How To Get A Business Loan
Posted in: Business, Finance

How To Get A Business Loan

Having enough knowledge of the various steps to getting a business loan can help a business owner reduce frustration and increase your chances of getting approved.

A small business loan can help you start or grow your business, but navigating the lending process, along with stricter lending standards, can be daunting. Breaking it down into manageable steps – from understanding the qualifications to looking for lenders and knowing how to apply for a small business loan – can help you get the financing your business needs.

In five simple steps, here’s how to get a small business loan:

1. Check if you qualify for a business loan

Answer these questions to determine if you might qualify for a small business loan:

What’s your credit score?

You can get your credit report for free from any of the three major credit bureaus: Equifax, Experian, and TransUnion, through any of the credit card issuers and personal finance websites.

Suzanne Darden, a finance specialist at the Alabama Small Business Development Center disclosed that banks prefer to offer their low-rate business loans to borrowers with a credit score of at least 680. If your credit score drops below this threshold, consider small business loans for bad credit borrowers or nonprofit microfinance loans.

How To Get A Business Loan

How long have you been in business?

Lenders will assess how long your business has been in operation. You must be in business for at least a year to qualify for most online small business loans and at least two years to qualify for most bank loans.

Do you make enough money?

Many lenders require a minimum annual income, which can range from $50,000 to $250,000. Calculate your income and find out the minimum required by a particular lender before you apply.

If your income isn’t high enough, don’t rely on yourself just yet. Consider short-term business loans, SBA microloans, or even equipment financing.

Can you afford the payments?

Take a close look at your business finances, especially cash flow, and determine how much you can afford to claim your loan payments each month. Some online lenders require daily repayments, so be sure to take this into account.

To easily repay your loan each month, your total income should be at least 1.25 times your total expenses, including your new repayment amount, says Darden.

For example, suppose your business income is $10,000 per month and you are already paying $7,000 for rent, payroll, and other charges. Under this rule, you should afford to make a monthly payment of $1,000, since $10,000 is 1.25 times $8,000 of total expenses.

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Do you have collateral?

You can get both secured and unsecured business loans from many lenders. A secured loan requires business collateral, such as property or equipment, which the lender can seize if you can’t repay the loan.

Placing collateral is risky, but it can also increase the amount your lenders allow you to borrow and earn you a lower interest rate. Lenders can also ask for personal guarantees, even for unsecured loans.

That means you’ll personally pay off the loan if your business can’t, and you could let a lender take over your assets like house or car if you default.

2. Decide on the type of loan you need

Lenders will ask you why you want a small business loan. Your answer to the question will definitely fall into one of three categories and it will determine what type of business loan is right for you?

  • You want to start a business

Lenders need cash flow to support loan repayments, so businesses in their first year typically cannot get business loans. Instead, you’ll have to rely on other types of start-up financing, such as business credit cards and personal loans.

  • You want to manage day-to-day expenses

A business line of credit might make sense. This type of flexible financing allows you to tap into the financing you need to cover expenses like payroll or unforeseen costs like repairs, providing a useful safety net when needed.

  • You want to grow your business

Consider a government-backed SBA loan or a traditional term loan, which often has a higher loan maximum – SBA loans can be as high as $5.5 million, for instance. Many lenders also offer specific products to meet the needs of a growing business, such as loans for the purchase of equipment or vehicles.

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How To Get A Business Loan

3. Compare small-business lenders

There are three main sources for getting small business loans: online lenders, banks, and nonprofit microfinance. Each usually has multiple products, but one may be better in some cases than others.

When to get a business loan from online lenders:

  • You’re running out of collateral.
  • You are running out of time for business. You need financing fast.

Online lenders offer small business loans and lines of credit of around $1,000 to $5 million. The average annual percentage rate for these loans ranges from 6% to 99%, depending on the lender, the type and size of the loan, the repayment term, the borrower’s credit history and whether there will be need for collateral.

These lenders rarely have APRs as low as traditional banks, but approval rates are higher and funding is faster than banks – up to 12 hours.

When to get a business loan from banks:

  • When your business has been in operation for at least two years.
  • You have good credit.
  • Your business is not urgently in need of the money.

Traditional bank options include term loans, lines of credit, and commercial mortgages to buy a property or refinance.

Through the commercial banks, the US Small Business Administration offers small business loans with its 7 (a) loan program, short-term microloans, and disaster loans. According to the Congressional Research Service, the US Small Business Administration offers loans of up to $5.5 million, with 7 (a) loans averaging $533,075 in fiscal 2020. On the average, the SBA microcredit is $13,000.

The US Small Business Administration also has a 504 loan program that helps promote the economic development of communities by financing purchases of corporate capital assets – such as land, buildings or equipment – through long-term financing at a fixed rate.

It can be difficult to take out a small business loan from a bank due to factors such as lower sales volume and lower cash reserves. Add in bad personal credit or no collateral, and many small business owners show up empty-handed.

Getting financing takes longer than other options, but banks are usually the lowest APR option.

When to get a business loan from microlenders:

  • If you have bad credit or no credit history.
  • Your business is new.
  • You can’t get a traditional loan.

Microfinancers are non-profit organizations that typically lend short-term loans of less than $50,000. The APR on these loans is generally higher than that on bank loans. Your application may require a detailed business plan, financial statements and a description of the loan, making it a lengthy process.

In addition, the loan amount is, by definition, “micro”. However, these loans can work well for small businesses that are not qualified for loans from traditional banks as a result of limited operating history, low personal credit, or inability to provide collateral. Estimate the cost of getting a business loan

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4. Gather your documents

Before applying, make sure you have all the required documents. Locating these files now and making them easily accessible will help streamline the process of getting a small business loan.

Depending on the lender, you will need to submit a combination of the following:

  • Business and personal tax returns
  • Business and personal bank statements
  • Business financial statements
  • Business legal documents (e.g. articles of incorporation, commercial lease, franchise agreement)
  • Business plan.

5. Apply for a business loan

You did it! Now that you know the type of loan and the lender that’s right for you, it’s time to apply. You can start your journey by looking at two or more options with similar loan terms and annual percentage rate, or APR.

From the loans you are eligible for, choose the one with the lowest APR (as long as you are able to handle regular loan repayments) and apply with the documents you collected.

Keep in mind that the credit bureaus do not distinguish between requests for business and personal information. If you use your personal credit history, your credit score could be affected when you apply for a small business loan, which is why it is important to choose the best option.

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