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A business loan can provide the funds you need to grow your business, cover daily expenses, and purchase equipment or inventory. If you’ve never applied for a business loan, you might not be sure where to start or what documents are required.
Here’s a simple guide that walks you through the process of evaluating your options and preparing for your business loan application in five easy steps.
1. Decide why you need financing
There are several types of small business loans. Deciding why you need financing will help you choose the right type of loan. Here are some common scenarios:
- Buy new equipment Some lenders offer equipment loans. This type of loan is designed to help you buy professional equipment, such as machinery or office furniture. The loan is secured by the equipment, so the lender can grab it if you don’t pay back the loan.
- Borrow a small amount of money. If you need to borrow a small amount of money, consider applying for a microcredit. The Small Business Administration (SBA) in the United States has a microcredit program that allows qualified applicants to borrow up to $ 50,000. In addition, there are non-profit organizations that offer microcredits, such as Kiva and the Women’s Microfinance Initiative.
- Start a business. Since most lenders have a minimum amount of time for business needs, it can be difficult to find one that will give you a start-up loan for a new business. If you are just starting out, you may need to apply for a microcredit or a business credit card. You may find it easier to qualify for a business credit card than other types of business loans because approval is based on your personal credit score.
- Pay for daily operations. A working capital loan, a short-term loan used to cover daily expenses like rent and payroll, can help cover temporary cash flow issues.
- Borrow money as needed. If you don’t know the exact amount you need to borrow, a business line of credit might be a good option. Once a lender gives you a line of credit, you can withdraw funds up to a certain amount to cover your business expenses and only pay interest on the amount you borrow.
2. Check your eligibility
While business loan requirements vary, here are four things lenders are likely to consider when reviewing your small business loan application:
- Credit score. When you apply for a business loan, a lender will look at your personal and business credit scores. They help the lender assess the likelihood of you paying off your loan. In general, the higher your credit score, the better your chances of getting a loan and getting a low interest rate.
- Deposit and / or personal guarantee. Some lenders require you to produce collateral (something of value, like equipment or inventory) that she can seize if you don’t pay back the loan. Some lenders may also require personal collateral, which means you have to secure the loan with personal assets, such as your savings, house, or other valuable assets.
- Time in business. A traditional bank typically requires a business to have been in business for at least two years, while an online lender typically requires only one year. If you’ve been running your business for less than a year, don’t be discouraged. Some online lenders will approve qualified applicants who have only been in business for six months.
- Annual revenue. Your total annual sales are also a relevant factor. Before you apply, ask a lender what the requirements are and look at your business finances to see if you are meeting them.
3. Compare business loan options
There are several places where you can find small business loans. Here are three of the most common types of lenders.
Online lenders offer a variety of loan products for small business owners, including term loans, merchant cash advances, lines of credit, and microloans. Loan approval rates were higher for online lenders than for traditional banks in 2019: 80% versus 74%, respectively, according to a 2019 Federal Reserve Small Business Credit Survey.
One of the reasons for this is that online lenders often have less stringent requirements than traditional banks. Therefore, you may find it easier to get approval for a business loan from an online lender if your credit is below average. Additionally, online lenders often have much faster turnover – some may issue funds as early as the same business day.
However, a major downside to taking out a business loan from an online lender is that they often charge higher interest rates than a traditional bank.
Related: Average business loan rates: what will your fees be?
Traditional banks offer many of the same types of business loans as online lenders. The main advantage of applying for a small business loan from a bank over an online lender or micro-lender is that it usually offers lower rates for qualified applicants.
One downside to applying for a business loan from a bank is that it often has more stringent eligibility requirements. If you have a bad personal credit score (a FICO score below 580), you will probably have a hard time qualifying without a co-signer, that is, someone who agrees to repay the loan if you fail to meet. your payment obligations.
Traditional banks also may not be the best option if you need quick access to funds – applicants were most frustrated with long wait times, according to a 2019 SBCS survey. For example, loan processing SBA through a bank can take several weeks or even months.
Microlenders are typically nonprofit organizations that provide microloans of up to $ 50,000 to qualified applicants, often designed to provide financing to business owners who are not eligible for traditional business loans. Micro-lenders generally have less stringent eligibility requirements.
For example, the Kiva microlender does not have a minimum credit score requirement. Instead, it approves candidates on the basis of “share capital”. To qualify, you need to have a certain number of people loan you money through Kiva’s platform before your loan application becomes public on their website.
Related: Business loan calculator: estimate your payments
4. Gather the required documents
Once you understand your loan options, gather the required documents. A lender will likely ask for these items:
- Personal and professional tax declarations
- Commercial licenses
- Articles of incorporation
- Personal and business bank statements
- Profit and loss accounts
- financial state
- Business plan
- Building lease
If you are unsure what documents are needed, contact the lender before submitting an application.
5. Submit your application
The last step is to submit your small business loan application. Depending on the lender you have decided to work with, you can do this online or in person.
Here is some information a lender might ask for:
- Your name
- Company Name
- Social security number (SSN)
- Desired loan amount
- Purpose of the loan
- Company tax identification number
- Annual revenue
Once you submit your application, you will need to wait for an approval decision. If your loan is approved, a lender will send you a loan agreement to sign before issuing your funds or a line of credit that you can draw on.
Frequently Asked Questions (FAQ)
What Credit Score is Required for a Business Loan?
Since lenders have different eligibility requirements, the personal credit score you need to qualify for a business loan varies. That said, the minimum credit score requirements can range from 500 to 680.
The business credit score required to qualify also varies from lender to lender. Also, it depends on the type of loan you are applying for and the business credit rating used by the lender. For example, when it comes to SBA loans, you will generally need a minimum business credit score of 155 to pass the SBA screening process. However, most lenders set their minimum score requirements between 160 and 165.
How do I get a business loan with no cash?
Although most lenders charge annual income, it is possible to get a business loan if your business does not have the money. Some lenders do not offer certificateless business loans, that is, loans that do not require verification of business income. To qualify, you will likely need to have excellent credit and provide personal collateral.
Can I Get a Business Loan With Bad Credit?
While it will likely be more difficult for you to get approved for a small business loan with bad credit, it is possible. Some lenders specialize in offering business loans to borrowers who have bad personal credit. However, if approved, a lender will most likely charge you a higher interest rate.
To benefit from a lower interest rate and increase your chances of approval, consider applying with a co-signer who has a good credit rating (at least 670, according to FICO) and a decent income, if possible. A co-signer is someone who agrees to repay your loan in the event of default. Before you ask someone to co-sign for you, make sure they understand that a missed payment can damage their credit.