A business loan can provide the funds you need to expand operations, cover day-to-day expenses, and purchase equipment or inventory. If you’ve never applied for a business loan, you might be unsure about where to begin or which documents are required.
Here’s a simple guide that walks you through the process of evaluating your options and preparing your business loan application in five easy steps.
1. Decide Why You Need Financing
There’s more than one kind of small business loan. Deciding why you need financing will help you choose the right kind of loan. Here are a few common scenarios:
- Buy new equipment: Some lenders offer equipment loans designed to help you purchase business equipment, like machinery or office furniture. The loan is secured by the equipment, so the lender can seize it if you fail to repay the loan.
- Borrow a small amount of money: If you need to borrow a small amount of money, consider applying for a microloan. The U.S. Small Business Administration (SBA) has a Microloan program that allows qualified applicants to borrow up to $50,000. Not-for-profit organizations like Kiva and the Women’s Microfinance Initiative also offer microloans.
- Establish a business: If you’re just starting out, you may have to apply for a microloan or a business credit card since most lenders have minimum time in business requirements for traditional loans. A business credit card may be easier to qualify for since approval is based on your personal credit score.
- Pay for day-to-day operations: A working capital loan can help you cover temporary cash flow problems by providing a short-term loan to cover daily expenses like rent and payroll.
- Borrow money on an as-needed basis: A business line of credit could be a good option if you don’t know the exact amount you need to borrow. Once a lender issues you a line of credit, you can withdraw funds up to a certain amount to cover business expenses and only pay interest on the amount you borrow.
Funding Turnaround Time
As you consider different types of financing for your business, consider how quickly you need to receive your funding. Each loan option will have different turnaround times once you submit an application, and if you need your funding quickly, some options may be better than others.
Many loans, including loans from banks and credit unions, can take 30 or more days to be funded. Yet, this can vary based on the lender and your application, including if any asset backing the loan needs to be assessed.
If you need a quick turnaround time for funding, some SBA loans can be funded within 10 days, and there are online lenders that offer fast business loans. These loans, which include both traditional loans and equipment loans, can be funded within a day in some cases.
2. Check Your Eligibility
Although business loan requirements vary, here are four things lenders are likely to consider when reviewing your small business loan application:
- Credit score: Lenders will review both your personal and business credit scores to assess the likelihood you’ll repay your loan. A higher credit score increases your chances of loan approval and receiving a low-interest rate.
- Collateral and/or personal guarantee: Some lenders require collateral or a personal guarantee to secure the loan. Collateral can be something of value, like equipment or inventory, that the lender can seize if you default on the loan. A personal guarantee means you have to secure the loan with personal assets, such as savings, home, or other valuable possessions.
- Time in business: Traditional banks typically require a business to have been in operation for at least two years, while online lenders usually require one year. Some online lenders may approve qualified applicants who have only been in business for six months.
- Annual revenue: Your total annual sales are a relevant factor. Before applying, review your business finances and ask the lender about their revenue requirements.
3. Compare Business Lending Options
There are several places you can find small business loans. Here are four of the most common types of lenders:
Comparing Offers
As you shop for loans from various lenders, use a business loan calculator to calculate the costs of each loan. This can help you find the lowest cost financing option.
4. Gather the Required Documents
Once you understand your lending options, gather the required documents. A lender will likely ask for these items:
- Personal and business tax returns
- Business licenses
- Articles of incorporation
- Personal and business bank statements
- Profit and loss statements
- Financial statements
- Business plan
- Building lease
If you’re unsure what documents are needed, contact the lender before applying.
5. Submit Your Application
The final step is to submit your small business loan application. Depending on the lender, you can do this online or in person.
Here’s some information a lender might ask for:
- Your name
- Business name
- Social Security number (SSN)
- Desired loan amount
- Loan purpose
- Business Tax ID
- Annual revenue
Once you submit your application, you’ll have to wait for an approval decision. If approved, a lender will send you a loan agreement to sign before issuing your funds or a line of credit you can draw from.
Types of Business Loans
Depending on your business’s needs, one loan type may work better than another. Before accepting any financing, consider various business loans to ensure your business is best served by the loan.
- SBA loans: SBA loans are small business loans guaranteed by the Small Business Administration. They often come with lower interest rates and down payments than other options but may require an established business to qualify.
- Term loans: Traditional installment loans repaid over predetermined terms. They can be used for most business-related expenses.
- Lines of credit: A form of financing that your business can draw from on an as-needed basis, making it a good option for ongoing cash flow issues.
- Invoice factoring and financing: Selling outstanding invoices to a factoring company at a discount to get paid for outstanding invoices quickly.
- Merchant cash advance: Giving a lender a portion of your future sales, making it a good option for businesses with high sales volume.
- Equipment financing: Funds the purchase of equipment or machinery, with the purchased equipment backing the loan.
How To Get Approved for a Business Loan
Business loan eligibility requirements vary by lender, but in general, you and your business must meet these qualifications:
- Credit score: Most lenders will require a personal credit score of at least 670. Business credit score requirements may also apply after two years in operation.
- Time in business: Lenders often require your business to have been in operation for at least six months to two years.
- Business revenue: To qualify for a business loan, your business will need $100,000 to $250,000 in annual business revenue.
How To Choose the Best Business Loan
Choosing the best business loan comes down to comparing loans you qualify for and determining which loan is the right fit. Here are loan factors to consider:
- Annual percentage rate (APR): Comparing APRs can give you an apples-to-apples idea of which business loans will be the most and least affordable.
- Fees: Projecting upfront fees and factoring them into the equation can help you compare costs.
- Repayment terms: Choosing a loan term that aligns with your goals and what you can afford in installment payments is crucial.
- Funding speed: Online lenders may offer faster funding if speed is a high priority.
