Do you need capital to fund your startup or expand your current business? Business owners can select from various loan options. While there’s likely an ideal loan for your needs, finding the right financing can feel overwhelming. You’ll have to assess rates, collateral, credit score requirements, and other details. While it’s usually complicated to get a loan, It doesn’t have to be this way.
Want an easier path to business financing? This simple step-by-step process can help you get started, navigate the loan process, and secure the capital you need.
How to Apply for a Business Loan in 6 Steps
1. Understand How Much You Want to Borrow and What For
You may be tempted to start applying for small business loans the minute you spot lenders offering funding choices. However, rushing into the loan application process can result in too much or too little capital. If you don’t receive enough proceeds, you’ll have to submit another loan application and restart the process for an additional sum of money. This path results in additional loan administration fees and a lengthier process to obtain the funds you need. If you borrow too much money, you’ll end up paying more interest than necessary.
You should also understand how a loan will help your business before you apply for financing. More money isn’t always good. In fact, it can weaken some businesses by enabling unprofitable business segments with zero upsides to eating up your cash. If the investment doesn’t perform well, you’re still responsible for the loan payments, which can create cash flow challenges in the future.
Take some time to review your annual revenue and expenses to see how much you can afford each month. You can pick a lengthier loan term to keep more cash in your pocket. However, a shorter loan term will get you out of debt sooner and result in lower overall payments. Understanding how you will use the funds to grow your business and how much you need will give you a distinct advantage during the loan application process.
2. Assessing Your Loan Eligibility
Business lenders have several requirements to mitigate risk and increase the likelihood that borrowers pay on time. You will encounter minimum benchmarks for revenue, your credit score, and other factors. Raising your credit score will help you get better rates and terms. Some business lenders let you use your personal FICO score, but a business credit score will give you more options.
Some loan programs may also require that you use business assets as collateral, especially loans for real estate properties. It is a good idea to check your lender’s eligibility criteria before applying for a loan.
3. Find the Right Type of Business Loan
Once you’re clear on the desired loan amount, you can start researching loan options to find the best fit for your company. Business owners can explore various financing options, and it can get overwhelming to consider the pros and cons. Most business owners get financing from one of these loans. Understanding each loan’s quirks will streamline your research and application process.
Business Term Loan
A business term loan is an installment loan product paid out in a lump sum. You’ll repay what you borrow in equal monthly payments if the loan is fixed. However, the monthly payment amount may fluctuate if you get a variable-rate loan. Variable-rate loans change based on interest rates. It’s not a good idea to have variable-rate loans when interest rates are rising, but the opposite is also true during economic cycles with decreasing interest rates.
SBA Loans
SBA Loans are backed by the federal government and help small business owners secure enough funding to keep operations running smoothly. Loans are not made by the U.S. Small Business Administration (SBA) directly – you’ll have to work directly with a lender to apply for a loan. Borrowers must adhere to the rules and regulations set forth by the SBA that govern these loan products.
While these loans provide competitive interest rates, the SBA has more stringent requirements and a lengthy application process. You may have to wait 1-3 months before receiving funds from an SBA-backed loan. You can get a loan term between 10-25 years, which is more time than what you’ll get from most business loans. The extra wait is worth it if you have time to spare and have a good credit score and annual revenue numbers.
Working Capital Loans
Some businesses only need money to cover payroll, inventory, utilities, and other short-term expenses. Working capital loans are short-term loans that provide the funds you need for these costs. You’ll receive a lump sum and have to repay the debt over time.
Equipment Financing Loans
Equipment financing loans can be used to cover most equipment purchases that businesses need to operate. Some lenders don’t require down payments, and most of them set the equipment as collateral for the loan. While collateral on a loan increases your risk, you can get a lower interest rate. Equipment financing gets you out of equipment leasing, a process similar to rent. Businesses with equipment leases never own the equipment outright and continue to pay years later. While an equipment financing loan will reduce your cash flow in the short term, fully paid-off equipment will give you more flexibility in your budget. Business owners have to think long-term to thrive, and equipment financing loans tap into this mentality.
Merchant Cash Advances
Businesses that hit a financial hump and need to secure funding to cover a short-term deficit could find merchant cash advances useful. You can borrow capital and repay the loan based on a percentage of your daily sales. Lenders will review your credit and debit card sales volume to determine how much to charge. However, these loans are usually reserved as a last resort. Terms and fees make these loans more expensive than most of the other business financing methods.
Invoice Factoring
Invoice factoring or accounts receivable financing turns your outstanding invoices into immediate cash. Invoice factoring companies charge a factoring fee to provide this service. You’ll receive funds right away, and the invoice factoring company will reach out to the clients who owe the invoices. Invoice factoring companies won’t only look at your credit. They will also look at your client’s financials to determine if the client can repay the invoice.
