Table of contents
- 1. Determine why you need financing.
- 2. Make Sure You’re Eligible
- 3. Evaluate Business Loan Options
- 4. Gather the Documents You’ll Need
- 5. Fill up and submit your application
A business loan may help you develop your operations, pay for day-to-day expenditures, and buy equipment or inventory. If you’ve never applied for a business loan before, you may be confused about where to start or what paperwork you’ll need.
In five simple stages, this article will lead you through the process of reviewing your alternatives and preparing your business loan application.
1. Determine why you need financing.
There are several types of small company loans. Determining why you want funding can assist you in selecting the appropriate loan. Here are a few examples of typical scenarios:
Purchase new equipment
Equipment loans are available from certain lenders. This loan is intended to assist you in purchasing business equipment such as machines or office furnishings. Because the loan is secured by the equipment, the lender has the right to confiscate it if you don’t pay it back.
Borrow a little sum of cash
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. In addition, non-profit groups such as Kiva and the Women’s Microfinance Initiative provide microloans.
Create a business
It might be difficult to locate a lender willing to provide you with a startup loan for a new company since most lenders have a minimum time in business criteria. You may need to apply for a microloan or a company credit card if you’re just starting started. Because acceptance is dependent on your personal credit score, you may find it simpler to apply for a business credit card than for other forms of company loans.
Pay for the day-to-day running of the business
A working capital loan, which is a short-term loan intended to fund everyday expenditures such as rent and wages, may help you deal with short-term cash flow issues.
Borrow money just when you need it
A company line of credit might be an excellent alternative if you don’t know the precise amount you need to borrow. You may withdraw cash up to a set amount to meet business expenditures once a lender grants you a line of credit, and you just pay interest on the amount you borrow.
2. Make Sure You’re Eligible
Although business loan criteria differ, lenders are likely to evaluate the following four factors when considering your small company loan application:
A lender will look at your personal and business credit ratings when you apply for a business loan. They assist the lender in determining the chances of you repaying your loan. In general, the better your credit score, the more likely you are to be approved for a loan and to be offered a low-interest rate.
Personal guarantee and/or collateral
Some lenders demand you to put up collateral, which is anything of value that the lender may 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 for the loan, such as your money, property, or other valuables.
Time is money in the corporate world
A conventional bank would often demand a company to have been in existence for at least two years, but an internet lender will typically just require one year. Don’t be disheartened if you’ve just been in business for a year or fewer. Some internet lenders may accept eligible candidates with six-month company history.
Revenue during the year
Your overall yearly sales are also a significant consideration. Ask a lender about the conditions before applying, and evaluate your company finances to determine whether you fulfill them.
3. Evaluate Business Loan Options
Small company loans may be found in a variety of locations. Three of the most frequent kinds of lenders are listed below.
Lenders on the Internet
Term loans, merchant cash advances, lines of credit, and microloans are among the lending options available to small company owners via online lenders. 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.
One explanation for this is that internet lenders’ standards are typically less severe than those of conventional banks. As a consequence, if you have bad credit, you could find it simpler to obtain acceptance for a business loan from an online lender. Furthermore, internet lenders sometimes have a far quicker turn-around time—some may even provide cash the same business day.
However, taking out a business loan with an internet lender has a number of drawbacks, including higher interest rates than a conventional bank.
Banks with a long history
Many of the same sorts of business loans are available from traditional banks as well as internet lenders. The major benefit of applying for a small business loan via a bank rather than an internet lender or microlender is that banks often provide cheaper interest rates to well-qualified candidates.
One downside of asking for a business loan via a bank is that the qualifying standards are frequently more strict. Without a co-signer—someone who agrees to repay the loan if you fail to fulfill your payment obligations—if you have a negative personal credit score (a FICO score less than 580), you will likely have a difficult time qualifying.
According to a 2019 SBCS poll, applicants were most disappointed by extended wait periods, so traditional banks may not be the greatest choice if you require immediate access to cash. SBA loans obtained via a bank, for example, might take several weeks to months to complete.
Microlenders are primarily non-profit organizations that give microloans of up to $50,000 to qualifying applicants, with the goal of providing capital to entrepreneurs who do not qualify for standard business loans. Microlenders’ qualifying standards are frequently less severe.
The microlender Kiva, for example, does not need a minimum credit score. Rather, it selects candidates based on their “social capital.” Before your loan request gets public on Kiva’s website, you must obtain a particular number of individuals to give you money via their platform.
Calculate Your Payments using a Business Loan Calculator
4. Gather the Documents You’ll Need
Gather the needed paperwork after you’ve figured out your loan alternatives. The following elements are likely to be requested by a lender:
*Tax returns for individuals and businesses
*Licenses for businesses
*Bank statements, both personal and commercial
*Statements of profit and loss
*Statements of Income
*a business strategy
*Lease on a building
Before you apply, check with the lender to see what papers are required.
5. Fill up and submit your application
The last step is to submit your application for a small business loan. You may do this online or in person, depending on the lender you want to deal with.
Here’s what a lender would want to know:
*Your given name
*Name of the company
*Number assigned by the Social Security Administration (SSN)
*Loan amount desired
*The goal of the loan
*Tax ID for a Company
After you’ve submitted your application, you’ll have to wait for a response. If your loan is authorized, you will be sent a loan agreement to sign before receiving money or a line of credit from which you may draw.