How to Get a Business Loan

How to get a small business loan

Obtaining a small business loan is often a critical step when starting and scaling a business. After all, financing provides business owners with the capital they need to launch their business, maintain cash flows during tough times, or expand their operation. However, obtaining funding as a small business can be a complicated procedure, if you don’t prepare. Simply by understanding the application process, having the right documentation available, and researching the best loan options available to your business, you can make obtaining a small business loan a much easier task.

1. Determine How Much Capital You Need

When approaching a small business lender, every business owner should have a strong idea of not only how much money they need, but exactly what they plan to use the capital for. Having a defined business plan throughout the loan process will ensure that you avoid borrowing more than you actually need and paying interest on undeployed capital, or borrowing too little to complete your growth initiative and worsening your business’s debt.

Similarly, to ensure that your business will use the funds responsibly, most lenders will want to see a defined plan for how you plan to use their capital. Whether it be for business expansion, marketing initiatives, inventory financing, or stabilizing cash flows during seasonal fluctuations, you’re more likely to be approved for a loan if you present potential lenders with specific needs and a targeted plan for the future.

Why Get a Business Loan?

Before applying for a loan or financing it’s necessary to consider the purpose for obtaining additional capital. Without a plan in place, you may squander your chance at growth or stability. Having a clear understanding of how the financing will help you achieve your business goals can ensure that the money is well invested. By mapping out exactly how you plan to use the funds, you should arrive at an understanding of exactly how much financing you need.

If you plan to use the capital to expand your business, tally up all of the associated costs plus any additional liquidity you may need to support your growth initiative to find a suitable number. If you are looking to stabilize cash flows during the slow season, spend some time projecting future revenue and current cash shortages to ensure that you apply for the right sum. By focusing on how the money will be used, you should be able to pinpoint the most helpful amount of funding for your business, which will ensure that you maximize its impact.

2. Evaluate Your Business’s Financial History

Before approaching a small business lender, spend some time researching the variety of loans and financing options that are available to your business. To determine which loans and financing your business qualifies for, you’ll first need to evaluate the financial history of your business as well as a number of other factors such as your credit history, length of time in business, and monthly cash flows.

Credit Score

One of the first factors that small business lenders will examine in your financial history is your credit score. Your personal credit score is presented as a number between 300-850, and it reflects your “creditworthiness” in the eyes of lenders. Your personal credit history, a compilation of your existing account statements, total levels of debt, payment history, and many other factors, is crucial in determining their creditworthiness, credit score, and ability to meet the financial obligations of a loan. The more favorable your credit history, the likelier you are to return a business lender’s investment in your company. However, it is still possible, through a number of ways, to secure loans with bad credit.

Length of Time in Business

Another factor to consider when applying for small business loans is your length of time in business. Many lenders require that you have a certain minimum amount of experience in business before you can obtain a loan, and most debt financing options are not available to those just starting their business. With a short operating history, it is difficult for investors to predict your business’s probability of repaying their loan, as your expected revenues and typical cash flow are not yet defined. Most lenders tend to require 6+ months in business before issuing loans, and many reserve their most attractive offers for those with a stable history of operation.

Cash Flow

In addition to your business’s operating history, lenders will be particularly interested in your typical cash flow and monthly revenue. Lenders will want to see a consistent cash flow and steadily performing monthly revenues in order to determine if your business will have the necessary cash on hand to meet its financial obligations.

3. Compare Different Types of Business Loans and Financing

Based on all the above information, your business needs and financial history, your small business will have a variety of loan and financing options to choose from. Some are easier to qualify for than others, some have longer repayment schedules with lower interest rates, and others have more flexible approval amounts and repayment structures. To make the most of a loan or other financing solution, it’s important to pursue the funding options that best suit your business needs at the moment.

Unsecured Term Loans

If you are a small business owner with a strong credit rating, favorable credit history, and healthy business, an unsecured term loan may be your best option. Unsecured term loans are issued by lenders that are confident in a business’s ability to complete monthly payments. Because they do not require that you “secure” your loan with collateral, unsecured term loans often come with higher interest rates, and are issued to the healthiest operations. For example, an established restaurant owner seeking loans for working capital in order to continue paying their wait staff throughout the pandemic may apply for an unsecured term loan.

Merchant Cash Advance

For small business owners with a weaker credit history, or those with fluctuating revenues that seek short-to-mid term financial support, a merchant cash advance is an ideal financing option. Unlike term loans, remittances on cash advances are determined by future revenues. Rather than paying back a fixed sum each day, week, or month, your business returns a set percentage of credit and debit card revenues each month, ensuring that you are not stuck paying more than you can afford each month.