Invoice financing is one of the only business financing options that does not put you into more debt. Once you sell accounts receivable, you get to walk away without having to make monthly payments. Business owners with bad credit won’t have to worry about an excessively high interest rate. The funds you receive from invoice factoring can help repay debt and put you in a better position when applying for a loan in the future.
Business Lines of Credit
Business lines of credit give you the flexibility to borrow funds when you need them. You only pay interest on a revolving line of credit when you borrow against the principal. Some business owners take out credit lines even if they do not have an immediate need for new capital. You can use a business line of credit whenever you need it, and you don’t have to reapply if you repay your credit limit. You can simply borrow against your paid-off credit limit again and repay the balance over time.
Business lines of credit usually have higher interest rates than business term loans. You shouldn’t let a balance stay unattended for too long. Some people get business credit cards to get their credit line, but you don’t need a card to get a line of credit. Most people use business lines of credit to address short-term expenses that they can quickly repay.
4. Find and Compare Lenders Offering Business Loans
Traditional banks, credit unions, and online small business lenders offer commercial lending products. You’ll want to shop around for financial institutions that have the loan product(s) you’re seeking, along with desirable terms and rates. You should keep these details in mind when researching lenders:
- Online lenders generally have the most rapid loan processing times and offer to fund newly established companies. If you need money quickly, online lenders are usually the best choice.
- Banks and credit unions are ideal for businesses with consistent revenues and adequate cash reserves that have been established for some time. These institutions usually provide more competitive loan terms, but you’ll also have to wait longer to receive funding.
You shouldn’t rush to apply for the first loan offer, no matter how good it looks. Most lenders do a hard credit check when reviewing your loan application. A hard credit check will reduce your credit score by a few points. While it’s not a big deal, applying for too many loans will trigger several hard credit inquiries, which can have a more meaningful impact on your credit score. Only reserve your loan applications for the best available choices. Taking your time with the process can help you find a lower interest rate and save thousands of dollars over the loan’s lifetime.
5. Prepare Documentation Required by the Lenders
Gathering documents can take a while, and it’s better to get this out of the way before applying for a business loan. The initial preparation will speed up the review and underwriting process. That way, your application won’t be held up because the underwriter doesn’t have everything they need to make a final lending decision.
The required documentation varies for each business loan product, but it helps to have the following resources available:
- Your company’s name and address
- Your name, address, and ownership percentage (Quick note: The lender will likely request that you provide the same information for your business partners).
- Your company’s Federal Employer Identification Number (FEIN)
- Your company’s articles of incorporation and any other legal documents
- Three to six months of bank statements for your company
- Accurate and up-to-date information about your annual revenue
- Profit and loss statements for the current year
- Financial statements for the current year (i.e., Balance sheet and cash flow statement)
- Tax returns for your company from the past two years
- A business plan detailing how you will use the loan proceeds and grow your company
6. Submit Loan Applications to Lenders
Before deciding on a lender, reach out to learn more about their minimum qualification criteria. You shouldn’t waste time applying for a loan if you don’t have a high enough business or personal credit score. It’s equally important to ask about the documents you’ll need to submit as part of your loan application. Missing one of these documents will extend the process and block you from receiving vital capital. You can remediate the issue by providing the right documents, but submitting everything correctly the first time is better.
Once you’re ready, complete the loan application in its entirety. If you have questions while filling out the required forms, promptly reach out to the lender for clarification. That way, you’ll avoid unnecessary delays, errors, and rejection from a simple misunderstanding.
Depending on the lender, it could take anywhere from a day to a month to learn if you qualify. Online lenders usually provide quicker financing than what you’ll get if you apply for bank loans. The lender will also notify you of the next steps in the process to get your loan closed and funded as quickly as possible.
Conclusion: Tips to Improve Your Chances of Business Loan Approval
Getting a business loan will give you extra capital and more choices for how to grow and maintain your business. Traditional lenders and other providers have requirements. Knowing the eligibility requirements can help you prepare your business and its finances so you get more loan offers.
Building your credit score, paying off debt, and increasing your company’s revenue are the three most effective ways to get business loans. Lenders want to work with business owners who have financially stable companies. You may also have to get creative with the type of financing you pursue. While SBA lenders have lower rates, you can work with alternative lenders who offer choices like business lines of credit, equipment loans, and merchant cash advances.
Business owners have many choices. Don’t limit yourself to one lender; apply for multiple loans instead. You can also submit your application to a lending marketplace to instantly get connected with several lenders.
FAQs About How to Apply for a Business Loan
Some business loans are harder to get than others, and the level of difficulty depends on your company’s revenue and credit score. A higher score and more annual revenue will make it easier to get a loan.
It usually takes a few business days to get approved for a loan. However, SBA loans have lengthier timeframes and can take up to three months.
You can apply for a business loan and receive capital even if you are a startup owner. Some business lenders specifically work with new businesses.
Interest rates and terms for business loans vary considerably. Your annual revenue and credit score are decisive factors that determine the offers you will receive.
