Funding a business is often one of the greatest challenges for an entrepreneur. Your chances of getting approval on a small business loan depends on the lender’s requirements and how well you meet them, so applying with little to no preparation risks denial.
Experts at Forbes Advisor offer their guidance and the five steps you need to follow to secure a small business loan.
1. Consider Why You Need a Loan
There are various types of small business loans, some of which will be more suitable based on your financing needs. For instance, if you require more equipment for your business, such as computers and printers, you can apply for an equipment loan. However, the lender can seize any equipment you finance through the loan if you fail to repay because the asset serves as collateral.
Alternatively, you can apply for a working capital loan, which you can use for business operating expenses, such as payroll. You can even apply for a microloan if you only need to borrow a small sum.
These are just some of the options that you can choose from, so it’s essential to consider what you need most before you start browsing for loans.
2. Evaluate Your Eligibility
Your personal and business credit score is one of the main factors lenders will take into consideration. A higher credit score increases your odds of approval and receiving a low interest rate.
Additionally, lenders may require you to pledge collateral, meaning a valuable item like equipment or real estate, that the lender can seize if you default on the loan. Lenders also typically require a personal guarantee, which means you legally agree to repay the loan with your personal assets if the business cannot.
Lenders also look at the amount of time you’ve spent in business. A traditional bank will typically require two years of operation, but an online lender may accept businesses that have been in business for as short as six months to one year.
Annual revenue is another consideration for lenders, so it’s wise to find out their requirements for annual sales, typically $100,000 to $250,000, and then assess your business to see if you qualify.
3. Compare Lending Options
Thoroughly research and compare lenders to ensure you find the best business loan. Term loans, microloans, and lines of credit are just some of the loan products that online business loan lenders offer. Requirements for online lenders tend to be less strict than traditional banks, so approval is typically easier. Plus, online lenders may offer funding as fast as the same day you’re approved.
Traditional banks offer a lot of the same loans as online lenders, but you may find it more difficult to qualify due to stricter requirements. In some cases, like with a low credit score, you may need a co-signer who will repay the loan if you fail to do so. However, you may land lower interest rates with this option and secure a loan that meets your needs. This may not be the most suitable option if you need quick funds, as banks tend to be slower in this aspect than online lenders.
Another option is microlenders that can offer microloans up to $50,000, which is ideal for those who don’t qualify for traditional business loans as the requirements tend to be more flexible. Some microlenders approve you based on social capital instead of your credit score, which involves financial contributions from outside of the business.
4. Prepare the Required Documentation
The usual required documents for a loan consist of a business plan, a minimum of 12 months of personal and business bank statements, personal and business tax returns for at least two years, and any details about current and past business loans.
In addition, you will usually need to provide copies of applicable business licenses and legal documents, articles of incorporation, profit and loss statements, financial statements, and a building lease. It’s wise to check with your preferred lender before applying to ensure you have the required documentation prepared and up to date.
5. Submit a Formal Loan Application
Once you’ve researched multiple suitable lenders, submit a formal loan application online or in person, depending on the lender.
You will normally need to provide the lender with your name, business name, and Social Security number, as well as your desired loan amount and purpose, business tax ID, and annual revenue. If you’re approved, your funds will be issued once you have signed a loan agreement. You can always contact customer service with any questions if you have any uncertainty.
“Diving straight into a small business loan application without taking steps to prepare can be overwhelming and lead to difficulties acquiring the desired loan,” says a spokesperson from Forbes Advisor. “Following these simple steps, such as thoroughly researching lenders and checking your credit profile, could be all that you need to ensure that you don’t pay more for your loan than necessary as well as avoiding a lengthy process.”
