Commercial Loan Application: Everything You Need to Know
So you’ve decided to get a business loan. Maybe you want to expand your operations or purchase new equipment to accommodate a growing client base. Or, perhaps you need funds to keep your business afloat during slow times. No matter the reason, it can be a daunting step and a serious process. Understanding the lay of the land before you begin will help ensure you get the best loan for your circumstances.
Just as each lender and loan type has its own eligibility requirements, fees and repayment schedules, each also has its own application process. Some lenders require extensive documentation while others make it surprisingly simple to get an infusion of cash into your company.
While you’ll have to consult with a particular lender about the specifics that they require, this guide can give you a good idea of what you might expect. Be ready for anything and you’ll get capital in-hand without a hitch.
How to choose a commercial loan type
The first step in applying for a commercial loan is finding the lender and funding type that are right for your business. There are three categories of business funding, each of which has its own particularities, advantages and costs: loans, other credit and advances.
Private loans: Also called traditional loans or bank loans, these are the gold standard of business lending – low-cost capital with high eligibility requirements. Your credit must be good to excellent to procure these loans, especially from traditional lenders such as major banks. But get ready for a complex and extensive application process. Private loans are best for businesses with good credit, no time constraints, and specific, one-time funding needs.
Government-backed loans: The Small Business Administration (SBA) guarantees various types of private loans, which are referred to as “SBA loans” even though the SBA doesn’t disburse the funds. These loans have low interest rates, but borrowers with less-than-stellar credit can apply. However, there are various eligibility requirements and the money can only be used for specific purposes. These loans are good for borrowers who aren’t able to access traditional loans, and whose characteristics and plans for the money match SBA requirements.
Microloans: Some nonprofit community-based organizations offer small SBA-backed loans averaging $13,000. This little infusion of cash is a good for companies that have minor needs, are just starting out and haven’t built up a credit history.
Inventory/equipment financing: Those looking to purchase inventory or equipment may find inventory/equipment financing a good option. The equipment being purchased can act as collateral for the loan, so there’s less need for personal guarantees or other forms of collateral. This is a good option for businesses who have a specific inventory or equipment need to fund.
Lines of credit: Once you’re approved for a business line of credit, your business can access funding at any time for as long as you remain in good standing. Unlike credit cards, lines of credit come with reasonable rates, and there are few to no restrictions on how you can use the money. But the application process can be complicated and time-consuming, especially if you’re borrowing from a traditional lender. Lines of credit are best for businesses that anticipate ongoing and unpredictable financing needs.
Merchant cash advance (MCA): Funders give borrowers a lump sum up front in exchange for a percentage of future credit card sales or other receivables. Merchant cash advances are available to those with bad credit and can often be procured quickly. They come with high fees and rates. This option is best for those who aren’t able to get funding in other ways and/or who need money quickly.
Invoice factoring: A business can sell a portion of its unpaid invoices to a lender in exchange for an immediate tranche of funding. This option is a good one for quick cash, but that advantage comes with high fees and rates. Invoice factoring is a solid choice for those who often receive payments late or whose billing cycle is out of sync with spending needs.
Finding the right lender for your commercial loan
Once you decide on the type of funding you need, research which lenders offer that specific financial product and compare them to each other. First peruse each lender’s website to see how upfront it is about its products. Next, call the customer service number to get a sense of how helpful and forthcoming the lender is in person. Here are five factors you should look at as you investigate:
- Eligibility: Lenders each have their own eligibility requirements, so finding one that matches your profile is an obvious place to start. Gather basic business information such as your business’s annual revenue and your personal credit score before contacting lenders to ask about eligibility.
- Fees and rates: This is the cost of borrowing – one of the most important aspects of your financing. Lower rates are better, but there are other factors that influence cost. Ask about whether a lender charges are any fees that are not disclosed on its website, such as an origination fee, servicing fee, late-payment fee, prepayment fee, guarantee fee, or check-processing fee. Also ask whether there is a possibility of saving money on a loan by paying it back early.
- Time to funding: Depending on how fast you need the funds, this will either matter a lot or not at all. For those who need immediate cash, time to funding can be a deal-breaker. But it’s better to be in a situation where you can wait longer for funding from the lender that is a better financing match.
- Application requirements: Some lenders have lengthy and complex applications. Check to see if you have everything needed to apply, and if not, consider how difficult it will be to get it together. Even if it’s a headache to produce the requested documentation, going through the process is a good exercise for your company. So, try not to be scared off by hefty application requirements.
- Transparency and trust: These are the intangible aspects of choosing a lender and you may need to rely on your gut feeling to some extent. Is information about the products readily available on the lender’s website or in its materials? Do you sense that the lender is trying to upsell you or holding back important information until you inquire? Ultimately, it’s about whether you feel like you’ll be in good hands. If the answer is no, then look elsewhere even if a more trustworthy-feeling lender has slightly higher rates or fees. That might be a reasonable price to pay for peace of mind.
Make sure your commercial loan application gets approved
Each lender defines its own application process, so the list of documents and other information required to apply will be different in each situation. However, there are steps you can take to ensure you put your best foot — and application — forward.
Be clear on your needs. Know what you’re funding, how much you need, and when you need it. The lender will want to know these basics off the bat, so don’t go into the process without clarity. It’s fine if you’re not sure exactly what you will need the funding for, but that desired flexibility may mean you’d be best suited for a line of credit instead of a loan.
Have your basic information on hand. Basic business info you’ll need includes items like your tax ID number; your DBA names, if you have any; and the names, contact information, Social Security numbers, and ownership percentages of all business owners.
Prepare required documentation. Your lender will tell you what you need to submit. This can be a short or long list, depending on the loan and lender. But you’ll likely need bank statements, personal and business tax returns, a balance sheet and a business plan. There may be many other documentation requirements, but these are the requests you’re most likely to run into.
The bottom line
The loan application process can be tricky and time-consuming, but if you give it your full attention and patience it can be the key to helping your business thrive.
Most lenders are eager to work with responsible partners, and therefore are motivated to make sure you succeed in the application process. It’s smart to take advantage of their help so you submit a complete and accurate application and accompanying documentation. Got a question about what to submit? Pick up the phone and ask.