Building a business requires capital, and one way to obtain that capital is through a business loan. But qualifying for a business loan can be hard if you don't meet business lenders' strict standards.
As a result, the more you know about what lenders require and what you need to be eligible, the easier it will be to get approved or to the find the next best thing.
How to Get a Business Loan
Here's what you need to do to get funding for your business with a business loan.
1. Determine How Much Money You Need and Why
Lenders will likely ask you this question, and it's also good for you to know, so you can justify taking out the debt.
Depending on how established your business is, your reason for taking out a business loan could fall into one of five categories:
- To get started
- To manage day-to-day expenses
- To have a safety net
- To invest in new equipment or inventory
- To start building a business credit history
Now is also a good time to decide how much you need. Avoid guesstimating because you could end up with more debt than is necessary, or less money than you need. Instead, take the time to calculate the loan amount based on detailed cost projections, and how much you can afford in monthly payments and interest.
If you're not sure how to do this, consider hiring an accountant who can help you and other accounting needs.
2. Decide Which Type of Loan Is Best
It may be difficult to get a business loan if you're just starting out. Many small business lenders require you be in business for a certain amount of time and have a minimum annual revenue.
If you have no revenue and no established business, you might also consider applying for a personal loan or a small business credit card.
Personal loans and business credit cards are unsecured, so they don't require that you put up collateral like a business loan. That said, they typically charge higher interest rates than business loans. Also, personal loans don't help build a credit history for your business.
If your business is established, you'll have several other options to fund your business, including:
- Small Business Association (SBA) loans
- Bank loans
- Business lines of credit
- Invoice factoring
- Merchant cash advance
Each of these options varies in eligibility requirements, terms, and costs. Research each option thoroughly to determine which is best for you and your business.
3. Check Your Credit
If your business is established and you've borrowed money in the business' name before, you may have a business credit score. Check your business credit report to get an idea of where it stands and what you can potentially do to improve it.
The Experian Intelliscore Plus business credit score ranges from 1 to 100 and predicts seriously derogatory payments.
|Intelliscore PlusSM Score Range||Risk Level|
|51-75||Low to Medium Risk|
If you don't have a business credit score or your score is fairly low, you may need to rely on your personal credit history to get approved for a loan.
You'll have a better chance of getting approved for a loan if your personal credit score is considered good or better, so check your personal credit score to see where it falls. Here are the ranges for the FICO® 8 Score:
|Credit Score||Rating||% of People||Impact|
|300-579||Very Poor||16%||Credit applicants may be required to pay a fee or deposit, and applicants with this rating may not be approved for credit at all.|
|580-669||Fair||17%||Applicants with scores in this range are considered to be subprime borrowers.|
|670-739||Good||21%||Only 8% of applicants in this score range are likely to become seriously delinquent in the future.|
|740-799||Very Good||25%||Applicants with scores here are likely to receive better than average rates from lenders.|
|800-850||Exceptional||21%||Applicants with scores in this range are at the top of the list for the best rates from lenders.|
If your credit isn't where it needs to be, consider taking some time to improve your credit score before applying for a business loan.
4. Compile Financials and Gather Documents
Business lenders need to know if your business is a good risk before giving you money. While a business credit score can help with that, it's not the only thing lenders check.
For example, you'll also need to put together your financial statements, including your balance sheet, income statement, and cash flow statement for the past year or two. You may also want to put together a business plan and include these financial statements with forecasts for the next three-to-five years.
Other statements and documents you may need when applying for a business loan may include your:
- Business and personal bank statements
- Business or personal credit report
- State registrations and licenses
- Articles of incorporation or other required legal documents
- Business and personal tax returns
You don't necessarily have to have all of this information together when you apply. But it can speed up the process significantly if you're prepared.
5. Determine Your Collateral
Business loans typically require collateral to protect the lender's interests. If you have an established business, you may be able to put up some of your business assets to secure the loan, including:
- Accounts receivable
If you don't have sufficient business assets, you may have to use your personal assets as collateral, such as your vehicles or home. But remember that the bank can take these assets if your business defaults on the loan, so avoid using personal assets that you can't afford to lose.
6. Shop around for the Best Business Loans
You can get business loans from several different lenders, including traditional banks, online lenders, and nonprofit microlenders.
The best way to find the best terms for your business loan is to compare offers from several lenders. Start by determining which lenders offer the type of business loan you want, then compare at least three or four lenders in that category.
Look at the annual percentage rate (APR) they offer, as well as other terms, such as loan limits, repayment terms, fees, and penalties. The most important factors to keep in mind are the monthly payment and the total cost of the loan.
If you're looking for a personal loan instead of a business loan, the process is a little more straightforward. Simply compare several top personal loan companies based on rates and other terms, and pick the one that works best for your budget.
7. Apply for and Close the Loan
Once you find the right lender and loan, go through the application process. Because each lender is different, you may be asked to provide documentation in addition to what's described above. Get any additional documentation to the lender as soon as possible to avoid delays.
Note that it can take a while to process a business loan application, so you'll want to apply long before you actually need the funds. For example, it can take up to two to three months to get an SBA loan, depending on the situation.
Keep in contact with the lender throughout the process to make sure it's going smoothly. As soon as the loan closes, create a strategy to pay off the loan.
A good strategy can help you avoid the problems that come with defaulting, including losing your collateral and seeing a negative impact to your business or even personal credit score.
The Bottom Line
If you need funding for your business, a business loan is a great way to do that. But it's important to understand how to get a business loan in a way that limits your costs and gets you the type of capital you need.
By following these steps, you'll have a better chance of getting the type of loan you need, and at a price your business can afford.