If you’re seeking financial assistance to bolster your business, a business loan can be the answer, enabling you to expand, manage daily expenditures, or procure equipment and inventory. If you’re new to the world of business loans and unsure about where to start or what documentation is needed, this comprehensive guide will walk you through the process, making it a breeze in five straightforward steps.
Step 1: Define Your Funding Purpose Business loans come in various forms, so the first step is to determine why you need financing. Identifying your specific requirements will help you select the most suitable loan type. Here are some common scenarios:
- Purchasing Equipment: Consider equipment loans, which are secured by the equipment itself, facilitating the acquisition of machinery or office furnishings.
- Small Loan Amount: If you require a small sum, explore microloans. The U.S. Small Business Administration (SBA) offers a Microloan program, allowing qualified applicants to borrow up to $50,000. Not-for-profit organizations like Kiva and the Women’s Microfinance Initiative also provide microloans.
- Business Start-up: Launching a new venture can be challenging due to minimum time-in-business requirements at many lenders. In such cases, consider microloans or a business credit card, which may be more accessible, especially if you have a strong personal credit score.
- Daily Operations: Address temporary cash flow challenges with a working capital loan. This short-term solution covers daily expenses such as rent and payroll.
- Flexible Borrowing: Opt for a business line of credit if you don’t have a fixed borrowing amount in mind. This option provides flexibility, allowing you to withdraw funds as needed while paying interest only on the borrowed amount.
Step 2: Verify Eligibility Lenders have specific criteria for evaluating small business loan applications. While requirements can differ, here are four factors lenders are likely to consider:
- Credit Score: Lenders will review both your personal and business credit scores to assess your loan repayment likelihood. A higher credit score improves your chances of approval and secures a lower interest rate.
- Collateral and Personal Guarantee: Some lenders may require collateral, valuable assets like equipment or inventory, to back the loan. In certain cases, a personal guarantee may also be necessary, involving securing the loan with personal assets such as savings, your home, or other valuable possessions.
- Time in Business: Traditional banks often mandate at least two years of business operation, whereas online lenders might require only one year. For start-ups with less than one year in operation, microloans or business credit cards may be more attainable.
- Annual Revenue: Your total annual sales are another critical factor. Check with lenders for specific requirements and review your business finances to determine if you meet them.
Step 3: Compare Business Lending Options You’ll find small business loans available from various sources. Three common types of lenders are:
Online Lenders: Online lenders offer a range of loan products, including term loans, merchant cash advances, lines of credit, and microloans. They often have less stringent requirements than traditional banks, making approval more accessible, even with less-than-stellar credit. However, online lenders may charge higher interest rates.
Traditional Banks: Banks provide similar business loan types as online lenders but typically offer lower rates for well-qualified applicants. However, they often have more stringent eligibility requirements, making approval challenging for those with poor personal credit scores.
Microlenders: Microlenders are usually not-for-profit organizations that offer microloans up to $50,000 to qualified applicants, particularly aimed at those who don’t meet traditional business loan criteria. Microlenders often have less strict eligibility requirements.
Step 4: Gather Required Documents Prepare the necessary documents to streamline the application process. Lenders may request items such as:
- 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 uncertain about the required documents, reach out to the lender before applying to ensure you have all the necessary paperwork.
Step 5: Submit Your Application Once you’ve explored your lending options and gathered the required documents, it’s time to submit your small business loan application. Depending on your chosen lender, you can either apply online or in person. Here’s some information you might need to provide:
- Your name
- Business name
- Social Security number (SSN)
- Desired loan amount
- Loan purpose
- Business Tax ID
- Annual revenue
After submitting your application, await an approval decision. Upon approval, the lender will send a loan agreement for your signature before disbursing the funds or establishing a line of credit for you to access.
Choosing the Best Business Loan To select the most suitable business loan, compare the options you qualify for and evaluate these factors across different loans:
- Annual Percentage Rate (APR): APR reflects the total annual cost of a loan, encompassing interest and fees. It’s essential for comparing affordability.
- Fees: Be aware of upfront fees charged by lenders, as these contribute to your overall loan cost.
- Repayment Terms: Loan terms can vary from one to 25 years. Longer terms result in lower monthly payments but higher overall interest costs. Choose a term aligned with your financial goals and affordability.
- Funding Speed: Consider the speed of funding. While major banks may offer competitive rates, the application process can be slow. Online lenders often provide quicker access to funds.
How to Secure a Business Loan from a Bank The process for obtaining a business loan from a bank may differ among institutions. Some major banks offer online applications, where you input personal and business details to apply. Alternatively, you might need to visit a branch in person.
Typically, you’ll need to provide details such as your business name, establishment date, gross annual revenue, and annual household income for all owners. Brick-and-mortar banks often have stricter eligibility criteria, necessitating strong credit and financials for approval.