Guide to small business loans: How to apply, best types, and tips
In this 10-minute read:
- When should I get a loan for my small business?
- Questions to ask before getting a business loan
- Small business loan requirements
- Types of small business loans available
- How to get a small business loan
Getting a business loan is a common process for many small businesses as they are starting up or looking to grow. Sometimes you just don’t have the capital to take your business to the next level, so you need a little help along the way.
Before getting a loan for your small business, make sure that your plan for return is solid and that you will be able to pay back the loan and keep your business going strong.
When should I get a loan for my small business?
To determine when you should get a loan for your business, you need to understand the different types of loans that are available and have a purpose for your loan.
Generally, you want to acquire a business loan before you are in dire need of one, but close to the time that you are actually ready to spend the money.
You shouldn’t ever get a business loan as a last-ditch effort to save your company or on an impulse. It needs to be well-thought-out and serve a purpose to help grow your business.
We’ll guide you through some questions to ask before getting a loan, the basic loan requirements you’ll need, the types of loans available to you, and, when you’re ready, how to get your small business loan.
Questions to ask before applying for a business loan
Before you get a small business loan, there are several questions you should ask yourself to determine what your goals are for the loan and whether or not a loan is the best decision for your business right now.
- What do I need the money for?
- How much money do I need?
- What does my credit history look like?
- How soon do I need the funds?
You should also come up with a list of questions to ask the lender so that you know exactly what is required of you when it comes to acquiring the loan and paying it back. Some questions to get you started:
- Will you lend to businesses in my industry?
- What are the interest rates of the loan?
- Are there any other fees associated with the loan?
- How long does the loan application process take?
- What will my payment schedule be?
- When is my first payment due?
- How do I make payments for my loan?
- Are you rated well with the BBB? What is your rating?
- Can I speak to some of your past and current customers?
- Do you report payment history to the appropriate credit bureaus?
- Are there any penalties for early loan payoff?
These questions will get you started in determining whether or not you need a loan and will be able to qualify for one, as well as help you find the best possible lender for your situation.
Small business loan requirements
It will help you out immensely to know what the requirements of a business loan are before you apply for one. Set yourself up for success by making sure that you can qualify for a small business loan.
Here are some of the basic requirements for business loans. Keep in mind that certain lenders may have different requirements and these are just a general guide.
- The amount you want to borrow
- The purpose of the loan
- Personal credit score
- Business credit score
- How long your business has been in operation
- A solid business plan
- Your industry
- Type of business
- Licenses and permits that authenticate your business
- Employer identification number
- Copy of your commercial license
- Proof of collateral you wish to use
- Annual revenue and profits for your business
- Bank statements
- Balance sheet
- Personal tax returns
- Business tax returns
- Disclosure of all debts
- Accounts payable and accounts receivable aging reports
- Ownership and affiliations of the business
- Legal contracts and agreements of the business
Not all lenders will require every piece of information that we’ve listed here and some may have a few more items, but this will give you a good start to be prepared for the information that your lenders may ask for.
Best types of small business loans: how to choose
There are several different types of small business loans. Carefully considering the questions we listed above and understanding the purpose of your loan will help you to determine the best type of loan for your business.
Here are some of the most common types of loans that small businesses use.
Lines of credit
Business lines of credits are very similar to credit cards in that they are open-ended and have specific limits. With a line of credit, you can withdraw funds, repay them, and then pull out more funds later as needed.
Common reasons for business lines of credit include managing cash flow gaps, increasing working capital, and purchasing inventory.
The best part about lines of credit is that you only pay interest on the money that you spend. Even if you are approved for a large amount, you only pay interest on the portion that you actually use.
Term loans are the type of loan that most borrowers think of when they hear the term “business loan.” You are given a sum of money which you need to pay back, with interest, at regular intervals over a given period of time.
The thing to be aware of with term loans is that they need to be repaid promptly, so they aren’t a good choice if you need working capital. Term loans are best when you have a large purchase coming up (real estate or equipment) and you’re going to use all of the loaned funds towards that business expense right away.
As you can imagine, equipment financing is used to purchase business equipment like machinery or vehicles. The equipment you purchase with the loan is used to help secure the loan.
Equipment loans generally have low interest rates and most allow you to finance between 80% and 100% of the cost.
Invoice factoring is the process by which businesses sell their unpaid invoices to “factoring” companies. These companies will give a cash advance that is generally between 70% and 100% of the invoice, and then will collect their payment when the customer pays the invoice.
