When you start the process of getting a business loan, you need to figure out why you need the money and how the loan will help your business. Next, you have to decide on the best loan for you. After that, you have to choose the best lender that offers costs and terms that suit your situation. Then you have to gather all the information to see if you qualify for the loan. Finally, you have to get your documents together so you can apply.
While it’s difficult to navigate your way through a small business loan, when you have a better understanding of how it works, you will have an easier time getting accepted. Get to know more on what to know about business loans so you’re fully prepared for the process.
Figuring out why you need a loan
There are a number of reasons why you might be considering a business loan. This can include:
- Wanting to start a business
- Wanting to grow your business
- Needing to cover day-to-day expenses
- Funding new research and development
- Hiring new employees
- Expanding your office space
- Enhancing sales and marketing efforts
- Growing into new territories
- For a safety cushion
Different types of business loans
Along with different reasons why you need a loan, there are a variety of business loans available. Your options vary depending on the length of the loan, your business needs, and the specific terms you’re looking for. Following are a few of the options you have available.
- Small business line of credit: With a small business line of credit, you have access to your funds from the lender as you need them. There is a cap on how much money you have available in your line of credit, but it’s useful for covering unexpected expenses and managing cash flow. There’s usually a fee for setting up the line of credit, but you don’t have to pay interest until you draw money. Additionally, you typically have to renew a line of credit every year. If you don’t renew, you have to pay back the money you took out in full at that time.
- Small business term loans: A small business term loan is for a set dollar amount and used for growing or operating a business. You pay interest monthly, and the loan can last anywhere from six months to three years. Additionally, you can have secured or unsecured term loans and fixed or variable interest. This type of loan is ideal for a business that has a large one-time expense or needs capital to expand.
- Small Business Administration loans: Some banks work with the U.S. Small Business Administration (SBA) to offer low interest rate loans. These loans come backed and guaranteed by the SBA, meaning the repayment terms and interest rate are more favorable than most loans. The loan amounts can range anywhere from $30,000 to $5 million. However, keep in mind that the application process for an SBA loan is time-consuming and there are strict requirements small businesses must meet in order to qualify.
- Working capital loans: A working capital loan is good for companies that want to finance daily operations. Companies can use this type of loan to cover gaps in revenue and expenses due to seasonality or other circumstances. While some companies can get unsecured loans, a company with little or no credit history will have to provide a personal guarantee or pledge collateral for the loan. Working capital loans have amounts that range from $5,000 to $100,000 and tend to have short repayment periods that are between 30 days and one year.
- Accounts receivable line of credit: An accounts receivable line of credit is a credit secured by the company’s accounts receivable (AR). This type of loan lets you get cash immediately, depending on your AR level. The interest rate is variable, and the line of credit gets paid down as the AR gets payments from your customers.
- Equipment loans: If you’re looking for a business loan to buy equipment, an equipment loan is the ideal choice. This type of loan requires a down payment of 20 percent, and interest is variable or fixed and usually paid monthly. The equipment is collateral for the loan, you can borrow amounts anywhere from $5,000 to $500,000, and the loan repayment period ranges between two and four years. You can use an equipment loan to buy software, vehicles, and business equipment.
Available business loan lenders
Once you know what type of business loan you need, you have to decide what type of lender you want to work with. The following are the main types of lenders that offer business loans.
- Large commercial banks: Large commercial banks are the traditional lenders of business loans. They can include familiar names such as JP Morgan and Wells Fargo, and they have branches all over the country. They tend to have a slower loan process with more rigorous criteria for acceptance.
- Local community banks: Another popular lender of business loans is a local community bank. While local community banks are smaller, they’re sometimes easier to work with because they have a strong desire to provide loans to local businesses.
- Direct online lenders: The internet opened a new world for businesses looking for a loan. Direct online lenders include companies like Swift Capital and Fundation. The application process is relatively fast and easy. These lenders offer everything from short-term loans to working capital loans in amounts that range from $5,000 to $500,000.
Find out if you qualify
Before you apply for a loan, it helps to know if you qualify. The first thing lenders will look at is how long you’ve been in business. Nearly all small business loans require at least one year of operation, and many bank loans need two years of operation. Lenders will also require a minimum annual revenue, which can range between $50,000 to $150,000.
Lenders will look at your cash flow to make sure you bring in enough to cover the loan repayments, and they’ll look at any existing loans you’re currently repaying. Finally, lenders will look at your credit score to determine whether you qualify for a loan. Most lenders want a credit score above 680.
Apply for the loan
The final step in getting a business loan is applying for it. For the best chances of success, you need to offer detailed documents and information about your business. Most lenders will ask for the following information:
- Amount of loan requested
- Federal tax identification number
- Name of business and any DBAs
- The legal structure of the business, such as S corporation, C corporation, or LLC
- A list of executive officers
- Financial statements for the past two to three years
- Up-to-date financials for the current year
- Projected financial statements
- Business tax returns for the past two to three years
- Copy of general liability insurance policies
- Business legal documents, including franchise agreement, commercial lease, and articles of incorporation
- Collateral available for the loan
- Financial statements of the business owner
- Business credit report
- Business bank statements
- Business plan
Don’t forget your online presence
Business loan lenders will do due diligence to make sure you’re a good candidate for a loan, and this includes looking online to see what type of information is available about the business and its owner. Be sure you do your own due diligence to make your online presence as appealing as possible. This includes:
- Making sure the company website is up to date and professional
- Reviewing any Yelp reviews left for your business
- Reviewing your business’s presence on social media websites such as Facebook, Twitter, and LinkedIn
- Reviewing your own postings on social media websites
From deciding on the right loan to gathering all the documents you need to get a loan, there’s a lot that goes into getting a business loan. However, once you understand how to get a business loan, you have a better chance at receiving an approval.
Growing from a few to a few hundred employees takes strategy and the right space.