Many small business owners consider taking out a business loan at some point in their careers. A business loan can be used to start a new company, but it can also be used to help grow an existing company. Navigating the loan process can be tricky, though, especially as lending standards continue to evolve. We’ll outline five simple steps you can take to help secure funding for your business.
1. See if you Qualify for a Business Loan
The first step is to see if you may qualify for a small-business loan by asking some important questions:
- What’s your credit score? Lenders often offer low-rate business loans to borrowers who have a minimum credit score of 680.
- How old is your business? Lenders may look at how long you’ve been in business, and many require you to be in business for at least one year to qualify.
- What is your annual revenue? Some lenders have a minimum required annual revenue.
- How is cash flow? You’ll want to make sure you have enough cash to afford your loan payments each month.
The answers to these questions should be enough to get you started but recognize that some lenders will also require business collateral to secure a loan (equipment or property). If you default, the lender can seize this collateral. While that sounds risky, it can also net you a lower interest rate.
2. Determine Which Type of Loan Will Work Best
Which type of loan you need depends on why you want a loan to begin with. If you’re starting a business, you’ll probably want to look to other types of financing like personal loans. Most lenders require cash flow for a business loan, so startups that don’t yet have cash flow may not qualify.
If you’re looking for a way to manage day-to-day expenses, a business line of credit might work for you. This allows you to get financing on an “as-needed” basis to cover payroll or other expenses that may come up.
If you’re looking to grow your business, look at SBA loans, which are backed by the government. SBA loans go up to $5.5 million and other traditional loans may also offer higher borrowing maximums.
3. Compare Business Loan Options
You have options when it comes to getting a business loan, so be sure to look at banks, online lenders, and even nonprofit microlenders. Which option works best may depend on your unique business circumstances. Some lenders may work better for startups while others are good options for those who lack collateral.
4. Gather the Necessary Paperwork
When you apply for a loan, the lender will require certain information. It’s best to gather this documentation beforehand so you are prepared. Be sure you have the following:
- Personal tax returns
- Business tax returns
- Business financial statements
- Legal documents (lease, franchise agreements, articles of incorporation, etc.)
- Business plan
Having this information ready can help you streamline the application process.
5. Apply for a Business Loan
You’re now ready to apply for a business loan. Determine which option you’ll pursue based on the annual percentage rate (APR) and loan terms. It’s typically best to apply for the loan with the lowest APR.
Remember that a business loan is just like other loans in that your credit score may be impacted when you apply. Since credit bureaus don’t differentiate between personal and business inquiries your personal credit score may be impacted, especially if you’re using your personal credit history.
Understanding and following the five steps above for getting a business loan can streamline the process and help reduce stress along the way.