If you have a lot of unpaid invoices that are hurting cash flow, this type of financing can be helpful.
Merchant cash advance
A merchant cash advance provides business owners with funds in exchange for a percentage of their income over a certain period of time. Payments are made daily as a percentage of the customer transactions that day.
These types of loans typically have high interest rates since they take a percentage of your sales, so we only recommend using these as a last resort.
How to get a small business loan
Now that you’ve determined how much you need to borrow and learned what types of loan may be the most beneficial to your business, it’s time to put your plan into action.
Follow these steps to acquire your small business loan.
Determine which type of loan you need
Before you can apply for a loan, you need to determine what type of loan your business needs. Do your research to figure out which types of loans suit the needs of your business best and then find a lender that can deliver.
Find the best lender for your business
There are several different types of lenders out there who want to help your business succeed (and make some money in the process). Determine the type of loan you want will help you narrow down your list of lenders that you can choose from.
Common types of lenders that small businesses go to:
- Commercial banks
- Local community banks
- Direct online lenders
- Peer-to-peer lending sites
- Bank lenders with SBA guarantees
Determine if you are eligible for a small business loan
Carefully examine your personal and business credit history, revenue history, assets, and total debts. Lenders make judgments based on all of these things and how high of a risk it will be to give you a loan.
Answering some of these questions can help you to decide if a lender will make the judgment call that you want to hear:
- Do you make payments on loans on time?
- Do you have any outstanding debts that haven’t been paid?
- Do you have valuable assets that can stand as collateral?
- How long have you been in business?
- Do you have any venture capital investors, strategic investors, or angel investors? (Having investors looks good to lenders)
- Are your financial statements in order?
Get your financial statements together
Leading on that last question, you should definitely get your financial statements in order before applying for a small business loan. Your lender will ask for these, so it’s vital to prepare yourself ahead of time and be well aware of how your finances look.
Lenders will carefully review your statements to analyze your cash flow, margins, accounts payable and receivable, and more. Be prepared for questions about your records, and keep your accountant involved in the process.
Gather detailed information and documentation for your loan application
We mentioned a list earlier of basic requirements that you should have prepared before applying for a business loan. Make sure you have all of those details together in order to make the application process go as smoothly as possible.
Research your lender and loan type beforehand as well to see if there are any additional, non-typical requirements by the lender.
It takes time to get statements and records together, so give yourself the time you need and don’t postpone the application process by delaying this key step.
Know how much you want to borrow
You can’t ask for a loan without knowing how much you need to borrow. The lender will want to know the amount you wish to borrow and how you plan to use the funds.
It can be good to ask for a little more than you initially planned for just in case you hit any hurdles while spending the funds.
Determine the security options for the loan
Lenders just want to make sure they are going to get their money back (with interest), so they will have different security options to improve the odds of that happening.
This is often coined as “collateral” but may simply be a security interest to the lender on company assets.
Another thing that lenders will do to ensure this security on their funds is to get a personal guarantee from the business owner. It’s usually a good idea to avoid this when possible because this puts the owner’s personal assets at risk as well as the business’s assets.
Analyze the terms of the loan
Don’t just blindly accept any loan because you need the money. You need to make sure the terms of the loan make sense for your business and that you can actually deliver on them.
Key terms you should review with your lender and accountant:
- What is the interest rate on the loan and can it vary over time?
- How often can you pay the interest?
- When is the principal interest due or is it spread over the lifetime of the loan?
- What’s the loan origination fee?
- Are there any other costs or fees associated with the loan?
- Are there limits on how the funds can be spent?
- Are there any security requirements?
- Can the loan be paid off early? Is there a penalty for that?
Review your online presence
Lenders are going to perform their due diligence to ensure that your business is going to be a valuable investment for them. To ensure that your business is reputable and professional, they will likely check to see what your online presence is like.
This will include your website, social profiles, any online reviews your business has, and even the business owner’s personal accounts and social posts.
If there’s anything that you think might prevent you from getting a loan, make improvements and updates before you apply.
Apply for the loan
Once you are familiar with the process and know what type of loan you want, it’s time to put in your application. Depending on the type of loan you are getting, the waiting period for a business loan can be anywhere from 24 hours to 6 months (this time frame should be disclosed to you when you talk to the lender).
If you want some help improving your online reputation before applying for a business loan, Womply’s reputation management software can help you manage all your online review profiles and customer reviews in one simple dashboard. You can even set up customizable, automatic review replies if you desire.
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