A business loan can give you the money you need to increase operations, pay for ongoing costs, and buy inventory or equipment. If you’ve never applied for a business loan, you might not know how to get started or what paperwork is needed.
Here is a straightforward guide that will help you through choosing the best course of action and put together your business loan application in just five simple steps.
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1. Determine Your Need for Financing
There are numerous varieties of small company loans. Choosing the appropriate type of loan will be aided by determining why you require finance. Here are a few typical situations:
- Get New Machinery: A few lenders provide loans for equipment. This kind of loan is intended to assist you in buying office supplies or other pieces of machinery for your firm. The equipment is collateral for the loan, so if you are unable to make payments, the lender may seize the equipment.
- Take out A Small Loan of Money: Consider requesting a microloan if you only need a modest sum of money. A Microloan program offered by the U.S. Small Business Administration (SBA) enables qualified candidates to borrow up to $50,000. Additionally, non-profit institutions like Kiva and the Women’s Microfinance Initiative provide microloans.
- Create a Business: Finding a lender who will give you a startup loan for a new business might be challenging because most of them have a minimum time in business requirements. You might need to apply for a microloan or a business credit card if you’re just starting started. Since acceptance is determined by your personal credit score, you could find it simpler to apply for a business credit card than for other types of business loans. For more information, visit linxlegal.
- Pay for Ongoing Expenses: You may be able to address short-term cash flow issues by taking out a working capital loan, which is a short-term loan used to pay for everyday needs like rent and wages.
- Take out Loans When You Need Them: A company line of credit might be an excellent choice if you are unsure of the precise amount you need to borrow. When a lender grants you a line of credit, you can take money out up to a predetermined limit to pay for company expenses while only being charged interest on the amount you actually borrow.
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2. Verify Your Qualification
Despite the fact that business loan requirements differ, the following four factors are likely to be taken into account by lenders when evaluating your small company loan application:
- Credit Rating: A lender will look at both your personal and business credit scores when you apply for a business loan. They aid the lender in determining how likely it is that you will return the loan. In general, the better your credit score, the more likely it is that a loan would be approved and have a favorable interest rate.
- Collateral and/or personal guarantee: Either a personal guarantee or collateral Some lenders demand that you put up collateral, which they can seize if you default on the loan and is something of value like inventory or equipment. Some lenders may also demand a personal guarantee, which entails using your cash, your property, or other valuable assets to guarantee the loan.
- Time In business: While an internet lender often just wants one year of operation, a traditional bank typically demands that a company has been in operation for at least two years. Do not give up if you have been running your company for less than a year. Some internet lenders will accept candidates with a six-month business history if they are suitable.
- Annual Income: Another important aspect is the sum of your annual sales. Before submitting an application, find out the conditions from a lender and check your company’s finances to see whether you meet them.
3. Evaluate Available Business Lending Options
You may locate small company loans in a number of locations. The top three lending categories are listed below.
Web-Based Lenders
Online lenders provide small company owners with a range of loan solutions, such as term loans, merchant cash advances, lines of credit, and microloans. According to a 2019, Small Business Credit Survey by the Federal Reserve, loan acceptance rates were higher for internet lenders than traditional banks as of 2019—80 percent versus 74 percent, respectively.
This is due, in part, to the fact that online lenders frequently have laxer standards than conventional banks. As a result, if your credit is less-than-stellar, you could find it simpler to get approved for a business loan with an online lender. Additionally, online lenders frequently turn around loans far more quickly—some may even do it the same business day.
However, a significant drawback of using an internet lender for a business loan is that they frequently offer higher interest rates than a conventional bank.
Standard Banks
Many of the same sorts of business loans are offered by conventional banks and online lenders. In comparison to an online lender or microlender, a bank often offers lower rates for qualified candidates, which is the major benefit of applying for a small business loan with one.
Applying for a company loan through a bank has the drawback of frequently having stricter eligibility conditions. A co-signer—someone who agrees to repay the loan if you are unable to make your payments—will be necessary if your personal credit score is poor (a FICO score of less than 580).
If you require quick access to funds, traditional banks might not be the greatest choice. According to a 2019 SBCS survey, applicants were most disappointed by lengthy wait times. For instance, processing SBA loans through a bank can take weeks or even months.
Microlenders
Microlenders are often not-for-profit organizations that give qualified borrowers with microloans up to $50,000. These loans are frequently intended to help business owners who aren’t eligible for conventional business loans. Typically, microlenders have laxer qualifying standards.
For instance, Kiva, a microlender, does not have a demand for a minimum credit score. Instead, it makes hiring decisions based on “social capital.” Before your loan request is made public on Kiva’s website, you must convince a predetermined number of people to lend you money via their platform.
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4. Compile the Essential Documents
Once you are aware of your lending choices, compile the necessary paperwork. Most likely, a lender will demand the following:
- Returns for Both Personal and Business Taxes
- Business Permits
- Constitutional Documents
- Statements of Personal and Business Finances
- Income and Expense Reports
- Financial Records
- Business Strategy
- Building Rental
Before applying, get in touch with the lender if you’re not sure which documents are required.
5. Send Your Application
The application for a small business loan must be submitted as the last stage. Either online or in person, depending on the lender you’ve chosen to work with, are options.
Here are some details a lender might request:
- You, Please
- Company Name
- Ss# (social Security Number) (ssn)
- Ideal Loan Amount
- Loan Objective
- Company Tax Id
- Annual Income
You must wait for an approval decision after submitting your application. A lender will provide you with a loan agreement to sign before issuing your funds or a line of credit you can draw from if your loan is approved.