If you do your homework, getting a loan for a business is not difficult. Understanding your business's requirements and finding the right small-business loan for you can help increase your chances of approval.
In six easy steps, you can get a loan for your business.
1. Determine the type of loan that you will need to finance your business
The type of business loan that is best for you will depend on your goals. In general:
To finance large purchases or business expansions, traditional term loans can be used. These lump sums are paid back over time with interest. SBA loans have high borrowing limits -- up to $5.5 million. A variety of lenders offer tailored products that can be tailored to the needs of growing companies, such as equipment loans or vehicle purchases.
You need funding for your day-to-day expenses. Business credit lines are flexible and allow you to access financing when you need it.
Looking to finance a startup? It can be difficult for entrepreneurs to obtain a traditional loan for their business. However, personal loans and business credit cards can offer good alternatives if your business hasn't been around for long enough to be eligible for a term loan or line of credit.
2. Find out if you are eligible for a loan for your business
There are many places you can obtain a loan for your business, such as banks, microlenders, and online lenders. These questions will help you determine which lender is best suited to your needs to get a loan for small businesses.
What is your credit score?
Each of the three major credit bureaus, Equifax Experian and TransUnion, can provide your credit reports for free. Your credit score can be obtained free of charge from many credit card companies and personal finance websites.
The banks prefer to lend low-rate business loans only to borrowers with good credit scores, 690 or higher.
Nonbank lenders are an option if your credit score is below this threshold. It is easier to get online business loans. Consider small-business loans or microloans for borrowers with poor credit.
How many years have you been in the business?
To qualify for online small-business loans, you must have been in business for at least one year. Most bank loans require at least two years.
Are you making enough money?
For business loans and credit lines, many lenders require that you have a minimum annual income of $50,000 to $250,000.
Consider SBA microloans or business credit cards if your income isn't sufficient to be eligible for these loan products.
3. Calculate how much you can afford to pay
Take a look at the financials of your company, especially cash flow. Then evaluate how much money you can afford each month to pay for loan repayments.
Suzanne Darden, a finance specialist at Alabama Small Business Development Center, states that your income should equal at least 1.25 times all your expenses. This includes your new repayment amount.
Let's say that your company earns $10,000 per month. This is 1.25 times $8,000 worth of expenses. A $1,000 monthly loan payment should be possible if you have $7,000 of rent, payroll, and other expenses.
Online lenders may require weekly or daily repayments. You'll need sufficient cash flow to pay the due date.
4. Deciding whether or not you would like to collateralize the loan
There are two options for business loans: unsecured or secured. Secured loans require collateral from your business, such as equipment or property, which the lender can take if you default on the loan repayments. Although it is risky, collateral can help you get a lower interest rate and increase your loan amount.
Even for unsecured loans, lenders may require personal guarantees. If your company cannot repay the loan, you will personally repay it. In some cases, a lender may also ask for a personal guarantee.
5. Compare small-business lenders
You will want to obtain the best terms possible for your business loan. Other factors such as funding speed may also be important to your company. Different funding sources may prove more beneficial in certain cases than others.
How to obtain a loan for a business from an online lender:
- You lack collateral.
- Time is a precious commodity in business.
- Funding is urgently needed
Online lenders offer small-business loans as well as lines of credit up to $500,000. These loans typically have an annual percentage rate of 6% to 99% depending on the lender, type and size of loan, repayment term and collateral required.
Although these lenders don't have APRs that are as low as traditional banks, approval rates and funding times are much faster than banks. In some cases, even the same day.
How to obtain a loan for a business from banks:
- At least two years in business.
- Good credit is yours.
- Cash is not something you need to do quickly.
Traditional bank options include commercial real estate loans and lines of credit, as well as term loans. These loans can be used to purchase properties or refinance.
The U.S. Small Business Administration offers general loans to small businesses through banks. It also provides microloans, disaster loans, and 7(a) loan programs. SBA also offers a 504 loan program, which helps to finance the purchase of land or buildings through fixed-rate, long-term financing.
If you haven't been in business for more than two years, or don't have consistent income, it can be difficult to get a small-business loan. Many small-business owners end up with no collateral or bad credit, which can lead to poor credit scores.
Although getting funded by a bank can take longer than a loan from online lenders, banks offer the best APRs.
How to obtain a microlenders business loan:
- Bad credit history or no credit history.
- You're a startup.
- A traditional loan is not available.
Microlenders, which are non-profits, typically provide short-term loans less than $50,000. It may take a long time to complete the application.
The loans are also small in size, which is by definition "micro". However, these loans can work for startups and smaller businesses that don't have the collateral or poor credit history to qualify for traditional bank loans.
Accion Opportunity Fund and Kiva are just a few examples. Accompany Capital is another example of a nonprofit microlender.
6. Get a loan for your business
You made it! It's now time to apply for small-business loans.
Compare loan terms and APRs between at least three options. It is the best way to determine the total cost of a loan for a business because it includes all fees and interest rates.
>>> Search for small-business lenders
You can choose from the available loans to qualify, but only if you are able to make regular payments. Gather your application materials for a business loan. These could include:
- Name and address of your business.
- Your tax ID number for business.
- Your business plan.
- Your proposal for a business loan.
- Statements of financial position for businesses.
- Information about the owners of your company.
Credit bureaus do not distinguish between personal and business inquiries. Your credit score can be affected if you use personal credit history when applying for small business loans. This is why it is important to choose your best option.