Securing a business loan is important for launching or expanding a business. However, the process can be challenging for those without a background in finance. Fortunately, you can get a business loan by following five easy steps. In this article, we’ll walk you through each step to help you secure the funding you need to take your business to the next level.
Define Your Financing Purpose
Understanding your financing purpose will help you select the right small business loan. To get an idea, consider the following scenarios:
– Equipment purchase
Some lenders provide equipment loans for acquiring machinery or office furniture. The equipment secures the loan, enabling the lender to seize it in case of non-payment.
– Borrowing small amounts
For modest funding requirements, explore microloans. The U.S. Small Business Administration offers a Microloan program, allowing qualified applicants to borrow up to $50,000.
– Startup establishment
New businesses may opt for micro-loans or business credit cards, as traditional lenders often require a long business history.
– Daily operations
A working capital loan provides short-term financing to manage day-to-day expenses, covering temporary cash flow issues like rent and payroll.
– Flexible borrowing
Opt for a business line of credit when you require variable borrowing amounts. Once approved, you can withdraw funds as needed, paying interest solely on the utilized portion.
Check Your Eligibility
Here are four things that lenders will consider when reviewing your small business loan application:
– Credit score
Your personal and business credit scores will be reviewed to assess the likelihood of loan repayment. Higher scores increase approval chances and lower interest rates.
– Collateral and personal guarantee
Some lenders require collateral or personal assets to secure the loan in case of default.
– Time in business
Traditional banks usually require two years of operation, while online lenders require one year. Some online lenders approve businesses operating for only six months.
– Annual revenue
Your total annual sales are a relevant factor. Review your business finances and ask the lender for their requirements before applying.
Compare Business Lending Options
Explore various sources for small business loans, including:
– Online Lenders:
They offer a range of loan products with faster approval rates and more flexible requirements but may charge higher interest rates.
– Traditional Banks:
They provide similar loan options with lower rates for well-qualified applicants but have stricter eligibility criteria.
– Microlenders:
Not-for-profit organizations offer microloans up to $50,000. These microloans cater to individuals who may not qualify for traditional loans.
Collect Necessary Documents
Once you’ve explored your lending options, gather the essential documents typically requested by lenders, including:
– Personal and business tax returns
– Business licenses
– Articles of incorporation
– Personal and business bank statements
– Profit and loss statements
– Financial statements
– Business plan
– Building lease
If unsure about specific document requirements, contact the lender in advance for clarity before submitting your application.
Submit Your Application
After submitting your application, await the approval decision. If approved, the lender will provide a loan agreement to sign before disbursing funds or granting access to a line of credit.
