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How to apply for a small business loan in 6 steps
Learning how to apply for a small business loan or other business financing can not only help you get the right loan for your business but can also assist in deciding whether it’s the right move in the first place.
1. Write up a business plan
Many small business lenders will want to see a business plan that explains why you need the funding, how you plan to use the money, and what you’re going to do to pay it back.
Writing up a business plan isn’t just a good exercise for convincing a lender to approve your application, though. It’s also an important step in determining whether borrowing money right now is a good idea.
Many small business loans require collateral or a personal guarantee, and if you borrow money unwisely, it could affect more than just your company if you can’t repay the debt. So by walking yourself through a business plan, you can get a better idea of your reasoning and the feasibility of repayment.
If you realize during this part of the process that borrowing right now isn’t a good idea, you can start working on a plan to get to the point where it is one. On the flip side, if your business plan is solid, it can fortify your decision and make the rest of the process go more smoothly.
2. Find the right type of loan
There are several different types of small business loans, many of which are designed for certain types of businesses and financing needs. If you’re brand new and looking to cover working capital, for instance, your options will be more limited than if you’ve been in business for years and have a strong track record.
Here’s a quick summary of some of the more common business loan types available:
- Term loan: Typically a long-term loan designed for growth. Term loans are offered by financial institutions such as banks, credit unions and other commercial lenders, and typically have high eligibility standards. These can range from short-term loans to terms around twenty years depending on a number of factors, including loan amount, credit history, etc.
- SBA loan: Similar to term loans with one major difference: they’re backed by the U.S. Small Business Administration and offered through financial institutions. Like term loans, SBA loans are typically provided by traditional lenders and have relatively strict eligibility requirements.
- Line of credit: Unlike a traditional loan, a small business line of credit is a revolving form of credit, allowing you to gain access to cash when you need it. It’s best for short-term financing needs or brief lapses in cash flow when you need to cover working capital and other operating costs. Depending on the lender, you may be able to get a line of credit if you’re relatively new or established.
- Invoice financing: Provides financing based on unpaid invoices. You can qualify for a loan of a percentage of a verifiable invoice, and payment is typically due in full when you receive the money from the customer. Because the invoice amount is used as collateral, you may be able to get invoice financing regardless of how new your business is.
- Merchant cash advance: Works as an advance on your credit and debit card sales. Merchant cash advances are available for all types of businesses, but the cost of financing is very high.
- Microloans: Typically offered by nonprofit lenders, microloans are designed for startups with relatively small financing needs. As the name implies, these are relatively small, short-term loans.
- Business credit cards: Like consumer credit cards, business credit cards provide a revolving line of credit you can use and pay off as long as the account is open. It’s a good option for any type of business because approval is primarily based on personal credit history.
- Commercial Real Estate Loans: A mortgage loan taken out by a business for commercial property, rather than residential property. Unlike a traditional residential mortgage which typically have 30-year terms, a commercial real estate loan will have a term from 5-20 years.
As you consider which loan type is best for you, consider both the needs of your business and your eligibility. If, for instance, you’ve been in business for five years and have upwards of $100,000 in annual revenue, you may have a good chance of getting approved for some term and SBA loans.
But if you’re a new startup or you’ve been in business for a while, but revenues are inconsistent, you may be limited to other, more expensive forms of financing.
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3. Determine which type of lender is the best fit
Historically, commercial lenders have been banks and credit unions. But with the rise of internet technology and the growing need for startup financing, small business lending through online lenders and microlenders are becoming more popular.
Banks and credit unions: In general, banks and credit unions are best when your business is well established with strong sales volume and cash reserves. They’re also worth considering if you don’t need the money anytime soon, as the application and funding process can take months.
Banks and credit unions often require collateral, so don’t apply unless you have something to secure the loan that you’re willing to part with.
