Many companies need initial capital to fund operations and acquire commercial real estate. It’s also normal for small business owners to take out loans for their established companies. Business owners can choose from several types of small business loans, and knowing the key steps can make this financing more accessible.
What is a Business Loan?
A small business loan is a financial product that allows businesses to receive capital. In return for receiving a lump sum, business owners must pay off the loan with interest. Many small business owners, especially startups, rely on these loans to get their ideas off the ground and expand operations.
Is It Hard to Get a Business Loan?
Some business loans are harder to obtain than others, and it also depends on your company. Established business owners with high business credit scores will have a much easier time obtaining financing than startup founders with no business credit history. Some small business lenders offer financing for startups and have fewer requirements, but those financial products tend to have higher interest rates.
Step By Step Process on How to Get a Small Business Loan
Getting a small business loan may feel complicated at first glance, but it becomes more manageable if you know the steps. You can follow this process to obtain capital for your business:
- Step 1: Research loan options and determine which type of loan is right for you
- Step 2: Review your business credit, years of experience, revenue, and other details to determine if you qualify
- Step 3: Calculate how much you can pay back each month
- Step 4: Compare small business lenders
- Step 5: Gather the necessary documents and submit applications
- Step 6: Compare loan offers, choose the right agreement for you, and obtain funds
Preparing to Apply for a Business Loan
Before you apply for a small business loan, it’s important to assess your financial profile to determine what you need and if you qualify.
Assess Your Financial Needs
Small business owners should review their revenue and expenses to determine how much financing they need. If you don’t receive enough capital, you’ll have to submit another loan application. Receiving too much capital results in excessive origination fees and interest payments.
Evaluate Your Credit Score
Your business credit score determines your choices. A higher business credit score will make more loans accessible, while you will have fewer options if you have a low business credit score. You can build your business credit score with on-time payments to end up with a more favorable business loan.
Gather Necessary Documentation
Small business lenders will need several documents to verify your company’s identity, financials, and other details. Here are some of the documents you may need:
- Your company’s name and address
- EIN
- Your business plan
- Financial statements, such as tax returns and bank account statements
- Your personal ID and Social Security Number
- Personal guarantee
Understanding Your Loan Options
You can choose from several business financing options to obtain the necessary capital for your business. These are the highlights.
Term Loans
A term loan provides a lump sum and requires that you make fixed monthly payments throughout the loan’s term. Most of these loans have 10-20-year terms.
SBA Loans
SBA loans are some of the most competitive loans in the industry, and you can borrow up to $5 million with a 7(a) loan. However, these loans are also the most difficult to obtain and have lengthy application processes.
Equipment Financing
Small business owners can use these loans to obtain new equipment. This financial product allows business owners to avoid equipment leases, which don’t give them ownership of the equipment. Equipment financing is more expensive than leasing in the short run but is more affordable in the long run, especially for durable equipment.
Business Lines of Credit
A business line of credit gives you a lump sum and requires that you make interest-only payments during the draw period. This method allows you to borrow capital while making lower monthly payments in the beginning. The remaining balance may turn into a term loan, or you may have to repay the entire balance. Some lenders also let you renew the line of credit for a fee or reapply for a new line of credit. It’s also possible to pay off the credit line’s entire balance before the draw period concludes.
Business Credit Cards
These financial products offer enticing rewards for every purchase. You can also distribute corporate cards to your employees and monitor their expenses. However, business credit cards have higher APRs than most business financing options.
Invoice Financing
If you have a bunch of unpaid invoices, this financing method can work for you. Invoice financing companies will let you finance your invoices and essentially receive your payments upfront instead of waiting for your clients to pay. You’ll then have to repay the financing once your clients pay their invoices.
Merchant Cash Advance
A merchant cash advance is suitable for business owners with low business credit scores and limited experience. You’ll receive a lump sum and have to repay the cash advance with a percentage of debit and credit card sales. However, merchant cash advances have higher APRs than most small business financing options.
Finding the Right Lender
You should review several business lenders before deciding on the right one for you. These are some of your options.
Traditional Banks
Many traditional banks offer small business loans. It can take a few days to get approved for financing, but these banks tend to offer the most competitive rates in the industry.
Online Lenders
Online lenders usually have higher rates but give you access to capital much sooner than traditional banks. These lenders also tend to be more flexible than traditional small business lenders.
Credit Unions
Credit unions offer competitive rates and terms for their members. They are similar to traditional banks but function as non-profits.
Peer-to-Peer Lenders
Business owners with enough colleagues can consider reaching out for capital. Peer-to-peer lending platforms can also give you the money that you need.
Writing a Business Plan
Most small business lenders will request a copy of your business plan to gauge how you will use the funds and if you present a good investment opportunity. Even if the lender doesn’t require a business plan, it’s still good to create one for your company.
Preparing Your Loan Application
Once you compare lenders and decide on some top choices, it’s time to prepare your loan application. Here’s what you have to do.
Business and Personal Information
You’ll have to gather several personal and business details, such as tax forms and bank statements. You’ll also need your EIN, and you may have to provide your personal ID and Social Security Number. Check the lender’s requirements before submitting an application so you have everything that you need.
Collateral Documentation
Some small business lenders require that you provide some collateral against the loan. Using collateral reduces the lender’s risk and can result in a lower interest rate.
Loan Proposal
You will have to propose how much you want to borrow and determine which loan term makes the monthly payments reasonable. Small business owners should also detail how they plan on using the funds and how they will pay back the loan.
Preparing an Elevator Pitch
You don’t need a lengthy elevator pitch. Small business owners should briefly describe the opportunity in their industry, how the capital will grow their company, and most importantly, how they will keep up with the monthly loan payments. You can mention a high business credit score or FICO score during the elevator pitch to demonstrate that you stay on top of your bills.
Submitting the Loan Application
Small business owners can choose to submit their loan applications online or in person. Here’s what you should know about each choice.
Online Application Process
An online application process lets you choose from more financial institutions, and it’s also much quicker.
In-Person Application Process
While an in-person loan application takes more time and limits your options, some people prefer to speak with a representative in person. They have a reliable point of contact if they have any questions.
What to Expect After Submission
After submitting your application, it can take a few days or weeks to hear a decision. Funds will arrive in your specified bank account if the loan application is approved.
Tips for Increasing Your Chances of Approval
It’s possible to increase the likelihood of getting approved for a loan. These are some of the actions you can take while conducting your research.
Improving Your Credit Score
A higher business credit score will help you borrow more money and secure a lower interest rate. A strong personal credit score can also improve your chances if the lender requires a personal guarantee.
Building a Strong Business Profile
Growing your business and tapping into more revenue streams will make your application more desirable to lenders. A strong business profile reduces the lender’s perceived risk and makes them more eager to do business with you.
Seeking Professional Advice
You can also reach out for professional advice during the loan application process. Business consultations and speaking with loan officers can give you a better idea of what it takes to get approved.
ROK Financial understands that each business has unique challenges and goals, which is why their team of experienced advisors is available to guide you through your financing journey. Whether you’re looking to purchase equipment, expand your operations, or manage cash flow, their experts can help you identify the best funding solutions tailored to your specific needs.
To benefit from expert guidance and explore financing options that suit your business, fill out this contact form. A dedicated advisor from ROK Financial will reach out to discuss your situation and provide personalized recommendations to help you achieve your business objectives. Don’t navigate the financing landscape alone—let ROK Financial be your trusted partner in securing the funding you need for success.
