How to Get a Business Loan

Looking to secure a business loan? Look no further! Acquiring the necessary funds to grow your operations, manage daily expenses, and invest in equipment or inventory can be made possible through a business loan. However, if you're new to the world of business loans, you might feel uncertain about how to get started or what documents are necessary.

To ease your concerns, we have prepared a comprehensive guide that outlines five straightforward steps. This guide will assist you in evaluating your available options and preparing a well-structured application for your business loan. With this easy-to-follow roadmap, you'll be well on your way to obtaining the financial support you need.

By understanding your specific financing goals, you can navigate the loan landscape with confidence, selecting the ideal option to fulfill your business's unique requirements.

Determine Your Financing Purpose 

When seeking a small business loan, it's crucial to understand that various loan types are available. Identifying your specific financing needs will guide you in selecting the most suitable loan option.

Here are a few common scenarios to consider:

Acquire new equipment: Certain lenders specialize in equipment loans designed specifically to facilitate the purchase of business machinery or office furniture. These loans are secured by the equipment itself, enabling the lender to reclaim it in the event of loan default.

Secure a small loan amount: If you require a modest sum, exploring microloans is worth considering. The U.S. Small Business Administration (SBA) offers a Microloan program that allows eligible applicants to borrow up to $50,000. Additionally, not-for-profit organizations like Kiva and the Women's Microfinance Initiative provide microloans as well.

Establish a new business: Securing a startup loan for a newly established business can be challenging due to lenders often imposing minimum time-in-business requirements. In such cases, alternative options like microloans or business credit cards may be more accessible. Business credit cards, in particular, may have easier qualification criteria since approval primarily relies on your personal credit score.

Cover day-to-day operations: For temporary cash flow difficulties and ongoing operational expenses like rent and payroll, a working capital loan can offer timely assistance. This short-term loan helps you manage your daily financial obligations effectively.

Flexible borrowing: If you anticipate fluctuating borrowing needs and are unsure of the exact loan amount required, a business line of credit presents an attractive solution. Once approved, you gain access to a predetermined credit limit, allowing you to withdraw funds as needed to cover business expenses. Interest is only charged on the borrowed amount.

Assess Your Eligibility

While the specific criteria for business loans can vary, there are certain aspects that lenders typically consider when evaluating your small business loan application. Here are four key factors to keep in mind:

Creditworthiness: Lenders will scrutinize both your personal and business credit scores when you apply for a business loan. These scores assist lenders in assessing the likelihood of you repaying the loan. Generally, a higher credit score enhances your chances of loan approval and obtaining a favorable interest rate.

Collateral and/or personal guarantee: Some lenders may require you to provide collateral, such as equipment or inventory, which they can seize in the event of a loan default. Additionally, a personal guarantee may be requested, requiring you to secure the loan with personal assets such as savings, your home, or valuable possessions.

Time in business: Traditional banks often mandate that a business have been operating for a minimum of two years, whereas online lenders typically have a requirement of just one year. If your business has been established for less than a year, don't be discouraged. Certain online lenders are willing to approve qualified applicants who have operated their businesses for as little as six months.

Annual revenue: Your total annual sales serve as a significant factor. Before applying for a loan, it's advisable to inquire about the specific revenue requirements of the lender and thoroughly review your business's financial standing to determine if you meet their criteria.

By understanding these essential eligibility considerations, you can better gauge your qualification for a business loan and make informed decisions that align with your specific circumstances. Remember to assess each lender's requirements to find the best fit for your business.

Explore Business Lending Options

When seeking small business loans, there are various avenues you can explore. Here are three prominent types of lenders worth considering:

Online Lenders: 

Online lenders provide a wide range of loan products tailored to small business owners. These offerings include term loans, merchant cash advances, lines of credit, and microloans. According to the 2019 Small Business Credit Survey conducted by the Federal Reserve, online lenders, boasted higher loan approval rates compared to traditional banks—80% versus 74%, respectively.

One advantage of online lenders is their comparatively relaxed requirements, making it easier to secure a business loan, particularly for those with less-than-perfect credit. Additionally, online lenders often boast swift processing times, with funds sometimes being disbursed as quickly as the same business day.

However, it's important to note that opting for a business loan from an online lender can come with a downside. These lenders often charge higher interest rates compared to traditional banks, which is a significant factor to consider when evaluating the overall cost of borrowing.

Traditional Banks: 

Traditional banks have long been a go-to option for business loans. They offer a variety of financing solutions tailored to meet different business needs. While banks typically have more stringent requirements, including higher credit score expectations, they may offer competitive interest rates for well-qualified borrowers. Establishing a relationship with a bank can also provide additional benefits, such as access to other financial services and personalized guidance.

Credit Unions: 

Credit unions are member-owned financial institutions that can be an alternative source of business loans. They often provide competitive rates and flexible terms. Credit unions are known for their community-oriented approach and may be more willing to work with small businesses, even those with limited credit history. Building a relationship with a credit union can offer long-term advantages beyond just securing a loan.

When exploring business lending options, carefully evaluate the terms, interest rates, repayment terms, and overall suitability of each lender. This ensures you make an informed decision that aligns with your specific business goals and financial circumstances.

Micro Lending Opportunities: 

Microlenders offer a distinctive avenue for small business financing, catering to entrepreneurs who may not meet the criteria for traditional business loans. These not-for-profit organizations specialize in providing microloans, typically up to $50,000, to eligible applicants. Microlenders often have more flexible eligibility requirements, making them accessible to a wider range of borrowers.

