Few people are capable of dreaming up the next big billion-dollar business, and even fewer have the money on hand to start realizing that dream. That’s where small business lending comes in.
Credibly analyzed resources from the Small Business Administration, the Federal Trade Commission, and qualified lending institutions to compile this list of ways any business owner can prepare for loan approval.
The SBA advertises that it can approve loans in less than 36 hours for standard loans, but it may actually take weeks from beginning to end for you to actually get funding. Conventional bank loans may be difficult to access and can move slowly as well. Online lending options, however, usually are better options for business owners who need financing quickly, as their approval process takes hours or days as opposed to weeks or months. Today’s small businesses find themselves facing an economic environment that has bewildered even experienced executives and business leaders.
Compared to before the pandemic, far fewer small businesses have taken out loans to help them expand their business in recent years, according to survey data from the Federal Deposit Insurance Corp. The same is true of SBA-backed loans for which fewer applicants have been approved in the last three years compared to pre-pandemic. At the same time, billions of dollars in federal aid has flowed through the regional SBA offices around the country to business owners who have kept employees on payroll in recent years.
Most small businesses, however, now report they’re trying to hire more workers as they concurrently raise prices, according to a February 2023 survey from the National Federation of Independent Business.
And if small business owners aren’t hiring more workers, they’re trying to retain the ones they have as workers continue to feel the pressure of inflation. Nearly 1 in 2 small businesses reported raising pay in February, according to the NFIB.
Loans are one tool businesses may take advantage of to cover costs in uncertain times or expand. Even if today’s high-interest rate environment might scare would-be borrowers, there are options if business leaders shop around and study up.
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Determine the type of loan best suited to your business needs
Businesses can choose among conventional banks, online alternative lenders, and government-backed SBA loans. All come with their own advantages and drawbacks that a business owner needs to consider.
The SBA mainly backs three types of loans, under programs named 7(a), 504, and a “microloan” program. Each loan can legally be used only for certain business activities. The 7(a) loan is the most common and can be used for land, real estate for a new storefront or restaurant, increasing inventory, or covering general operating expenses and recurring seasonal costs. These loans are generally easier to qualify for but may not offer the most competitive terms.
Only some 1 in 10 banks offer SBA-backed loans, which, even if they provide more favorable terms and rates, include a lengthy approval process and can be harder to qualify for.
A conventional bank loan may also come with stringent qualifications such as higher credit score requirements or debt-to-income ratios.
For instance, in February 2023, small business loan approval rates at big banks fell to 14.2%, which makes securing financing tough for the average business owner. However, if you meet the requirements, traditional banks do tend to offer more competitive rates and flexible payment schedules for those who qualify.
Online alternative lenders tend to have double the approval rates as big banks. They generally have less stringent requirements for qualification compared with all the other options, as well as speedy approval and disbursement of cash. However, business owners need to do their homework to make sure they are aware of any hidden fees, less favorable or competitive terms, and higher rates.
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Check your financial well-being
Lending is based on trust, and trust is garnered through a strong history of repayment. Before tapping that next loan, it’s a good practice to check up on your financial well-being. Traditional banks and online lenders will pay attention to your personal FICO score and financial history, whether or not you have a healthy cash flow, how long you have been in business, and at times, your industry.
Generally, you can expect that SBA loans and big banks will have more strict requirements when it comes to financing.
If you find that you’re having difficulty procuring loans due to your credit score or financial history, there may be lenders who offer some sort of financing without checking credit, but the options are limited. The prospect of improving your business financial profile is gradual, but is better for your long-term financial well-being.
For example, Experian recommends not missing bill payments, catching up on past-due payments, and opening new accounts that report to the major credit bureaus as ways to improve your credit score.
If you’re having trouble establishing a healthy cash flow, Investopedia recommends these following tips:
- Analyzing how your inventory moves to see if certain products move slower (and thus aren’t generating cash) than others
- Encouraging customers to pay early
- Sending invoices out in a timely manner and clearly state the due date
Regarding the length of time you have been in business, that can be a roadblock when trying to secure small business loans—new businesses may not have the financial history that lenders are looking for. Generally, traditional banks and online alternative lenders have a minimum threshold they are willing to lend to.
For example, Credibly’s minimum requirement for time in business is at least six months. If there is an urgent need to secure financing, you might turn to crowdfunding, your personal network, or apply for a business credit card.
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Size can matter when it comes to your banking experience
It’s important to note that entrepreneurs report differing satisfaction rates with loans from various-sized banks. Small businesses that bank with and receive loans through small banks reported higher satisfaction rates than those that did business with larger banks, according to a Federal Reserve survey of 11,000 small businesses in 2021. Small businesses that work with online lenders reported a 34% satisfaction rate.
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Know what predatory lending terms look like
The SBA recommends borrowers shop around to ensure the lender they’re working with is providing competitive interest rates and fees. The agency warns that fees from any bank on a loan should not exceed 5% of the loan’s total value. It also recommends speaking with your attorney before signing any loan agreements, even at SBA-approved institutions.
Remember that under the Equal Credit Opportunity Act, lenders cannot deny you a loan based on race, color, religion, national origin, sex, sexual orientation, gender identity, marital status, or the demographics of your clients and customers.
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Prepare your documentation
If you’re looking to fund a startup idea, make sure you also have a business proposal prepared. If you’re looking to fund a currently operating business, you should prepare recent balance sheets and financial forecasts to share with lenders. Bank officials will want to know what you plan to do with the money lent to you and how you will repay it.
SBA loans require a specific form called a Form 1919 along with the other forms a lender may request of you. The form requires businesses to enter information about all general and limited partners as well as owners of more than 20% of the company.
In general, though, you should expect to provide documentation that verifies your identity, shows your cash flows, and provides proof of ownership. Other information you should have on hand are your business bank account details and your Federal Employer Identification Number (FEIN), also known as a business tax ID.
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Give your business ample time
A small business loan can take anywhere from hours to months to be approved depending on what kind of institution you’re borrowing from and the type of loan. It’s a good idea to have a thorough understanding of your financial needs well ahead of when you’ll need them so you have ample time to prepare.
If your mind is set on SBA-backed funding, be prepared to wait. While the SBA may say it can clear your loan in days, it can take longer for the actual lender to get the money to you. Citizens Bank, which operates in 14 states, estimates that a typical SBA-backed loan can take a month and a half to close.
However,if your company is in need of cash immediately, you may want to consider online alternative lending options as well as the SBA’s “Express” loan options. Online lenders typically will provide business owners with access to funds within days as opposed to the weeks and months from SBA-backed lenders and big banks.
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