What You Should Know Before Applying For a Small Business Loan
Small businesses often need additional financing for a variety of reasons. Whether expanding an existing business or purchasing a vehicle, businesses can acquire financing for many different purposes. The process of taking out a loan is straightforward for most business owners, and typically only requires that you decide what the loan is for, settle on an amount you will need, find a lender, and make your business loan application.
1. Understand which loan type best fits your funding need
Business owners have several options when it comes to taking out a loan. There are both secured and unsecured business lines of credit as well as secured and unsecured business loans. There are also small business auto loans, commercial real estate loans, equipment loans, practice solutions loans, and small business administration loans.
Lines of credit
Business lines of credit allow merchants to withdraw money from a revolving credit line versus borrowing a lump sum. Unsecured credit lines require no collateral, though many do require a minimum annual income to qualify. Alternatively, secured lines of credit place a lien on a business’ assets and often also require a minimum annual income, but typically provide a larger line of credit versus an unsecured credit line.
Small business loans can come as both short and long-term loans and like the lines of credit, an unsecured business loan requires no collateral while a secured business loan does.
Auto, real estate & equipment loans
Auto loans are targeted at helping businesses buy new vehicles, while commercial real estate loans help businesses buy land or property. Equipment loans are aimed at helping businesses buy new equipment, which can range from general purpose machines to heavy machinery.
Loans for doctors, dentists & veterinarians
A practice loan is aimed at healthcare businesses and includes loans for dental practices, veterinary practices, and general medical practices.
Finally, small business administration loans are flexible loans secured by the government and can be used for a variety of purposes.
2. How to find the right business lender for your loan
Many small business owners begin their search for a lender with local financial institutions they may already be doing business with, but there are also numerous online lenders that may be worth considering.
Specific organizations exist online to help you find the right lender for your loan needs. For an SBA loan, the Small Business Administration maintains an online Lender Match tool that will connect you with interested lenders. Borrowers can also search for community development financial institutions, which exist to extend financing to small community businesses in low-income communities.
Finally, for minority owners, the National Minority Supplier Development Council exists to support business operations. The NMSDC connects these business owners with supply chains, facilitates the creation of business partnerships, and helps connect certified minority business owners to working capital.
Which lender is right for you will depend on the type of loan you are looking for. Since there are so many types of loans available, there are no universal rules about finding a lender. Rather, each loan will have varying requirements. It’s important to understand those requirements and whether you are able to qualify before applying.
3. What it takes to get approved
Knowing whether you even qualify for a particular loan is imperative to being approved. If you’re uncertain, it’s a good idea to reach out to the lender to learn more about the products they offer and which options may be best for your business finance needs. You’re also going to need to get a bit of paperwork in order, including your name, business address, phone number, tax ID, income details, and a description of your business’ nature.
Importantly, all beneficial owners and controlling individuals of the business need to provide their name, date of birth, residential address, and Social Security number and/or EIN. Foreign-born owners can provide their passport number, the country that issued their passport, and their country of citizenship. Beneficial owners also have to list what percentage of the business they own.
Since lenders consider how long your business has existed, you’ll need to provide documents showing the date your business was established or the date when you acquired the business. You’ll also need to provide your annual net profits and gross sales, existing financial obligations, and the number of people you employ. Not all loans require collateral, so this may or may not be something you need to provide.
To meet the above requirements, be ready to submit both a personal and business income tax return covering the past three years. Also be ready to submit your business’ credit report. Owners who hold more than a 20 percent stake in your business will often have to fill out a personal financial statement, and you will also need to provide your business’ accounts payable and receivable.
For loans requiring collateral, you will need to fill out a collateral document. This document describes the value of both your personal and business property necessary for securing a loan.
Finally, since there are so many types of business loans, the business loan application you fill out will change depending on the nature of the loan. You will have to inform your lender about the purpose of the loan and the amount you are seeking. Afterward, they will determine the type of loan application you need to fill out and whether you need to provide collateral.
The bottom line
Applying for a business loan isn’t as confusing as it may first seem. You simply have to determine how much money you will need, what the loan will be used for, and settle on a lender.