SBA Loans

If your small business is in need of longer-term financing and assistance, SBA loans are a strong option. Contrary to what the name suggests, SBA loans are not actually issued by the Small Business Administration. These loans are offered by private lenders and are partially secured by the SBA. In order to incentivize lenders to offer favorable financing to small businesses in particular, the SBA secures these loans with the requirement that long repayment terms, lower monthly payments, and capped interest rates are offered to business owners. These factors make SBA loans a great choice for small businesses in need of long term financing, however, they are considerably more difficult to secure as a business owner, and are not a reliable source of funding if your needs are immediate, as SBA loans may take months to approve.

Line of Credit

A line of credit can be a fantastic solution for business owners who are tight on working capital, need to stabilize cash flows, or could benefit from access to emergency funds. Unlike a term loan, which is issued with specific payment terms and monthly payments, a business line of credit offers borrowers a maximum credit limit which they can draw from as needed., For example, a line of credit with a maximum draw of $250,000 permits a borrower to withdraw funds as needed until that limit is met, with interest paid only on the amount of capital that is used. Once the borrowed amount is repaid, you typically regain access to draw from the full $250,000.

Access to a line of credit would allow your business to stay adaptable to necessary changes in payroll, necessary increases in working capital, or split-second business opportunities through flexible withdrawal options.

Secured Loans

Secured loans, which require that borrowers pledge some sort of collateral (“security”) to a lender in the case of default, are a suitable choice for small business owners with savings or assets, who seek lower interest rates or larger loan amounts than would be available through unsecured loans. 

Common examples of secured loans come in the form of equipment financing, as physical machinery is provided to businesses with the guarantee of payback over the equipment’s lifetime. If the borrower is unable to keep up with payments, the lender receives ownership of the machinery used as collateral. Invoice factoring, wherein business owners sell unfulfilled invoices to a lending firm in exchange for upfront funding is also a form of secured financing. When the invoices are paid by customers, the lending firm takes a fee and returns the remaining sum to the business. 

Secured loans serve the long term growth of your operation, and often come with more favorable terms for borrowers than alternative arrangements as pledging collateral reduces the lender’s risk.

Business Credit Cards

Business credit cards, like consumer credit cards, are available to small business owners that seek access to a revolving line of credit to meet their company’s short term capital needs. Owners, and employees with access to the business card, may use credit to make purchases and withdraw cash at a moment’s notice. Just like consumer credit cards, your business card will require payments on a monthly basis, with the penalty of interest payments for each deadline missed. For this reason, business credit cards are not necessarily a long-term financing option for small businesses, but a means of extending the spending abilities of the business on a day-to-day basis

4. Find the Best Business Lender

Before you apply for a loan, it is important to select not only the right loan options but also the right lender. Each lender has different strengths and weaknesses, any of which may affect the ability of your business to stay afloat. Each lender has its own method for measuring risk and underwriting your financing, and each has its own policies regarding approval and payment windows. Your best fit depends on how urgent your needs are, what type of financing you need, and how your business stacks up to a lender’s criteria.

Traditional Banks

Traditional Banks are most favorable for small business owners with established businesses, positive credit history, and the ability to secure their loans. If you meet these requirements and are willing to wait a month or longer to access your funds, the lower interest rates and monthly payments offered by many traditional banks may serve your business well.

Online Lenders

If your business is in need of funding ASAP, a traditional bank may not do the job. Instead, looking to online lenders, which often provide a larger variety of financing options and a shorter approval process than standard banks, may allow you to find the right financing for your business and to access that financing at a quick turnaround rate of a few days.

SBA (Small Business Administration)

The Small Business Administration does not actually finance loans, however, their guaranteed SBA loans offer low interest rates and longer repayment periods for approved borrowers. SBA loans can be a great way to secure long term financing at a low interest rate, but their strict requirements and long approval process make securing an SBA Loan a months-long process, so SBA Loans may be a difficult option for borrowers in immediate need.

5. Gather Required Documents

Once you’ve determined which loans you hope to pursue, and through which lenders, you should prepare some vital documents to present to your loan officer. While each lender will ask for different materials, it’s likely that you’ll need to present some combination of the following: 

  1. Personal and business-related tax returns
  2. Personal and business-related bank statements
  3. Business-related financial documents, including a cash flow statement
  4. A business plan

6. Submit a Business Loan Application

Once your materials have been collected and your desired lender has been decided on, you’ll need to connect with a loan officer and formally submit your application for a small business loan. For more information on how to select the right loan for your business, and how to connect with loan officers dedicated to your application, visit here.

Author Bio

Jeffrey Bumbales
Director, Marketing & Strategic Partnerships