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How to Apply for a Small Business Loan: Your 9-Step Guide
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A small business loan can come in handy when you need working capital to cover everyday expenses or financing to help grow your company. Knowing how to apply for a small business loan could increase your odds of approval at the best rates and terms for you. If you’re interested in getting financing for your business, this guide can help.
- Know the reason and amount you’re seeking.
- Decide what kind of small business loan you need
- Fine-tune your business plan
- Do you qualify for a business loan?
- Research where to get a business loan
- Seek advice
- Compare loan options carefully
- Apply for a small business loan
- What to do if you’re denied for a business loan
1. Know the reason and amount you’re seeking.
One of the first questions many business loan applications (particularly from online lenders) will ask is the amount you’re seeking. The bank, online lender or credit union will also want to know the loan’s purpose. Before applying for a loan, give some serious thought to your answers because they might help determine your business’s true financial needs. Ask yourself additional questions, such as:
- How long will I need to take to pay it back?
- Can the business’s current monthly cash flow support loan repayment?
- What’s the expected return on investment from getting a loan?
Once you’ve taken a hard look at your financial statements and projections, you might discover that bootstrapping, crowdfunding or borrowing from friends and family is a better fit, particularly if you’re just starting your business. Startups may find it difficult to get approved for a small business loan: Most lenders are looking for at least six months in business and specific revenue or sales thresholds.
Established businesses. On the other hand, businesses with at least one year in business and $100,000 in annual revenue might qualify for a term loan up to $500,000 from an alternative lender, albeit at higher rates than you would find at a bank. A business owner with two or more years in operation, good to excellent personal credit and higher annual revenue will likely qualify for more favorable APRs and higher loan amounts.
2. Decide what kind of small business loan you need
Small business loans aren’t all alike and it’s important to make sure you’re getting the right type of loan.
For example, if you need short-term financing, you might consider:
- Accounts receivable financing
- Inventory financing
- Working capital loans
- Merchant cash advance
- Business line of credit
These kinds of financing are designed to cover near-term expenses and be repaid fairly quickly. Short-term working capital loans and lines of credit may or may not require collateral. Accounts receivable financing, inventory financing and merchant cash advances leverage specific business assets. Those are your accounts receivable, inventory and credit card sales respectively.
On the other hand, you might want to lean toward Small Business Administration (SBA) loans or long-term loans if you’re financing bigger growth projects. These kinds of loans can offer higher borrowing limits and longer repayment terms. Equipment loans can have short or long terms, and may be attractive because the equipment itself serves as collateral, typically keeping interest rates relatively low.
3. Fine-tune your business plan
Your business plan is an important part of how to apply for a small business loan, particularly if you’re planning to apply for an SBA or larger, long-term loan. Lenders want to see a clearly laid out plan that shows how you plan to put financing to work and what you expect to get in return.
A good business plan for a small business loan should include:
- Your executive summary
- Business profile
- How much you’re requesting to borrow
- Your plan for repaying the loan
- What you plan to offer as collateral, if anything
- Personal financial statement
- Business financial statement
If you haven’t updated your business plan recently, take time to do that so you’re prepared if lenders ask to see a copy of it.
4. Do you qualify for a business loan?
This is an important question to ask, as there are small business loan requirements you’ll need to meet regardless of what kind of financing you’re seeking. In terms of how to qualify for a business loan, lenders typically focus on these things:
- Personal and business credit history
- Operating history and time in business
- Business industry
- Financial statements including:
- Cash flow and projections
- Profits and losses
- Balance sheet
- Recent personal and business tax returns (past year, at least)
- Recent bank statements (last six months)
Businesses that can’t demonstrate that they have customers, positive cash flow, profits or valuable assets are unlikely to be considered good candidates for a loan.
Small business owner Jesse Silkoff was denied for a loan the first time around because he hadn’t been in business long enough; as he stated, “the lender wanted to see two years of proven income before agreeing to a loan.” Online lenders may have more lenient time-in-business, credit and revenue requirements than banks, but the tradeoff is typically higher rates.
Again, knowing what kind of loan you’re after can help you determine how likely you are to be approved. Here’s a quick look at small business loan requirements for some of the most common financing options:
- Startup loans. If you’re starting a business from scratch, it may be difficult to find a small business loan, as we mentioned earlier. You could look to a loan program like the SBA’s Community Advantage program, which is designed for new for-profit businesses in underserved markets; Originally set to expire on March 31, 2020, the pilot loan program has been extended through Sept. 30, 2022. Business credit cards are revolving and may not require collateral, but they also typically carry relatively high APRs and low credit limits.
