How to Apply for a Small Business Loan: Your 9-Step Guide
The process of applying for a small business loan can seem daunting. It’s difficult to know where to start, and the finish line can seem so far off. But, by putting one foot in front of the other and following these nine simple steps, getting a small business loan can be totally attainable.
1. Plan, Plan, Plan!
The first step for any new business should be to hash out a thorough business plan that details your goals and strategies for the next three to five years. This should include your budgets and financial ambitions, including what type (if any) financing you plan to pursue, and how you will spend that money to grow the business. Find out exactly how much the things you need will cost (manufacturing equipment or a warehouse space, for example), so you can budget accordingly.
2. Make it Official
Take care of all the paperwork needed to make your business an entity that stands on its own, separate of you personally. This can include a local business license, a federal Employer Identification Number, and filing to become an LLC, corporation, or whatever formal structure is applicable. Beyond this, take care of odds and ends like getting a business phone number and listing the business in local business directories. While they might seem simple, these little things can go a long way toward establishing business history and credibility, which will help you land a small business loan down the road.
3. Prioritize Credit
Open a credit card or two in the name of the business. Use them sparingly, even if you don’t really need to, to establish some credit history. Also, ask vendors and suppliers for terms, like net 30. Be sure to pay all your bills on time or early, if possible.
4. Shake a lot of Hands
Start forging relationships with banks, other lenders and contacts in the business community as soon as you can. It is important to start building connections early, before you actually need to use them. As with anything, people are more likely to want to work with individuals they know and trust.
5. Know your Credit Score
Invest in a credit monitoring service to keep an eye on your business credit score, as this will weigh heavily on your ability to secure a loan. A monitoring service will help you identify areas where your business needs to improve credit-wise. It will also allow you to spot and correct any mistakes, which can be common in business credit reports, as the reporting process is not as rigorous as personal credit tracking.
6. Be Choosy
Research the different types of lenders and decide which is the best fit for your business. Commercial banks are great for traditional business loans. Regional lenders like community banks and credit unions can be a good fit if your business will help economic development in a certain geographic area. Microlenders are appropriate for businesses needing smaller loans (typically less than $10,000). Alternative online lenders can quickly connect you with a number of competitive bids.
7. Prepare your Loan Package
A loan package is your application for a business loan, which is typically comprised of your business plan, financial projections (including specifically how much money you hope to attain and how you plan to spend it), and personal financial history (usually via past tax returns).
8. Cross your Fingers
It typically takes lenders about two to four weeks to process applications and get back to you with an answer. It is OK to check in with them weekly for a progress update. Be prepared to provide additional documentation and answer questions they might have.
Woo-hoo! All your hard work paid off and you landed a small business loan! Don’t let the money go to your head – make sure to spend it as you outlined in your business plan. Congratulations on taking your business to the next level!