One of the first steps to starting or growing a business is applying for a small business loan. It can be overwhelming but is a necessary step for small businesses that need additional funding.
Between choosing the lender, understanding the different types of loans, and understanding the qualifications, it’s wise to do your research before diving deep into the world of loans. That’s why we’re breaking it down step-by-step for you to make it as easy as possible.
Steps To Get A Business Loan
Understand What The Bank Is Looking For
Before you begin the application process, you’ll need to understand how a lender evaluates your application. Accepting a loan is based on the probability that the borrower will make every payment. Because of that, they look at the following:
- Credit score – Lenders will inspect your business credit profile and your personal credit score. This gives them a quick overview on how you’re able to settle payments on time based on historical data. In addition to this, it gives them a glimpse of your credit history. You can check out the stats via Credit Karma or Experian.
- Cash flow – Lenders want to ensure that you have money coming in. They will look at past sales, expenses, and future reporting. Many lenders require a minimum annual revenue of at least $50,000. They may even want a few months’ worth of bank statements.
- Time in business – This may be one of the trickiest parts if you are in the ideation stages of your business. It would be good to have a successful track record of running a business under your belt. Traditional lenders may want a few years of experience, while online lenders may only require a year. If both don’t apply, you may be better off applying for a business credit card.
- Collateral – Most loans will require some type of collateral. If you can’t repay your loan, they want to be able to recoup their losses. This may consist of your land, equipment, accounts receivable, etc.
Related: Why Accounting Is Important To Your Small Business
Decide What Type Of Loan You Need
There’s a wide variety of loans, which is why research is so important. Becoming an expert will help you determine which loan is best for your business needs. Some of the most popular loans include:
- Small Business Administration Loan (SBA) – The loans are available between the amounts of $50,000 – $5 million. Getting an SBA means that you have met stringent requirements determined by the administration. This process can take weeks, even months. Read more about them here to find out if you are eligible and see what you need to apply.
- Traditional bank loan – If you are in your first year of business, you’re most likely unable to get a traditional business loan. You may need to rely on a traditional bank loan.
- Microloan – Microloans are ideal for businesses that are in the beginning stages, as they offer much small loan amounts (up to $50,000). These lenders don’t consider your credit as much as others (though it is still relevant).
- Online lenders – These lenders are typically the first choice for many small businesses today because of the quick response times. If you don’t mind paying a higher APR and if you can pay it off in less than five years, you have the chance to acquire anywhere between $25,000 – $500,000.
These are just four of the major loan types you can explore. However, there are other options available. NerdWallet has a great calculator that can help you compare loan options that are best for you.
Decide On A Lender
Now that you understand the qualifications for each type of loan, it’s time to choose a lender. There are three main types of lenders–online lenders, banks, and microlenders.
An online lender is ideal for someone who lacks collateral, is new to owning a business, and needs money quickly. A bank loan is perfect for someone who’s been in business for at least two years, has good credit, and isn’t in a rush. Lastly, a microlender is the right decision for someone with bad/no credit, can’t get a traditional loan, and is fairly new to business.
Gather Documentation
Once you have chosen a type of loan and a lender, you want to make sure that all of your documentation is set. This will speed up the process and ensure that you will get feedback from your application quicker. You will most likely need to submit:
- Business and personal credit scores
- Business and personal bank statements
- Tax returns and other supporting IRS documents
- Business plan
- Applicable licenses and registrations
- Legal contracts
Related: 8 Money Mistakes Small Businesses Make
Apply
After countless hours of research, you did it! You’ve determined what type of loan is best, which lender you want to use, and you’ve gathered your documentation–now it’s time to apply.
Look at 2-3 different options based on loan terms and percentage rate or APR. Out of all of the ones you qualify for, opt for the one with the lowest APR (so long as you can afford the monthly payments).
Final Thoughts On Getting A Small Business Loan
There are many steps needed to apply for a small business loan. If you are struggling with your credit, it may be wise to work on raising it before you begin the application process—though this isn’t entirely necessary.
Demonstrating that you can successfully run a business and keep your finances in order will improve your likelihood of getting approved. If you need any assistance getting your finances in order to apply for a loan, reach out to us here!
