You have big plans for your small business. But what if those plans require big money that doesn't exist in your bank account? A business loan can help. And while finding, applying for, and getting approved for small business loans can be difficult, the more prepared you are, the better.
To get a business loan, start by determining how much money you need and what you'll use it for. Research possible financing sources and learn what their requirements are. And once you have an idea of what lenders are looking for, you can prepare a loan application package that proves you've got what it takes.
Why Do You Need a Loan?
Before you get started, you’ll want to know why you’re applying for a business loan. Lenders will ask you this question, so take some time and be able to articulate why you need a business loan and how much you need. It could be to start your business, to manage everyday expenses, payroll, marketing, to have a safety cushion, or to take your business to the next level.
Whatever the reason, be prepared to answer exactly what it is the loan will be used for, and how it will benefit your business.
Evaluate Your Options
Once you know how much money you need, figure out what kind of loan suits your purpose. The most common kinds of business loans include bank loans, SBA guaranteed loans, microloans, and credit business lines. Do your research beforehand to determine which loan option is best suited for your needs.
When weighing your options, find out what criteria the lender uses when evaluating your loan application. Often, businesses in their first year aren’t able to take out a loan because they don’t have enough collateral to do so. It would help if you had been in business for at least one year to qualify for most online small-business loans and at least two years to qualify for most bank loans. For example, if a bank loan requires three years of business tax returns and you've only been in business for six months, you'll need to look elsewhere.
You’ll also want to check your credit scores. There are two types of credit scores: business and personal. A business that's just starting won't have much of credit history. If it's a sole proprietorship, lenders might focus on your personal credit score when considering your loan application. Once you've been in business a while, your personal credit score won't matter as much, but it's still a factor in the loan decision. Before you start the loan process, get a business credit report and a free personal credit report, and address your trouble spots. Getting your credit scores in excellent shape before you apply for a business loan will boost your chances of success.
What Can You Afford?
The next step is to look carefully at your business’s financials and evaluate how much you can reasonably afford to apply toward loan repayments each month.
To comfortably repay your loan each month, your total income should be at least 1.25 times your total expenses, including your new repayment amount. For example, if your business’s income is $10,000 a month and you have $7,000 worth of expenses including rent, payroll, inventory, etc., the most you can comfortably afford is $1,000 a month in loan repayments. There are some great online tools you can use to determine how much your business will be able to put toward loan repayments.
Online vs. In-Person
Before you apply for a loan, take into consideration what option will be best for you and your business. Applying for a loan in-person may have its benefits if you already have an established business with good credit, small businesses have typically a tougher time getting approved due to factors including lower sales volume and cash reserves. Often, small business owners can come up empty-handed when applying for a loan in-person.
On the other hand, online loan applications may have faster processing times -- sometimes as fast as 24 hours. If your small business is new, lacks collateral, or needs funding quickly, an online lender could be the way to go.
Gather Your Documents
Once you’ve compared and evaluated your options, it’s time to apply for the loans that you qualify for, and that fits your business’ needs. Typically, you can apply for multiple small-business loans within a short time frame without a negative effect on your personal credit score.
When submitting your application, make sure you have all the necessary documents prepared. Depending on the lender, these may include business and personal tax returns, business and personal bank statements, business financial statements, and business legal documents like articles of incorporation or a commercial lease.
Once you have everything prepared, you’re ready to apply! A business loan proceeds can help your business get off the ground, survive a slow season, or expand to new markets. Whatever your purpose, getting a business loan shouldn't be taken lightly. It’s important to do your homework and make sure you’re fully prepared. Identify your business goals and how financing can help you achieve them. By taking the time to research the right loan option for your business, you'll improve your odds of getting the money you need.