As a business owner, you know that sufficient funding is the lifeblood of your business. Without adequate financial reserves, it can be difficult to make payroll, pay for inventory and cover the rent. Tight lending conditions can make it challenging to get funding for your business, but securing a loan is possible. This guide to how to get a business loan simplifies this sometimes daunting process.
1. Determine why you need a business loan
There are acceptable reasons to pursue a business loan that make it more likely you’ll obtain funding. Lenders look favorably on requests for funds if the money is for what they consider a valid reason, including:Safety cushion
Most lenders will approve of your plan for “rainy day” funds. Expansion
If your business is doing well and you’d like to expand, many lenders are willing to take a chance on your expansion. Day-to-day expense management
Does your business have seasonal or periodic variances? If you can show that your revenue ebbs and flows in a predictable way, lenders may consider this a valid reason to obtain funding. Financing equipment or software development
Do you need more money to ensure that your company runs efficiently? This is often an approved reason for funding.
2. Figure out if you have a good chance of qualifying
Determining if you have a good chance of getting a business loan is an important factor in preparing for the loan process. Whether you’ll qualify for a business loan depends on several key factors:
- Credit score of 670+ – If your credit score falls below this, consider short-term loans for borrowers with bad credit.
- How long you’ve been in business – Most lenders require that you’ve been in business for at least one year to qualify for an online short-term loan and two years for most bank loans.
- Revenue generated – How much money your business earns and your cash flow have a direct effect on if you’ll be able to make your loan payments. Lenders require minimum annual revenue that generally ranges from $50,000 to $150,000.
3. Gather the required documents
Help ensure the application process runs as smoothly as possible by collecting all necessary information before applying. Required documentation varies by lender, but you’ll usually need the following:
- Business and personal tax returns for up to the last three years
- Bank statements for the past 12 months
- Business legal documents, including licenses
- Financial statements for up to the last three years
- Current profit and loss statements (within 90 days)
- Cash flow projections for the next 12 to 18 months
- Business and personal credit history
- A detailed business plan that includes your personal and professional history and company mission statement
- An explanation as to why you require funding
- Personal guarantees from principal owners of the company
- Ownership structure (Inc., LLC, etc.)
4. Choose the best loan type for your business
Avoid unnecessarily wasting time by applying to the best type of loan for your small business situation. Here are the most common forms of business lending and when to consider each.
A business line of credit
Offered by banks and other licensed lenders, lines of credit allow you access to funds without having to take out a specific lump sum. Much like credit cards, lines of credit enable you to get the exact amount of money you need whenever you need it. The cost of a cash advance from a credit line is less costly than a cash advance from a credit card, but there are still fees and double-figure interest rates.Reasons to consider a line of credit: Manage cash flow, buy inventory and provide ready access to cash in the event of an emergency.
Good choice if: Your needs for additional cash vary from month to month. You’re able to pay off the credit line within a month or two because maintaining a balance will lead to paying excessive interest.
Generally distributed by banks and large commercial lenders, long-term loans are usually for at least a year, and more commonly five years or longer. Such loans generally feature a fixed interest rate and are often for $100,000 or more. Unless you have a well-established business, long-term loans are difficult to get.Reasons to consider a long-term loan: To buy or refinance property, acquire costly equipment or embark on a significant expansion to the business.
Good choice if: Your business is well-established and you show consistent success and growth. You have good credit (680+) and a history of paying your bills on time. You are also able to provide collateral, if necessary.
Instead of requiring monthly payments, short-term loans are due in full at the end of a predetermined loan term. This loan term is generally from 6 to 30 months, although sometimes longer. The interest rates for short-term loans are usually higher than for long-term loans, and the amount offered is usually less than $100,000.Reasons to consider a short-term loan: For working capital, including to build up inventory, make small purchases and occasionally cover payroll.
Good choice if: You need money quickly. Many short-term loan lenders approve loans as soon as 24 to 48 hours. Short-term loans are also helpful when you run a seasonal business that requires periodic infusions of cash while you wait for earned revenue to come in.
If you have a new business, getting funding can be difficult, because you don’t yet have a track record. The Small Business Administration (SBA) facilitates various loans to new businesses. These include general small business loans (7a) for specific types of businesses, such as those run by active duty or veterans. There’s also a microloan program that provides loans up to $50,000, with the average microloan at $13,000.Reasons to consider an SBA loan: For working capital, including to build inventory, make small purchases and meet day-to-day expenses as the business gains momentum and revenue starts to come in.
Good choice if: Your business is new and you haven’t developed a proven track record. You’re unable to qualify for a short-term loan or credit line.
Ready to get a business loan but unsure of which type of financing is right for you? Narrow down your options by checking out the following lenders to determine possible interest rates and required minimum credit scores.
Getting a business loan may seem intimidating. Following these steps will help ensure that you have a good chance of funding your enterprise. For further information about how to get a business loan or for loan options, visit SuperMoney’s Business Loans Reviews.
Julie Bawden-Davis is a widely published journalist specializing in personal finance and small business. She has written 10 books and more than 2,500 articles for a wide variety of national and international publications, including Parade.com, where she has a weekly column. In addition to contributing to SuperMoney, her work has appeared in publications such as American Express OPEN Forum, The Hartford and Forbes.