A business loan is a good loan if you want to expand operations, purchase equipment, and cover day-to-day expenses. If you’re applying for a business loan for the first time, you might be confused about where to begin and what documents are required for the application. In this article, we will discuss how to get a business loan.
Here’s a simple guide to help you learn how to get a loan, evaluate your options and, be ready to apply for a business loan.
1. Decide Why You Need Financing
There are many types of small business loans. You have to decide which loan is suitable for your business needs and then choose the right kind of loan. Here are a few typical situations:
Buy new equipment: There are some lenders who offer equipment loans. This type of loan is designed to help businesses purchase business equipment, such as office furniture or machinery. This is a secured loan, which means the lender can seize it if you can’t repay the loan.
Establish a business: It can be difficult to find a loan that offers a startup loan for a new business because most lenders have minimum requirements for years in the company. If you are a total beginner in business, you can apply for a business credit card or a microloan. Qualifying for a business loan is easier than other types of business loans because you need a good or excellent credit score.
Pay for day-to-day operations: It is a short-term loan that is used to cover daily expenses like payroll and rent. It can help you cover short-term cash flow issues.
Borrow a small amount of money: You can apply for a microloan if you want a small amount of money to borrow. You can apply to the U.S. Small Business Administration (SBA) to borrow up to $50,000 if you qualify for the loan. You can search for not-for-profit organizations for microloans, such as Women’s Microfinance Initiative or Kiva.
Borrow money on an as-needed basis: If you’re not clear about how much you need to borrow, considering a business line of credit can be a good option for you. When you qualify for a business line of credit, you can withdraw funds according to your business expenses. The interest rate is only applicable to the amount you borrow.
2. Check Your Eligibility
The business loan requirements can vary, but the common things lenders consider in a small business loan application are:
Credit score: The credit score is the most important factor that lenders consider. Your personal and business credit scores will be examined by a lender. If your credit score is good, you will qualify for a loan easily. But if your credit score is low, you will have some difficulty qualifying for a loan.
Time in business: A lender requires one year of time in business to qualify for a loan. But traditional banks require two years of business duration to qualify for the loan. If your time in business is less than one year, many lenders offer business loans to those who have been in business for six months.
Collateral or personal guarantee: If you don’t meet the lender’s requirements or have a lower credit score, consider adding collateral such as inventory or equipment. But they can seize it if you can’t pay the loan payments. Some lenders require a personal guarantee, which means you have to add your personal assets, such as a home or a car, to secure the loan.
Annual revenue: Your total business revenue is also an important factor. Lenders review your business finances to determine whether you meet their requirements or not.
3. Compare Business Lending Options
There are ways to find small business loans. The best types of lenders to get a small business loan are:
Traditional Banks
Traditional banks offer a variety of types of business loans as online lenders. The main advantage of choosing traditional banks is that they offer lower rates for high-credit-score applicants than any other lending option.
But the problem with applying for a loan through banks is that their eligibility requirements are very tough. If your credit score is low, then it is very difficult to get a loan without a cosigner. Generally, a cosigner is another person with a good credit score, which will help you qualify for the loan.
Traditional banks take too long to release your funds. So, if you want quick access to funds, traditional banks are not an option for you. For example, U.S. Small Business Administration (SBA) loans through a bank can to weeks or months take release funds.
Pros
• Lower interest rates for well-qualified applicants
• Lower fees
Cons
• Tough requirements to qualify
• It can take weeks or months to release funds
Online Lenders
Online lenders offer many loan products, such as merchant cash advances, term loans, microloans, and lines of credit. According to a survey by the Federal Reserve, the success rate of approval through online lenders (80%) is higher than through traditional banks (74%).
The loan requirements of online lenders are less stringent than those of traditional banks. That’s why qualifying for a loan through online lenders is easier than through traditional banks. You will get your funding faster than banks, and sometimes you may get the funds on the same day of approval.
Pros:
• Large variety of loan products
• High success rate than banks
• Receive funding quickly
Cons
• High interest rates
• Probability of hacking and scams
Microloans
Microlenders are generally type of not-profit-funds organizations that offer loans up to $50,000 to eligible applicants. Microloans are a good choice if you face difficulty getting a loan from traditional banks. Microloan eligibility requirements are not harder to meet.
Some microlenders don’t even require a credit score, such as Kiva. Instead of credit scores, they consider “Social Capital.” Social network of connections and relationships among people who work and live in a particular society.
4. Gather the Required Documents
When you understand what type of loan and lender you need, collect the required documents. The most important documents to apply for a loan are:
• Personal and business tax returns
• Articles of incorporation
• Business licences
• Profit and loss statements
• Personal and business bank requirements
• Business plan
• Financial statements
• Building lease
Contact the lender before applying to ensure that the documents are required for the loan application.
5. Submit Your Application
Submitting your small business loan application is the last step you have to take. You can submit your application online or in person, depending on the lender you choose.
The list of information that a lender may ask for is:
• Your name
• Business name
• Desired loan amount
• Social Security Number (SSN)
• Loan purpose
• Annual revenue
• Business Tax ID
Once the process is complete, you have to wait for the decision. If you qualify for a loan, the lender will issue you an agreement to read and sign. Keep in mind that reviewing the loan terms is very important before signing the agreement.
How to Choose the Best Business Loan
Choosing the best business loan is an important step in learning how to get a business loan. You should compare the loans you qualify for to choose the business loan that is right for you. Here are some factors you should consider while comparing loans:
Annual percentage rate (APR): APR is the cost of the loan on an annualized basis, including fees and interest rates. APR can help you determine which loan is best for your needs.
Repayment terms: Repayment terms are basically the duration of the loan. It can range from one year to 25 years. Choosing a long repayment term can decrease your monthly payments, but it will increase your interest rate over the loan term. The repayment terms depend on your needs and how much of a monthly payment you can afford.
Fees: Some lenders charge upfront fees to start the application process. Considering the fees of different loans will help you compare costs.
Funding speed: Many banks provide business loans with a lower credit score than other loan options, but their application process is slow. If you want funding immediately, online lenders are a good option for you.
How to Get a Business Loan from the Bank
The process and requirements for getting a business loan from a bank depend on the financial institution you choose. Many banks offer an online application process where you can fill out information about yourself and your business. If you want to apply in-person, go visit their nearest branch.
The information that you should fill out on your application includes your business name, business establishment date, total annual revenue, and all owners annual household income. Brick-and-mortar bank eligibility requirements are very hard to meet; you may need strong credit to qualify.
Frequently Ask Questions
How can I apply for a business loan?
The steps to apply for a business loan are given below:
• Review your and your business credit
• Choose a lender according to your needs
• Gather the required documents
• Apply for the loan application online or in-person
• Wait until your loan is approved
• Transfer funds into your account
How much loan do I need to start a business?
Learning how to get a business loan is very important in business. You can get a loan of $9,000 to $20,000 to start a business. If you require a large loan, for example, $750,000, you will need a large personal income. The startup loan process is different from that of other types of businesses.
Do small business loan easy to obtain?
Business loans are not easy for every business to qualify for. If your financial revenue and credit score are high, then you can easily qualify for a small business loan as compared to businesses with low financial revenue and a low credit score.
Is it difficult to qualify a business with no money?
It can be challenging to get a loan with no money because you have to meet the minimum annual revenue requirements to qualify for a loan. But some lenders allow loans to small businesses with no money or revenue.