One prominent microlender, Kiva, exemplifies this approach by not imposing a minimum credit score requirement. Instead, Kiva assesses applicants based on their "social capital." To qualify for a loan, entrepreneurs must gather a certain number of individuals willing to lend money through Kiva's platform. Once the required threshold is met, the loan request becomes visible on Kiva's website, opening up possibilities for additional lending support.

Microlenders play a vital role in empowering aspiring business owners and those facing barriers to traditional financing. Their focus extends beyond financial considerations, emphasizing community support and social impact. By harnessing the resources provided by microlenders, entrepreneurs gain an opportunity to turn their business visions into reality.

When exploring microlending opportunities, it's essential to research various organizations, understand their specific requirements, and assess how their mission aligns with your business goals. This allows you to make an informed decision and seize the potential benefits that microlenders offer in fueling your entrepreneurial journey.

Remember, thorough documentation showcases your commitment and reliability, enabling lenders to make informed decisions about your loan application.

Compile the Necessary Documentation 

After familiarizing yourself with the available lending options, it's time to gather the essential documents. Lenders typically require the following items during the loan application process:

Each of these documents serves a specific purpose in assessing your business's financial standing, credibility, and repayment ability. 

Personal and business tax returns demonstrate your income and tax compliance, while business licenses validate the legitimacy of your operations. Articles of incorporation establish your business as a legal entity. 

Bank statements, both personal and business, provide insight into your financial transactions and cash flow. Profit and loss statements and financial statements offer a snapshot of your business's financial performance and overall health. 

A well-crafted business plan showcases your strategy, goals, and projected outcomes. Lastly, a building lease agreement may be required to verify your premises and associated costs.

To ensure a smooth application process, it's advisable to contact the lender beforehand if you have any doubts regarding the specific documentation they require. 

By proactively gathering the necessary paperwork, you demonstrate preparedness and professionalism, enhancing your chances of securing the desired business loan.

Lodge Your Application

The final stride entails submitting your application for the small business loan. The submission process can typically be completed online or in person, depending on the chosen lender.

When filling out your application, anticipate that the lender may request the following information:

Once you have submitted your application, the next phase involves patiently awaiting the lender's decision. If your loan request is approved, the lender will provide you with a loan agreement that outlines the terms and conditions. It is essential to thoroughly review the agreement before signing it. Following the signing of the agreement, the lender will disburse the loan funds or establish a line of credit that you can utilize based on your needs.

Remember to maintain open communication with the lender throughout the application process and promptly provide any additional documentation or information they may request. By diligently following these steps, you maximize your chances of a successful loan application and secure the necessary funds for your small business.

How to Select the Ideal Business Loan

Finding the best business loan entails a careful evaluation of the loans for which you qualify and determining which loan aligns with your specific needs. Consider the following factors when comparing multiple loan options:

By carefully weighing these loan factors across multiple options, you can make an informed decision that aligns with your financial goals and requirements. Remember to consider the long-term implications of the loan, such as the total cost of borrowing and the impact on your cash flow, to ensure you choose the best business loan for your specific situation.

Remember, the requirements and procedures can differ among banks, so it's advisable to communicate directly with the bank and seek clarification if needed. 

By following these steps, you can navigate the process of obtaining a business loan from a bank with greater confidence and increase your chances of securing the funding your business requires.

Obtaining a Business Loan from a Bank: A Step-by-Step Guide 

The process of acquiring a business loan from a bank can vary based on the specific financial institution. While some major banks offer online application platforms where you can enter relevant details about yourself and your business, others may require you to visit a physical branch to initiate the application process.

To start the application, you will typically be asked to provide essential information, including:

It's important to note that traditional brick-and-mortar banks often have more stringent eligibility criteria compared to online lenders. To qualify for a business loan from a bank, having a strong credit history and robust financials may be crucial factors. 

When pursuing a business loan from a bank, consider the following step-by-step approach:

Commonly Asked Questions about Business Loans

The credit score needed to qualify for a business loan can vary among lenders. Minimum credit score requirements typically range from 500 to 680 for personal credit scores. For business credit scores, the specific requirement depends on the lender and the type of loan. For example, SBA loans often require a minimum business credit score of 155 for the pre-screen process, while other lenders set their minimum requirements between 160 and 165.

While most lenders have annual revenue requirements, it is possible to secure a business loan even if your business currently has no money. Some lenders offer "no documentation" business loans that do not require verification of business income. However, qualifying for such loans usually necessitates having excellent personal credit and providing a personal guarantee.

While it may be more challenging to obtain a small business loan with bad credit, it is still possible. Certain lenders specialize in providing loans to borrowers with poor personal credit scores. However, if approved, you can expect a higher interest rate. To increase your chances of approval and secure a lower interest rate, consider applying with a co-signer who has a good credit score (at least 670 according to FICO) and a decent income. A co-signer agrees to repay the loan if you default, so make sure they understand the responsibility involved before asking them to co-sign.

Some lenders may approve your business loan without requiring collateral if you sign a personal guarantee. By providing a personal guarantee, you accept the legal responsibility of repaying the loan with your personal assets or savings if the business is unable to do so.

Eligibility conditions for no-collateral loans vary by lender, so it is advisable to shop around and find a loan with application criteria that align with your circumstances. Online lenders, in particular, often have more flexible requirements, increasing your chances of qualifying for a no-collateral loan.

Remember to thoroughly research lenders, review their terms and conditions, and consider seeking advice from financial professionals to make informed decisions about your business loan options.