Do you need a small business loan? Building up a small business requires access to money that you may not have. While a small business loan can help you to achieve your goals as a business owner, these loans can be difficult to obtain due to the strict standards that banks have on lending money to small businesses. This places small business owners in a bit of a dilemma, as they often need outside funding to start, grow or cover daily expenses until the business gets off of its feet.
The best way to go about obtaining a loan for your small business is to be prepared. By doing your research, narrowing down your options and knowing exactly what you need to do to qualify for a loan, you can make the process go as smoothly as possible. Here are five steps you can follow to prepare yourself for applying for a business loan.
1. Know Why You Need the Loan
Most lenders will want to know why you need a loan, so having an answer on hand will help you during the application process. Common reasons for needing a loan include starting a business, growing a business, managing daily operating expenses and needing a cushion to fall back on during hard times.
2. Determine Which Loan is Right for Your Business
Knowing why you need the loan will help you discover what you qualify for. For instance, businesses that are just starting out often have a difficult time obtaining loans since most lenders require the business to have at least a year’s worth of cash flow. If you’re just starting a business you may need to rely on one or more of the following funding options:
• Business credit cards
• Loans from friends or family
• Personal loans
If you’ve been in business for a year or more, you will have more financing options open to you. These include loans from the Small Business Administration (SBA), business lines of credit, invoice factoring and term loans.
3. Figure Out the Best Type of Lender for Your Small Business
Do research on the types of lenders available to you and compare them based on factors like what the annual percentage rate (APR) of the loan is and what the terms of repayment are. Once you know what you qualify for and what you can afford, you should choose the loan that offers the lowest APR.
So where can you go to find the right loan for you? There are three options that most small business owners turn to when looking for a loan.
• Local Banks
Your local Bank is an excellent choice if you have good credit and can provide collateral on the loan. Options available from banks include term loans, commercial mortgages and lines of credit. The SBA offers small business loans through a number of banks. These loans range from $5,000 to $5 million, although the average amount of a loan from the SBA is $371,000. A major benefit of a bank loan is that many of them offer lower APRs than other funding options do.
Many small businesses find that bank loans are difficult to obtain. This is because smaller businesses have lower sales volume and not as much cash in the bank. Having a bad personal credit score can also make it difficult for a small business owner to be approved for a loan. A downside to a loan from a bank is that it generally takes between two and six months to receive your funding.
If you’ve been unable to get a loan due to poor credit, a lack of operating history or the small size of your business, a microlender may be a good option for you. Microlenders are nonprofits that offer short-term loans of $35,000 or less. A loan from a microlender usually has a higher APR than a loan from a traditional bank. Like a loan from the bank, the application process can be lengthy.
• Online Lenders (Alternative Lenders)
An online lender may be the right choice for your business if you are a newer business or one that doesn’t have any collateral. Online lending options are also a good option if you need funds in a timely manner. Most online lenders offer loans that range from $500 to $500,000. APRs are usually high, but you may qualify for lower rates if you have a good credit history.
4. Learn if You Qualify for a Loan
There are multiple factors that go into determining whether or not you qualify for a small business loan. Your credit score plays a significant role in whether or not you will be approved. Lenders will also want to see how long you’ve been in business, what your annual revenues are and whether or not you can make the required payments on your loan.
If you have a credit score below 680, you may want to look into business loans for people with bad credit or a loan from a microlender
5. Get Your Documents Together
What you will be required to submit depends on your lender and the type of loan you are applying for. Typically, a lender will want to see copies of your tax returns, bank statements, financial statements and any legal documentation that goes along with your business.