A business loan may help you develop your operations, pay for day-to-day expenditures, and buy equipment or supplies. If you’ve never applied for a business loan before, you may be confused where to start or what paperwork you’ll need.
In five simple phases, this article will help you through reviewing your alternatives and preparing your business loan application.
1. Determine the reason for your financial need.
Small company loans are available in many different forms and sizes. Determining why you want funds may assist you in selecting the most appropriate loan. Here are a few scenarios you could come across:
- Purchase new equipment. Equipment loans are available from a small number of lenders. This loan is intended to assist you in purchasing business equipment, such as machinery or office furnishings. The lender has the ability to confiscate the equipment as collateral for the loan if you don’t pay it back.
- Borrow a little amount of money. Consider applying for a microloan if you just need a modest quantity of money. The Microloan program of the United States Small Business Administration (SBA) permits qualifying applicants to borrow up to $50,000. Microloans are also available through non-profit groups such as Kiva and the Women’s Microfinance Initiative.
- Make a business. It may be difficult to locate a lender willing to provide you with a startup loan since most lenders have minimum time in company criteria. You may need to apply for a microloan or a business credit card if you’re just starting started. Applying for a business credit card may be simpler than applying for other forms of company loans since acceptance is dependent on your personal credit score.
- Pay for the company’s day-to-day operations. A working capital loan, which is a short-term loan used to meet everyday expenditures such as rent and wages, might help you deal with short-term cash flow issues.
- Take out a loan only if you really need it. If you don’t know how much money you’ll need, a business line of credit can be a good option. After a lender grants you a line of credit, you may withdraw cash up to a certain amount to cover company expenses, and you just pay interest on the amount you borrow.
2. Determine Your Eligibility
Despite the fact that company loan criteria differ, while examining your small business loan application, lenders are likely to look at the four factors outlined below:
- Credit rating. A lender will consider both your personal and business credit ratings when you apply for a business loan. They assist the lender in determining your likelihood of repaying your loan. In general, the better your credit score is, the more likely you are to get approved for a loan with a low interest rate.
- It’s possible that a personal guarantee and/or collateral may be requested. Some lenders need collateral, which is anything of value that the lender has the right to confiscate if you fail on the loan. Some lenders may additionally want a personal guarantee, which means you must put up personal assets as collateral to secure the loan, such as money, property, or other valuables.
- Time is money in the corporate world. A conventional bank would typically demand a company to have been in business for at least two years, but an internet lender would often just require one. Don’t be disheartened if you’ve just been in business for a year or fewer. Applicants with a six-month company history may be considered by certain internet lenders.
- Revenue was earned during the year. It’s also a good idea to look at your yearly sales figures. Before applying, talk to a lender about the terms and conditions, and analyze your company’s finances to determine whether you can satisfy them.
3. Small Business Financing Alternatives
Small company loans may be obtained from a number of sources. The following are three of the most common types of lenders.
- You may discover lenders on the internet: internet financing options for small company entrepreneurs include term loans, merchant cash advances, lines of credit, and microloans. According to the Federal Reserve’s 2019 Small Business Credit Survey, internet lenders had greater loan acceptance rates than conventional banks in 2019—80 percent vs. 74 percent, respectively.
Term loans, merchant cash advances, lines of credit, and microloans are some of the internet financing alternatives available to small business owners. Internet lenders have higher loan acceptance rates than traditional banks in 2019, according to the Federal Reserve’s 2019 Small Business Credit Survey—80 percent vs. 74 percent, respectively.
However, there are a number of drawbacks to utilizing an internet lender to get a business loan, including higher interest rates than a regular bank.
- Financial institutions with a long and renowned history: many of the same sorts of business loans are available from both traditional banks and internet lenders. The primary benefit of approaching a bank for a small business loan rather than an internet lender or microlender is that banks sometimes provide cheaper interest rates to qualified candidates.
One downside of going to a bank for a business loan is that the requirements are usually more severe. You’ll have a hard time qualifying if you don’t have a co-signer—someone who agrees to repay the loan if you don’t pay your bills—and you have a negative personal credit score (a FICO score below 580).
Long wait times were the most dissatisfying aspect of a 2019 SBCS research, so traditional banks may not be the greatest choice if you need cash right now. SBA loans backed by a bank, for example, might take weeks or months to complete.
- Microlenders are often non-profit organizations that give qualifying applicants with microloans of up to $50,000 to help small company owners who do not qualify for standard loans. The regulations of microlenders are usually less severe.The microlender Kiva, for example, does not need a minimum credit score. Candidates are instead picked on the basis of their “social capital.” You must collect a particular number of individuals to give money to you through Kiva’s platform before your loan request is made public on their website.
4. Gather all of the necessary papers.
Gather the appropriate documents once you’ve worked out your financing alternatives. The following components are likely to be sought by a lender:
- Tax returns for individuals and businesses are accessible.
- Licenses for businesses
- Incorporation documents
- Bank statements, both personal and business
- Statements of profit and loss
- Earnings Statements
- a promotional strategy
- The leasing of a building
Before applying, check with the lender to see what papers are required.
5. It’s time to send in your application!
The last step is to submit your application for small business funding. You may do this online or in person, depending on the lender you want to deal with.
The following information might be useful to a lender:
- What is your first name?
- The company’s name is
- You are assigned a number by the Social Security Administration (SSN)
- Loan amount desired
- The goal of the loan
- The Tax Identification Number (TIN) of a business
- Yearly Earnings