There are two ways entrepreneurs tackle the how to get a small business loan question. One way is to write a plan and apply for the loan. The other is to just open your doors. No loan required.
Well, not that easily. Your startup still needs cash of course; you just use your own. Unless you apply for a small business loan. Getting approved for a loan could make things easier.
The popularity of small business loans for startups are now commonplace and beneficial in many ways. They can provide a financial cushion, help to bridge payroll cost, meet equipment or product expenditures, and other overall business expenses.
So, let’s get started.
1. When Do You Need The Loan?
Are you an established firm that needs seasonal funds to get through a slow period? Get after it when things are super busy, not slow.
Are you launching your new business soon? If you plan to start your new company sometime in the future, mulling over business loan options is not a bad idea.
Either way, fill out that business loan app now. Bankers wants to see that an approval will add to your business success. And not depend on it.
2. How Strong Is Your Credit?
In other words, can you get a small business loan with bad credit? Yes, you can. Small business loans are approved with low scores.
The first thing to remember is how much you’ll pay for that loan. Of course, the stronger your credit the better the terms.
There are a host of companies that can help you improve your overall credit outlook. Credit Sesame and Credit Karma are two popular ones. You might also improve your score by verifying items found on your Transunion, Equifax, and Experian reports.
Why is this important?
Without a track record, lenders will rely on your personal credit to approve your loan application. But this condition will change with time.
As your business grows, so will your company’s credit. Therefore, you shouldn’t have to rely on your personal credit in the future.
To help with this, create a Dun & Bradstreet business profile. D&B collects and analyzes business data like Experian does for individuals. If done correctly, your business will secure future loans on its own.
3. Know Your Lender’s Requirements
The third tip to how to get a business loan is to find out your lender’s qualifications. Without a doubt, your approval chances increase if you’re prepared. Search your lender’s website to get an idea of what to expect.
This does not mean you will automatically be denied if you come up short in any area. It is just a guide. But try to avoid working with a lender that requires perfect credit.
Of course, there are other options if your credit score does not meet their minimum.
Traditional bank loans are usually options for well-established companies. Businesses with a proven track record.
In short, an entrepreneur shouldn’t be discouraged if their loan is declined. Denial notices are not a rejection of your company, you just need a better match.
4. How Will The Business Loan Be Used?
The fourth step to new business loans is outline the use. Even free grants require details.
The first question any small business lender will need answered is what you will do with the money? Do you plan on purchasing inventory with your loan? Do you need the loan to hire staff?
A well thought out plan for the cash gives you an edge.
Lending companies want to know how long you’ve been in business. You won’t have the best answer as a startup, but your outlook will improve with time.
Share your previous business experience. Any management skills learned will be helpful.
They will get specific regarding your numbers. What are your current sales? What are your projections? How many contracts have your secured?
If your immediate future is not sunny, don’t worry. An outline of past achievements should tip things your way.
Don’t be shy. Now is the time to shout about your marketing efforts. Maybe you sent out more bids, and increased sales. Paint a clear picture for lenders.
5. Organize All Loan Documents
Great record keeping is mandatory for your success. And it is mandatory when applying for a small business loan. Have all your documents ready to go.
A credit report.
Financial statements that include current and prior bank statements, income statements, and cash flow reports.
Articles of Incorporation and operating agreement.
Tax returns that cover the past three years.
Business license and EIN number.
Contracts or agreements with customers.
Business plan. Especially important for startups who won’t have the aforementioned documents.
A current resume might be beneficial too. It can be presented in lieu of some docs that will not apply to you.
6. Business Loan Types
Peer-to-peer, line of credit, receivable financing, factoring, merchant cash advance, and more. Deciding which one is best will depend on how old your business is.
Peer-to-Peer or P2P lending can be a great choice if you are not yet established. Companies will consider backing your commercial loan if certain criteria are met.
Also, rates can be competitive. Some P2P lenders even rival banks with lower terms. P2P lending can lead to networking opportunities since you are essentially borrowing from peers. But if these options don’t appeal to you we have more.
Line of Credit. Your bank can approve a line of credit or a regular loan. Speak to a loan officer, or simply apply online.
However, regular bank loans usually have tougher approval guidelines. But if you have been responsible with your credit, you’ll most likely receive an approval letter.
Small Business Administration (SBA) loans are yet another option. These loans are made by traditional banks, and guaranteed by the federal government. They require some red tape, but can have more advantages. As a matter of fact, SBA loans can have longer repayment terms.
Merchant Cash Advance is relatively easy to get. First, your credit card processor will take a look at your average billing. Second, they will advance you a portion of this amount. Next, you pay them back.
Of course, you’ll pay a processing fee out of your future receivables.
For example, let’s say your moving business secures a $5,000 dollar advance. You process $15,000 dollars in monthly revenue. And your average customer billing is $750 dollars. You will repay your merchant $150 dollars and keep $600. You’ll repeat this until your balance is paid.
Accounts Receivable Financing is another business loan type. It is fast option for certain businesses. Financing of this type relies on your monthly revenue, instead of your credit.
This may be an option worth pursuing if you’re having cash flow issues. But, although funding is quicker, the rates are usually high.
7. Do You Have Any Collateral?
Finally, we reached the last business loan type on our list.
If you don’t like the others, you can put up collateral. For instance, you will secure your loan with something of value that you own.
In the example of the moving company mentioned earlier, a lender may consider giving you a loan for truck #2 if you own truck #1.
For instance, if you show the bank that a second truck will increase sales they may do the trick. You’ll put the first truck up as collateral. A guarantee to the bank.
If your business is growing, securing your loan this way maybe a risk worth exploring.
So, what’s the bottom line regarding small business loans? Building credit and being extended credit take time. Staying on top of your business–and any loans–will increase your chances of success.