When you apply for a business loan it doesn’t have to be a difficult process as long as you do your homework ahead of time. If you understand your business’s strengths, weaknesses, and what it needs to do to qualify then it will help you find a loan that works for you.
Below we’ve listed how to get a business loan in 6 easy steps.
1. Determine What Type Of Loan Will Work For Your Business
Depending on what your goals are will help you decide what loan is best for you.
If you’re looking for capital expansion or to finance a large purchase
Traditional loans are when you borrow a lump sum of money that you then pay back over a fixed period of time. The rate of interest is determined when you first take out the loan and depending on who you work with you can sometimes borrow up to $5 million dollars. SBA Loans offer this maximum and other borrowers will also help you grow if you need money for specific purposes like vehicle or equipment purchases.
If you are looking to borrow money to finance your day-to-day expenses then you could look at a business line of credit. It’s a flexible type of funding that gives you a certain amount you can borrow (say you borrow a maximum of $35,000) you can then tap into this money whenever you need it. Unlike a traditional loan, you would rarely take out the full amount at one time and instead use it as a cash reserve whenever you need some extra capital.
If You Want To Scale A Startup
As an entrepreneur it can be challenging to get a traditional business loan because you might not have the track record to show your success. You could look at business credit cards or even personal business loans if you don’t yet have a trading history or you haven’t been in business long enough to qualify for a traditional loan.
2. Make Sure You Are Eligible For a Business Loan
You can borrow money from a number of different places including online apps, banks, credit unions or microlenders. Try and answer the questions below to figure out which lender is right for your needs.
Do You Have A Good Credit Score?
If you don’t know what your credit score is you can get it from one of the big three bureaus – Experian, TransUnion or Equifax. You can also find out what your credit score is from some credit card companies or personal finance companies.
Banks want to reduce their risk at all times and so prefer to lend to people with good to high credit scores. You should aim to have a credit score over 690 and above – this is considered an excellent credit history by all credit bureaus.
If your credit score is under 690 then you could look at other options. Online loans can be slightly easier to qualify for and would be an interesting alternative if your credit score is under 690.
You could also look at small business loans for borrowers with very bad credit – microlenders sometimes consider those with bad credit.
When Did You Start Trading?
For most business loans you will need to have been in business for at least one year to qualify for online loans and at least two years to qualify for the majority of bank loans.
Is Your Revenue High Enough?
Depending on what type of lender you work with they will require different revenue levels. You might need to make above $35,000 for some borrowers and others set the limit much higher at $250,000. It all depends on how much you want to borrow and for how long you want to borrow the money. If you don’t currently make enough turnover then you could look at a business credit card or a microloan from SBA.
3. How Much Can You Afford To Pay Back Each Month?
Before you apply for a loan make sure to look closely at the financials of your business – especially when it comes to cash flow. When you look at cash flow you should look at how much you can realistically put towards loan repayments each month without hurting the business.
A general rule of thumb is to try and keep your total income at least 1.25 times the total expenses. You should include your monthly repayment amounts when calculating the 1.25 figure.
If you are borrowing money online then look at what the repayment terms are. Some lenders require daily or weekly repayments so make sure to keep that in mind. It is no use running a monthly cash flow forecast if you have to make weekly repayments.
4. Determine Whether You Want To Borrow a Secured Or Unsecured Loan
Business loans can be either secured (you put up an asset as collateral) or unsecured (there is no collateral). If you are securing a loan against something the bank would typically secure your loan against a property or other types of machinery or equipment. If you fail to repay the loan then the lender can seize the assets from you. It is risky to do this (especially if you’re a startup) but you’ll typically get better rates and terms than with an unsecured product.
Some lenders will require a personal guarantee from you – even if it is an unsecured loan. A personal guarantee means that even if your business fails then you’ll still be liable to pay back the money borrowed from your own pocket.
5. How To Compare Small Business Lenders
Generally, you’ll want to get the loan that offers you the best terms. However, there are other factors that you can consider depending on what your requirements are.
When Should I Borrow Money From An Online Lender?
- When you don’t have collateral to put up
- When you haven’t been in business for long (1-2 years)
- When you need fast cash or liquidity
- You have bad or very bad credit
If you borrow money from an online lender they typically offer loans and lines of credit to a maximum amount of $500,000. Typically the APR (annual percentage rate) ranges from 5% to 100% depending on a number of factors. The factors include how much you want to borrow, for how long, your monthly earnings, the credit history of the borrower, and whether it is a secured or unsecured loan.
Online lenders don’t typically have APRs as low as high-street banks or credit unions but you generally get the money quicker and more people and businesses get approved. You can sometimes get your money on the same day, within 24 hours, or the next business day.
When Should I Borrow Money From A Bank?
- Your business has been running for over two years
- You have a good credit history.
- You don’t need the money immediately
Traditionally banks will offer lines of credit, standard term loans, and then also real estate loans for commercial property aquisition.
You have extra protection with small business loans because the U.S. Small Business Administration guarantees general loan types with the 7(a) loan program. They also offer protection for disaster loans and microloans.
There is also the 504 loan program which helps fund purchases for buildings, equipment, or land and offers this at a long-term fixed rate.
It is difficult to take out a loan from a bank if you have traded for less than two years, you have inconsistent revenue, or bad credit history. You should look at online lenders but should never take out a payday loan if your history is inconsistent.
Getting a loan from a bank typically takes the longest period of time but typically offers the lowest APRs.
When Should I Borrow Money From A Microlender?
- You have bad or very bad credit history
- You have just started your business
- You can’t get a loan from a bank or online lender
A microlender is typically a nonprofit that makes short-term loans of amounts under $35,000 – $50,000. When applying for a microloan you will usually need a detailed business plan, cash flow sand balance sheet statements, and a detailed description of how you will spend your money. This does make it a longer process than other options.
Even though it is called a microloan this type of loan might work for other size businesses that can’t qualify for traditional bank loans for a number of reasons.
6. Apply For Your Business Loan
After you worked your way through these five steps you should be ready to put your application in. Before you apply you should always look to compare a range of options (minimum 2-3) to see which is offering the best terms. The APR is a great way to compare loans because it includes all loan fees and also includes the interest rate.
Once you’ve seen which loans you qualify for apply for the one with the lowest APR and the best terms for your own personal circumstances (including whether you can pay the monthly loan repayments).
To apply you will need to be
- A U.S citizen
- 18 years or older
- Have a cell phone
- Able to afford monthly repayments
- Have an open business checking account to receive your money
- Business Tax ID
- Business Plan
- Loan proposal
- Financial statements
- Personal details about the owners and other shareholders
Keep in mind that the credit bureaus don’t differentiate between a personal credit check and a business credit check. If you are applying and using your personal credit history then note that this will leave a hard mark on your credit file. This means that you should only apply for a loan where you are confident that you will be approved.
FAQs for Business Loans
If you have never applied for a business loan before you’ll need a good credit rating, strong business financial performance, at least 12 months in business and sometimes you’ll need to offer something as collateral if you’re going for a secured loan. If you use an online lender they are less exacting about their requirements but you still need to tick all of their boxes.
It can be difficult to get a loan if you have bad or poor credit but there are ways to do it. We have seen lenders work with those with very bad credit as long as you have strong cash flow and business performance.