Steps to get a business loan

7 Simple Steps to Get a Business Loan

Money is the lifeline of any business. Whether your company is still a promising idea or you’ve been in business for years and are looking to expand, an infusion of cash can help the company move forward in a positive way.

Unfortunately, capital isn’t as easy to come by as it was just a decade ago. According to a recent Industry Pulse Report by OnDeck, 82% of small businesses that apply for a loan are denied financing by their bank.

82% of small businesses that apply for a loan are denied financing by their bank.

As you’ll see, the better prepared you are, the higher your chance of success. To get a business loan, simply follow these seven simple steps:

  1. Decide how much money you need and for what purpose
  2. Assess your business loan options
  3. Find out your credit score
  4. Research lenders based on your qualifications
  5. Write (or update) your business plan
  6. Prepare your loan application package
  7. Wait, celebrate, (or re-evaluate)

1. Why do you need a business loan?

Lenders are going to ask you this question, so work out your answer ahead of time. You should know how much you need and what you’ll use the money for. Business loans can be used for a variety of purposes, including the purchase of inventory, equipment, furniture or supplies or even for working capital. The purpose of your loan will determine the types of loans available and the lenders that are willing to work with you.

2. Choose the right loan for your business

If you’re a startup, getting funding can be difficult because most small business lenders want to see proof that your business has been making money for at least a year. Instead, you may need to look at sources such as personal loans, crowdfunding, or business credit cards to raise cash.

Compare Business Loans

If you’re looking for a short-term infusion of capital to manage daily expenses or to act as an emergency buffer you may want to consider:

  • a business line of credit, which is similar to a credit card and allows a business to borrow and repay money on a short-term basis;
  • invoice factoring, which allows a company to borrow against unpaid invoices;
  • or a merchant cash advance, which is a borrowing account against future credit card receipts.

If you’re looking to expand your business, a standard business loan is probably the best option. These are longer term loans that have fixed payments and more affordable interest rates for qualifying businesses.

3. Find out your credit score

Once you’ve determined the type of loan that your company needs, the next step is to figure out whether you qualify for a business loan. Most lenders, even with business loans, rely on the personal credit of the business owner(s) when making determinations.

Request your credit report from one of the online reporting agencies. You can get your credit scores for free at Credit Sesame. A FICO score of 650 and above is considered “good,” but isn’t a guarantee of funding. Even if your score is below 650, you might qualify for some types of business loans.

4. Shop around for the right lender

Now that you know what type of loan you need and where your credit stands, you can research lenders that will likely be willing to work with you. Consider national and local banks, credit unions, nonprofit microlenders, and online lenders. Most of these lenders offer business lines of credit, small business loans, and even personal loans.

When shopping for a business loan, you need to make a comparison between yours and the lender’s requirements while also comparing the cost of borrowing money. For example, if you have a credit score of 620 and have been in business for one year, your choice in lenders might be limited. Once you’ve narrowed down your options, choose the lender with the lowest annual percentage rate.

Some lenders might also charge a loan origination fee, which is a cost associated with small business loans. Fees can range from 1%-5% and are deducted from the original loan amount. Be sure to consider this cost when business loan shopping.

Banks and credit unions are a good source of business loans when you have both an established business and excellent credit. Most of these term loans will require you to provide collateral, however, and they do take longer to fund than other sources. SBA loans are available from banks and credit unions, and there are several types of small business loans depending on your needs. The most common is the 7(a) loan, and the average SBA loan is around $371,000.

Microlenders are often a good choice when small businesses can’t secure funding with traditional banks. These lenders make smaller, short-term loans of $50,000 or less. (The SBA’s microloan program’s average loan is just $13,000.) These loans still require a detailed application, but often work for a business that lacks collateral, has been in business for a limited time, or has owners with average credit.

Online lenders have become increasingly popular as sources of business loans. There are several reputable online lenders that fund loans quickly, work with new businesses, and lend to owner(s) that lack collateral or have less than excellent credit. Online lenders offer a variety of financing solutions that include SBA loans, business term loans, business lines of credit, invoice factoring, and merchant cash advances.

More specifically, online lenders offer loans and lines of credit from $1,000 to $500,000 with APRs that start around 7%. Some, however, can reach into the triple-digits, so it pays to shop carefully, understand terms, and read reviews.

5. Write (or update) your business plan

Create a detailed business plan. Whether you are a seeking startup funding or looking to finance expansion, your business plan is the primary vehicle to sell your company’s vision and financial strength to a lender.

A strong business plan tells your company’s story, from its inception to its relationship with the market. It illustrates your business’ mission and has a clear roadmap for achieving goals. Financial reports give a comprehensive view of what you’ve accomplished and your plans for the future.

From a lender’s perspective, a company that submits a solid business plan has a better chance to succeed and  pay its loan back on time.

6. Gather documents and apply for your loan

Some business loan applications require extensive paperwork. This isn’t always the case, however. For example, if you are applying for a business line of credit or invoice factoring arrangement, the process is much simpler. A business loan with a bank, credit union, or online lender will require that you share additional details about yourself and your business. Be prepared to submit:

  • Personal and business financial statements.
  • Business documents (such as Articles of Incorporation).
  • Personal and business tax returns.
  • Business lease agreements.
  • The résumés of the owner(s).

7. Wait and re-assess (if necessary)

The processing time will depend on the type of loan and the amount requested. SBA loans are known for taking weeks and sometimes months for approval and funding while some online lenders get back to you with a decision in a day or two.

If you aren’t approved, ask the lender why they didn’t approve your loan and, if they give you a reason, use that information to improve your odds next time. Chances are, there’s an opportunity available that’s a better fit for you and your business. Keep in mind that each time you apply for a loan a hard credit inquiry is performed. And, that each inquiry can cause your credit score to drop by a few points.

Bottom line

The best way to improve your odds of getting a business loan is to put time into preparation before you submit an application. If your credit or cash flow needs help, take whatever steps you can to improve these areas before you approach lenders. Once you feel you’re in the best shape possible, compare business loans to find the right lender for you and your company.

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