfect for low-cost expenses like supplies, marketing, payroll, or emergency situations.
- Long-term loans: Suitable for larger projects and fixed assets like renovations and expansions.
- Lines of credit: Provides flexible access to cash as needed.
- Working capital loans: Designed for short-term expenses like payroll, inventory, rent, or seasonal lulls.
- Equipment financing: Used for purchasing or upgrading necessary equipment.
- Commercial loans: Used for buying, building, or renovating property for your business.
- Microloans: Helps businesses in need of smaller loan amounts and don’t qualify for traditional financing.
If you’re considering a first-time business loan, aiming for a lower amount can help you manage payments while building your business credit. However, if you need immediate funding for emergency expenses, online alternative lenders can be a better option, although they may come with higher rates than traditional banks or SBA lenders.
2. Determine your eligibility
Every lender has specific requirements when it comes to small business loans. Generally, lenders consider the following criteria:
- Credit score: A personal FICO Score of 670 or higher and a good business credit score are usually required for the best interest rates and flexible terms.
- Time in business: Alternative lenders typically require your business to operate for six to 12 months before extending credit, while traditional banks may require a minimum of two years.
- Annual revenue: Many lenders require reliable income for small business financing, with annual minimums ranging from $36,000 to $480,000 or higher.
- Collateral and/or personal guarantee: Secured business loans may require collateral such as real estate, equipment, or cash. A personal guarantee might also be required.
- Repayment terms: Most lenders limit your loan to 30% of your annual revenue to ensure manageable payments.
3. Compare small business lenders
When it comes to small business financing, you have several options to choose from. Consider the following types of lenders:
Traditional banks
Traditional banks offer a variety of small business products, including term loans, lines of credit, business credit cards, and SBA loans. While they usually offer competitive interest rates, the application process can be longer and more stringent compared to alternative lenders.
SBA lenders
The U.S. Small Business Administration (SBA) partners with lenders nationwide to offer affordable financing options for small business owners. SBA loans come with capped interest rates based on loan amount and offer various programs to suit different needs.
Government lenders
In addition to SBA loans, the federal government works with lenders to provide low-cost funding solutions for small business owners. Exploring other government business loan options, such as the USDA’s Rural Microentrepreneur Assistance Program, can be beneficial.
Online lenders
Online business lenders, also known as nonbank or alternative lenders, provide quick funding decisions and fast access to capital. While their rates may be higher, they often consider your company’s potential instead of just relying on credit scores.
Microlenders
Microloans are available for startups, low-income businesses, or those with a damaged credit history. Nonprofit organizations and government agencies typically fund microloans, providing flexible terms, low-interest rates, and minimal fees.
4. Gather required documents
While each lender will have specific document requirements, having the following paperwork ready can speed up the application process:
- Business plan: A comprehensive business plan outlining your company’s mission, goals, and financing strategies.
- Business licenses: Make sure all required business licenses are up-to-date.
- Financial documents: Bank and income statements, balance sheets to confirm your company’s annual revenue.
- Personal financial statements: Personal financial information to determine overall creditworthiness.
- Personal and business tax returns: Required to show overall net profit.
- Legal documents: Articles of Incorporation, bylaws, or operating agreement depending on your business entity type.
- Building lease: Provide any building leases if applicable.
5. Apply for a business loan
Applying for a business loan can be a straightforward process. Online lenders typically offer quick and automated applications, often providing immediate approval. However, traditional banks may require a visit to a physical branch to apply.
Before submitting your application, it’s a good idea to have a business colleague or a professional review it to ensure all necessary information is included and the application is polished.
Your lender may request additional information such as personal details for all business owners, business street address, employer identification number, annual net profit, and number of W-2 employees.
Once approved, carefully review each lender’s business loan agreement, paying attention to interest rates, fees, term lengths, and funding speed to find the best deal for your business.
How to choose the best business loan
When comparing business loan options, consider the following factors to find the best deal:
Compare rates
Take note of whether the interest rate is fixed or variable. Fixed rates can make it easier to budget, while variable rates might be lower initially. Some lenders may use a factor rate, so ensure you convert it to an annual percentage rate (APR) for accurate comparison.
Watch out for fees
Be aware of additional fees such as origination fees, maintenance fees, late charges, and prepayment penalties. Calculate the total cost of the loan by adding these fees to the loan amount.
Consider term lengths
Decide whether you want longer loan terms with lower payments or shorter terms to save on interest. Remember, shorter terms mean higher payments but less interest paid over time.
Look at funding speed
Depending on your business’s needs, consider how quickly you need access to capital. Online lenders typically provide faster funding, with some offering same-day or next-day funding. Traditional bank and SBA loans may have lower rates but longer wait times.
Tips to help you get approved for a business loan
To increase your chances of approval, follow these tips:
Clean up your credit
Before applying for a loan, review your credit report for any errors and dispute them if necessary. Consider working with a credit repair company if you need additional assistance.
Establish a relationship with a lender
Building a relationship with a financial institution can improve your chances of getting approved for a small business loan. Consider applying for financing at your current bank or opening a business checking account with a desired lender.
Offer collateral
Providing collateral reduces lender risk and can increase your chances of approval. If your business is new and you don’t have business assets, consider pledging personal assets such as home equity or retirement accounts.
Alternatives to small business loans
If you don’t meet the eligibility criteria for a small business loan or prefer alternative options, consider the following:
- Small business grants: Apply for grants through the government or private entities, although they tend to be highly competitive.
- Business credit cards: Use business credit cards for everyday expenses, but be cautious of higher interest rates compared to other financing options.
- Crowdfunding: Raise funds from your customer base using crowdfunding platforms.
- Friends and family: Seek loans from friends or family members, but make sure to outline all expectations in writing.
- Personal loans: Use personal loans for business purposes, although loan amounts may be lower with higher APRs.
Remember, getting a business loan is just one of many financing options available. Explore all possibilities to find the best fit for your business’s needs.
