A business loan can provide the funds you need to expand operations, cover day-to-day expenses, and purchase equipment or supplies. If you have never applied for a business loan, you may not be sure where to start or what documents are required.
Here’s a simple guide to taking you through the process of evaluating your options and preparing your business loan application in the following easy steps.
Decide where to apply for a small business loan
Banks, alternative online lenders and other sources offer business loans. The best place to apply for a small business loan is usually where you qualify for the lowest interest rate. However, the following questions should also influence your decision:
• How good are your finances? Bank loans and SBA loans usually offer the most competitive interest rates. But those low rates come with strict qualifications: You’ll likely need at least two years in business, strong annual income and good credit (many small business lenders require a FICO score of at least 650) to qualify for financing. If you have bad credit or can’t otherwise meet these marks, applying for a small business loan from an online lender may be your best bet.
• What type of financing do you need? There are several types of business loans, but not from every lender. For example, if you are buying heavy machinery, a lender with dedicated equipment financing may make sense. For ongoing working capital, consider a business line of credit that you can draw on as needed. If you’re looking for an SBA loan, you can start your search with a lender you already have an existing relationship with. SBA lenders include national banks such as Chase and Wells Fargo, as well as regional and community banks.
• When do you need a loan? If you need financing in a hurry, you may want to prefer online lenders. These lenders may have automated processes that allow them to quickly review applications and offer quick business loans. If you can wait more than a few days, SBA Express loans can offer faster turnaround times than other federal options, but similar benefits like competitive rates and flexible terms.
Get your application materials
Each lender may require different documentation for their small business loan application. Most will probably want some form of the following:
• Information about your business. These items will range from the basics – such as your business name, address and VAT number – to more detailed documentation. For example, the lender may want a business plan or proposal describing how you will use the loan.
• Financial statements for you and your business. These can include documentation of your annual income, such as profit and loss statements, plus tax returns and bank statements for business owners and the business itself.
• Details of business owners. You may need information such as names, social security numbers and addresses for anyone who owns more than a certain percentage of your company, usually 20% or 25% depending on the lender or loan.
• Information about your insurance. Some lenders may require you to put up collateral, such as real estate or equipment, to secure the loan. You should provide information about the type of collateral you offer and its value. Before applying for a business loan, it may be helpful to get an independent auditor to value your collateral. Banks and SBA lenders are more likely to require collateral than online lenders.
• Personal guarantee. Most lenders will require you to sign a personal guarantee when you apply for a small business loan. A personal guarantee is a contract that states that you, the borrower, are responsible for repaying the loan with your personal assets if your business defaults. Other business owners may also be asked to sign personal guarantees.
Check your eligibility
While business loan requirements vary, here are four things lenders are likely to consider when evaluating your small business loan application:
• Credit score. When you apply for a business loan, the lender will check your personal and business credit scores. They help the lender assess the likelihood that you will repay your loan. In general, the higher your credit score, the better your chances of getting approved for a loan and getting a low-interest rate.
• Collateral and/or personal guarantee. Some lenders require you to put up collateral—something of value, such as equipment or inventory—that they can seize if you default on the loan. Some lenders may also require a personal guarantee, which means you must secure the loan with personal assets such as your savings, home, or other valuable property.
• Time in business. A traditional bank usually requires that the business has been operating for at least two years, while an online lender usually only requires one year. If you’ve been in business for less than a year, don’t get discouraged. Some online lenders will approve qualified applicants who have only been in business for six months.
• Annual income. Your total annual sales are also a relevant factor. Before applying, ask the lender what the requirements are and review your business finances to see if you meet them.
Review your small business loan application
Before applying for a small business loan, consider having someone else review your application, especially if it contains information that can be interpreted, such as a business plan. One resource is the Small Business Development Center or SBDC.
SBDC are local organizations partially supported by the federal government. Each branch includes qualified business professionals who can provide assistance on topics such as entrepreneurship and obtaining financing. You can find an SBDC in your state using the SBA Finder.
Make sure your business loan application contains everything the lender has asked for and is in the appropriate format. The lender may have questions when evaluating your application, but by cutting back and forth, you’ll get a decision as quickly as possible.
Select Creditor
Now that you know what qualifications you’ll need to bring—and what loan product is best for your needs—you can begin the next step of choosing a lender. Not all lenders provide all of the services listed, so you’ll want to narrow your search to those that offer the type of financing you’re looking for and are likely to approve your loan application based on your credit score.
Creditors usually fall into one of the following categories:
Direct creditors
These lenders provide loans directly and include banks, credit unions, and online lenders.
Loan markets
This option helps you find lenders based on your qualifications. You enter your information once and get to the best option for your credit situation and financing needs. These marketplaces exist online and applications are relatively quick compared to more traditional loan scenarios.
Submit your application
The final step is to submit your small business loan application. Depending on which lender you choose to work with, you can do it online or in person.
Here is some information a lender may ask for:
- Your name
- Business name
- Social Security Number (SSN)
- Required loan amount
- Purpose of the loan
- TIN
- Annual income
After submitting your application, you will have to wait for an approval decision. If your loan is approved, the lender will send you a loan agreement to sign before releasing your funds or line of credit for you to draw on.