Online lenders: If you need money faster, don’t have collateral or are relatively new in business, online lenders may be a better choice. These lenders can provide term loans, lines of credit and most other forms of financing. In general, though, you can expect to pay more in interest with online lenders than with traditional ones.
Microlenders: These lenders are best for new business owners who can’t get financing any other way. Because they’re funded by nonprofits, they’re typically smaller-dollar loans and carry higher interest rates than bank loans. But if you’re just starting out, it can be the only reasonable option available.
4. Shop around
Once you know which type of business loan is best for your needs, make it a goal to compare at least three to five lenders that offer it. It can be tempting to go with the first offer you see for the sake of convenience, especially when you need the money now.
But if you don’t take the time to look at multiple options, you could miss out on a lower interest rate and better overall terms.
With Nav, you can register and get matched with loans based on your credit profile. Depending on your creditworthiness, you may be able to compare several lenders in one place, saving you the time of getting pre-qualified with each one individually.
The type of business financing you apply for will also depend on what you need as the borrower. What works for a company looking to cover working capital may not work for another company looking to purchase real estate. Make sure you know exactly what your business needs are and what your budget can handle.
The more lenders you compare, the better your chances of getting the best loan available for you. But avoid spending too much time on this part of the process. If you’re finding multiple lenders that offer similar terms, that may be the best you can get.
5. Understand how to qualify for a business loan
Each lender has different eligibility criteria you’ll have to meet, so once you pick a lender, research what those criteria are. While some will share this information publicly on their website, others may require you to call in to get it.
Most all lenders will require your personal information as the owner of the business, and may even need to see your personal credit score as well. They’ll also look at your business credit score and report, so be sure to check your credit before applying to know where you stand.
This process can take time, but it’s much better than going through the entire application process only to find out that you didn’t qualify from the start.
Also, look into what documentation the lender requires. They’ll typically require the following:
- Your business plan
- Financial statements
- Your business license
- Other legal documents, including articles of incorporation, etc.
- Tax returns, including business tax returns
- Collateral, if required
By getting these things together before you apply, you can speed up the process.
6. Submit your application
Now that you’ve done your due diligence, submitting the application may be the easiest part of the process. Depending on the lender, you may be able to apply online, but some may require applications to be done over the phone or in person.
Whatever the method, be sure to have your documentation ready to upload, fax or hand to the loan officer. Make sure you understand the underwriting and funding process, so you can set expectations for how long it’s going to take and what you can do to make things go more smoothly.
Again, depending on the type of lender and loan, the application and funding process can take anywhere between a day and several months. And once you receive the money, be sure to have a plan to pay off the debt on time — or if the interest rate is high, possibly early.
Other frequently asked questions
As you research how to apply for a small business loan, you may come up with other questions that need answering. Here are some of the most common questions we’ve found.
How to get a business loan to start a business
As outlined above, brand-new businesses may have a tough time getting approved for a traditional loan or line of credit, so you’ll want to focus on online lenders and microlenders. As you shop around, make sure you understand each lender’s eligibility standards and what information they require to complete the application process.
How to get a business loan from a bank or credit union
If your business is well established, a bank or credit union may be willing to work with you. Unlike online lenders, banks and credit unions may be less likely to allow you to complete the entire application process online.
Even if one does, it may be wise to work with a loan officer in person anyway to give you a better chance to explain your business plan and address potential concerns.
How to apply for a business loan with bad credit
Whether you have bad personal or business credit, it can hurt your chances of getting approved for a small business loan.
If your personal or business credit score is less than stellar, you may need to do some extra research to find lenders that are willing to work with bad credit borrowers. You may also be asked to provide collateral, a down payment (for equipment financing, for example), and a personal guarantee. You can also expect to pay high interest rates.
The bottom line
Learning how to apply for a small business loan can be stressful, but taking the time to understand the process can help match you with the right loan and lender and improve your chances of getting qualified. As you follow these steps, you’ll be in a better position to get the financing your business needs.