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How to Get a Business Loan in 5 Steps

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A small business’s needs and opportunities can vary dramatically, and so can small business loans. To get a small business loan, you should match your business needs to what you can qualify for and comparison shop online. Before you start filling out loan paperwork, learn how to get a business loan in five steps:

1. Determine what type of funding you need

Whether you’re looking for funding to buy commercial real estate or simply need working capital to tide your business over in a seasonal lull, there are many types of business loans available. Answering these questions will help you nail down what and what type of loan you should be looking for and increase your chances of approval.

Do you want the funds upfront or on a revolving basis?

Business loans can come as an upfront lump sum of cash or as a credit line that you can draw from. Term loans provide you with a lump sum of cash, which might help you make a big purchase upfront. By contrast, a line of credit may be more suitable for your business needs, if you’re looking for flexible funding that allows you to withdraw only the funds that you need and then borrow again.

How much do you need to borrow?

The amount you’re looking to borrow will also help you narrow your options. You could find a microloan for as little as $500, while SBA loans offer up to $5.5 million. If you’re looking to buy business equipment, such as computers, vehicles or large machinery, an equipment loan may enable you to finance the entire cost of the equipment.

How soon do you need the money?

Different loan types have different timelines to funding. If you’re looking for funds to cover an emergency expense, then an SBA loan is probably not going to be an ideal option. Although it comes with comparatively lower interest rates, funding may take two months or longer. But, if you’re able to wait a bit longer for the funds, then you may have more options available.

2. Identify what you qualify for

After you’ve determined why you need a business loan and matched it to the types available, it’s important to take a step back and evaluate what you qualify for. The following factors are common eligibility criteria for business loans:

Credit: Do you need a lender that offers bad credit options?

Most business lenders will look at your credit history to help assess your risk as a borrower. To qualify for the best rates, your personal credit score should be 670 and above. But if your credit score is lower, bad credit business loans may be an option to consider. Be prepared to offer collateral and/or pay a higher interest rate as a tradeoff, though.In addition, businesses have separate business credit scores, which you build by responsibly opening accounts with vendors and paying off invoices in a timely manner. Building your business credit is helpful because it helps to separate your business finances and protect your personal credit.

Collateral: Can you pledge assets to secure your business loan?

Collateral is an asset — often real estate or physical equipment, though it could also be cash — that acts as security for a loan. If you default and can’t make payments, the lender can repossess your collateral as a form of payment. If you’re willing to offer collateral to get a secured business loan you may get offers with lower interest rates and possibly longer repayment terms. Common types of secured loans include equipment loans and commercial real estate loans, but even lines of credit and term loans can be secured.

Capacity: What’s a comfortable repayment?

When determining your repayment, remember that you’re going to have to pay the amount you borrowed — called the principal — plus interest and any fees. Use a calculator, such the one below to estimate your loan payments and determine how long you may need to borrow the funds.When evaluating your repayment capacity, make sure to check with lenders on the payment frequency. While traditional banks tend to offer standard monthly repayments, some online lenders require weekly or even daily repayments. In addition, some types of funding — like a merchant cash advance — frequently require repayment in the form of a percentage of daily or weekly credit card sales. Whatever the repayment schedule is, you’ll want to make sure you can keep up.

Time in business

Although it’s not one of the “three Cs” mentioned above, the length of time in business is often another factor determining eligibility for a business loan. Lenders have different requirements for how long your business needs to be in operation, with some as short as six months and some more than two years, so you’ll want to check. If you don’t qualify yet, you could wait until you become eligible or look for lenders who have lower requirements.

3. Gather the required documents

Before you apply for a business loan, your lender will likely request certain documents. Although specific requirements may vary by lender, some commonly required documents are a business plan, your personal and business tax returns and a balance sheet. Different lenders or loan types may require additional qualifications. For instance, the SBA enforces small-business size standards and may request a vendor quote for equipment loans.Your lender will review these documents during the business loan underwriting process — the phase is when a lender reviews your application and assesses how much of a risk it is to lend money to your business. By having these documents at the ready, you’ll help to speed the process along.

4. Comparison shop

There’s a lot of options for business loans, so comparison shopping is one of the best methods to reduce your costs. When you look online at what lenders are offering, shop around for the best fees, interest rates and repayment terms available to you before you apply. Our catalog of small business lender reviews is a great place to start comparing options.Remember that each lender carries its own terms. As a result, some lenders might be better for you than others. Plus, as you apply, be sure to note whether the lender makes a “soft” or “hard” credit inquiry — soft inquiries generally won’t harm your credit score when you apply, but a stream of hard inquiries can.

5. Apply and review offers

After you’ve decided what types of funding you’re looking for, know what payments you can afford, gathered required documents and compared rates and terms, submitting your application is the final step. Applying for online business loans is often quick and automated — you may receive immediate approval if you meet the requirements. On the other hand, if you’re applying with a traditional bank, you may need to visit a physical branch to apply and the Meanwhile, applying with the SBA or a traditional bank is generally more time-consuming, however; time to funding may take a few days to two months.When you receive an offer, take a second to breathe, then step back to review it. If you get multiple offers, you’ve got the higher ground and can choose the best one. Here’s what to look at:

  • Total cost. Don’t just look at the interest rate; take fees into account.
  • Amount and term. Does the loan offer as much as you want for as long as you need?
  • Repayment. How quickly do you need to start repaying the loan and are the payments manageable?

Frequently asked questions

To qualify for a business loan, traditional brick-and-mortar-banks often look for two years in business. However, online lenders tend to have more lenient eligibility requirements, with some online lenders offering startup business loans to businesses in operation for six months or less. You may be able to improve your likelihood of getting a business loan as a startup by pledging collateral for the loan or signing a personal guarantee, which holds you as the business owner personally liable for the debt.

If you have a low credit score or your business is relatively new, it can be difficult to obtain a business loan. You may be able to improve your chances of approval if you have an existing relationship with the financial institution. Consider opening a business bank account to establish a relationship for future business financing needs. Another way to improve your chances of approval is to check your credit report before you apply. If you discover an error on your credit report, dispute it. While the disputing process can vary by the credit agency, most investigations will need to finish within 30 days.

If you decide it’s not the right time to get a business loan, there are other funding options you can consider. Crowdfunding platforms like GoFundMe allow you to raise funds from the public, but they may collect a fee to use their service. You can also consider bootstrapping, which is when you use your own savings to fund your business. Finally, you could consider a personal loan to fund your business. While personal loans may be easier to obtain, they don’t help build your business credit. Plus, business loans may limit your personal liability if you’re unable to pay and default on the loan.

Business owners with credit scores of 670 or higher are more likely to qualify for the most competitive interest rates on business loans. However if your score falls below that or you have limited credit history, business loans for bad credit may be available. These lenders tend to place less emphasis on creditworthiness if your business has a steady stream of revenue and if you’re willing to offer collateral, such as equipment or real estate, as security for the loan. However, be prepared to pay a higher interest rate as a tradeoff for getting a business loan with a poorer credit.

The length of time it takes to get funding depends on the lender, type of loan you’re seeking, and review process. Some online lenders offer same-day business loans, which may give you access to the funds as soon as 24 hours after approval. On the other end of the spectrum, SBA 7(a) loans can take 60 to 90 days from the time you submit your application to the time the money is in your hands. Although there may be exceptions, if you’re looking for fast funding, be prepared for steeper interest rates or fees.

 

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