For small businesses, securing a loan can be a crucial source of capital. Owners of such businesses can use these loans to stock shelves, expand operations, or purchase new equipment. Small business funding options often include resources like community lending institutions, banks, micro-lenders, and online lenders. But, getting a loan is not an easy task for small enterprises. Careful consideration of various factors is necessary before applying for a small loan for a business startup.
How to get a small business loan
1. Decide on the loan type
Choosing the right loan for a small business is the first step. The type of loan business owners should opt for primarily depends on what they hope to accomplish with it. For instance, to finance large purchases or for expansion purposes, business owners can opt for traditional term loans that come with longer repayment periods and lower interest rates. For financing daily expenses, they can opt for flexible financing options like business lines of credit. For startup owners, it can be challenging to access traditional loans. So, they can tap into alternatives like business credit cards or personal loans.
2. Qualifying for a small business loan
Various resources help one avail of a loan for their small business, including microlenders, banks, and online lenders. But, certain eligibility criteria need to be met to qualify for such loans.
- Credit score: Banks offer low-rate loans to borrowers with good credit scores, usually 690 or above. On the contrary, if the credit score falls below this threshold, customers can go with non-banking lenders. Online business loans are usually faster to qualify for. Alternatively, one can look for loans for small business owners with bad credit or prefer microloans if their credit score is poor.
- Business age: To qualify for an online loan, one’s business should be at least six months to one year old. But, the organization should be at least two years old to avail of small business funding from traditional banks.
- Revenue: Several lenders also request a revenue statement before granting loans. Usually, most banks are easy with loan terms if a business generates revenue ranging between $50,000 and $250,000. But, if one’s business doesn’t meet this requirement, one could look for alternative funding for their small business, such as SBA microloans or business credit cards.
- Affordability: When assessing annual revenue, banks also consider cash flow, which helps them determine how much a business owner can afford to apply towards monthly repayments. Typically, when granting loans to small businesses, banks check if their total income is at least 1.25x the expenses, including the loan repayments.
3. Compare different small business funding options
Different types of loans for small businesses may include varying terms, interest rates, and other features. So, after deciding on a loan type, the next step is to compare different options to determine what offers the best terms.
- Loans from banks: Traditional banks typically offer commercial real estate loans, term loans, and lines of credit. Key benefits for small business owners include competitive loan interest rates and long repayment terms.
- Government: Various government agencies help small businesses with financing. Loans availed through this option typically have low rates and longer repayment terms and are easy to qualify for.
- Microlenders: Small businesses and startups that don’t qualify for traditional loans due to lack of collateral or bad credit can avail of loans below $50,000 from microlenders.
- Online lenders: Due to the high approval rates and faster funding, small businesses are increasingly preferring online lenders for their financing needs. Such lenders typically provide loans up to $500,000.
4. Application process
Lenders often request some documentation before granting a small loan to a business.
- Details about the business: Owners should provide details like the business’s name, address, and employer identification number (EIN) assigned by the Internal Revenue Service (IRS). Sometimes, lenders may also ask for a business plan or proposal outlining how the owner intends to use the loan amount.
- Financial statements: These include annual revenue statements such as tax returns, bank account statements (owner’s and that of the business), and profit and loss statements.
- Information about the owner: The business owner must provide information like their Social Security Number and the address of individuals who own more than 20-25 percent of the company.
- Collateral: Some lenders may demand collateral to secure the loan.
- Personal guarantee: After a business owner applies for a loan, lenders often ask them to sign a personal guarantee. This agreement states that the borrower is responsible for paying back the loan with personal assets during a business default.
After submitting the necessary documents, the loan application process may vary according to the lender. Some online lenders allow the buyers to link their business accounts via their website to qualify for funds. On the other hand, traditional banks and credit unions may want the borrower to apply via phone or by visiting their branch.
Before applying, the borrower must consider having a professional examine their application to ensure it includes everything and is in the appropriate format. This will reduce the risk of unnecessary delays and increase the chances of approval.
5. Reviewing the loan terms and getting funds
After the lender approves the loan application, they will send a loan agreement to the business owner. It will outline all the terms and conditions of the lending arrangement, including various important details like repayment terms and schedules, loan amounts, fees, and interest rates. Borrowers must review the agreement thoroughly and sign it only after confirming everything checks out. Once signed, they can return the agreement to the lender, who will then disburse the loan. Borrowers can use this loan to finance their small business’s needs.