- Term loans. Term loans, a lump sum of money you repay according to a set schedule, usually require you to have at least one year in business, though some lenders set the minimum at two years. The minimum credit score required is typically 600 or better, while you may need a minimum of $50,000 to $100,000 or more in annual revenue. If you don’t meet those credit requirements, bad credit business loans are available.
- Lines of credit. A business line of credit, where you typically only pay interest on the amount you use, up to a set limit, may also require at least two years of operating history to get approved. You may need a minimum credit score of 600 and annual revenues of $25,000 to $100,000 or better.
- Accounts receivable financing. Accounts receivable financing is a type of loan that allows you to borrow money against your outstanding receivables. Invoice financing and invoice factoring may be easier to qualify for than other types of financing because lenders or financing companies will take the credit quality of your invoices into consideration. You could read more about the differences between invoice financing and factoring.
Aside from credit scores, operating history and time in business, pay attention to personal guarantee requirements. Signing a personal guarantee means you agree to be personally responsible for the debt. A lender could also ask for a Uniform Commercial Code (UCC) lien, which is essentially a blanket lien against your business assets.
5. Research where to get a business loan
Your next question might be “where can I get a small business loan?” and the answer is, several places.
There are the traditional paths, such as banks or credit unions. Getting a small business loan from a bank or credit union could work in your favor if you have a history with that financial institution. Your bank might even be willing to offer you a discounted rate or more favorable loan terms if you’ve consistently been a good customer.
Online lenders. If you need small business funding quickly, then you may want to consider online lenders instead. Online lenders can offer a variety of loan options, from merchant cash advances and accounts receivable financing to term and equipment loans. You might be able to get approved and receive loan funds in just a few business days, or even faster; however, there may be a catch, in that you may pay more in interest or fees with online lenders if you have less than perfect credit. Looking at all the options can help you decide where to get a business loan.
6. Seek advice
When applying for a small business line, it can help to have some outside perspective. Building relationships with local bankers and accountants can establish a foundation for getting funded when your business is still in the early stages.
“How these professionals treat you and your ideas is a good indicator of how amenable [lenders] may be to a loan request,” said small business consultant Larry Fuschino.
Silkoff, the business owner, recommended having an accountant or another small business finance professional help with comparing the terms of a loan you may be offered, adding that this kind of assistance can save you money and headaches if it means avoiding the wrong kinds of loans.
Aside from your banker, you can get help by reaching out to your local SCORE, the Small Business Development Center for your area or your local Chamber of Commerce. These organizations can help you get going in the right direction if you’re unsure where to get a small business loan or how to apply for one.
7. Compare loan options carefully
If you’ve narrowed down your choices for loans and lenders, be sure to compare the following before making a final decision about which loan to apply for:
- Minimum and maximum borrowing amounts
- APR and whether rates are fixed or variable
- Loan repayment terms
- Loan fees, including origination fees and prepayment penalties
- Collateral requirements
- Personal guarantee and/or UCC lien requirements
- Minimum credit score requirements
- Business requirements, i.e. operating history, revenues, etc.
8. Apply for a small business loan
Applying for a small business loan means getting organized and having your documents ready to go. If you’re ready to pull the trigger on a loan application, here’s what you may need to have:
- A copy of your business plan
- Business bank account statements
- Personal bank account statements
- Business tax returns
- Personal tax returns if you’re a sole proprietor or other type of pass-through entity
- Proof of business registration and licenses
- Employer identification number
- Financial statements, including profit and loss, cash flow and balance sheet
- Proof of collateral if you’re getting a secured loan
- A listing of business assets and liabilities
If you’re applying for a small business loan in-person at a bank or credit union, your lender may ask for paper or digital copies of these documents. When you’re applying online, you should be able to upload copies of your documents through the lender’s application portal. If a lender asks for additional documents, be sure to get those in as quickly as possible to avoid slowing down the approval process.
9. What to do if you’re denied for a business loan
Getting approved for business loans isn’t always guaranteed. If your application is denied, there are some things you can do next, starting with reviewing the reasons for the denial.
For instance, if a low credit score is the culprit, you could work on improving your business and/or personal credit history to increase your odds of approval the next time around. If it’s a too-short operating history, then you may simply have to let some time pass before trying again.
In the meantime, consider other ways to get funding for your business. You might open a vendor line of credit with a company you purchase office supplies from, for example, or apply for a business credit card. Either one could give you access to capital in the near-term while you work on getting your business loan-ready.