1. Decide on the type of loan you need to finance your business
SBA loans or traditional term loans. These often have high borrowing limits – SBA loans can be as high as $ 5.5 million, for example. Many lenders also offer specific products to meet the needs of a growing business, such as loans for the purchase of equipment or vehicles.
Start-up funding, such as business credit cards and personal loans. These lenders need cash flow to fund the loan repayment, so businesses in their first year typically cannot get commercial loans. Instead, you will have to rely on other funding.
A business line of credit. It might make sense if you want to manage day-to-day expenses. This type of flexible funding allows you to tap into the funding needed to cover expenses such as payroll or unscheduled repairs, providing a useful safety net.
2. Find out if you qualify for a business loan
What’s your credit rating?
How long have you been in the business?
You must have been in business for at least a year to qualify for most online small business loans and at least two years to qualify for most bank loans.
Are you earning enough money?
Many lenders require a minimum annual income, which can range from $ 50,000 to $ 250,000.
3. Find out what payments you can afford
Take a close look at your business’s financials, especially cash flow, and assess how much you can afford to apply toward loan payments each month.
Some online lenders require daily repayments, so be sure to take this into account.
To comfortably pay off your loan each month, your total income needs to be at least 1.25 times your total expenses, including your new repayment amount, says Darden. For example, if your business income is $ 10,000 per month and you pay $ 7,000 in rent, salaries, and other expenses, you should be able to afford a monthly repayment of $ 1,000. Your income ($ 10,000) is 1.25 times $ 8,000 of expenses.
4. Decide if and how you want to secure the loan.
A secured loan requires business collateral, such as property or equipment, which the lender can seize if you do not repay the loan.
Providing security is risky, but it can also increase the amount lenders allow you to borrow and earn you a lower interest rate.
Lenders may also require personal collateral even for unsecured loans. This means that you will personally repay the loan if your business cannot, and that it can let a lender take care of things like your house or car if you default.
5. Compare small business lenders
There are three main sources of small business loans: online lenders, banks, and not-for-profit micro-lenders. Each usually has multiple products, but one may be better in some cases than others.
When to get a business loan from online lenders:
Online lenders offer small business loans and lines of credit of around $ 1,000 to $ 5 million. The average annual percentage rate for these loans ranges from 6% to 99%, depending on the lender, the type and size of the loan, the repayment term, the borrower’s credit history and whether collateral is required.
These lenders rarely have APRs as low as those offered by traditional banks, but approval rates are higher and funding is faster than with banks – up to 12 hours.
When to get a business loan from banks:
Traditional banking options include term loans, lines of credit, and commercial mortgages to buy property or refinance.
Through banks, the US Small Business Administration provides general small business loans with its 7 (a) loan program, short-term microloans, and disaster loans. The SBA provides loans of up to $ 5.5 million, with 7 (a) loans averaging $ 704,581 in fiscal 2021, according to the Congressional Research Service. The average SBA microcredit is $ 13,000.
Obtaining financing takes longer than other options, but banks are usually the lowest APR option.
When to get a business loan from microloans:
In addition, the loan amount is, by definition, “micro”. But these loans can work well for small businesses or startups that cannot qualify for traditional bank loans due to limited operating history, poor personal credit, or lack of collateral.
Estimate the cost of a business loan
6. Gather your documents
Before applying, make sure you have all the required documents. Locating these files now and making them easily accessible will help streamline the process of getting a small business loan.
Depending on the lender, you will need to submit a combination of the following:
Tax returns for companies and individuals.
Professional and personal bank statements.
Company financial statements.
Commercial legal documents (for example, articles of incorporation, commercial lease, franchise agreement).
7. Apply for a business loan
You did it! Now that you’ve determined the type of loan and the right lender for you, it’s time to apply.
Start by looking at two or three similar options based on loan terms and annual percentage rate, or APR. Because the APR includes all loan charges in addition to the interest rate, it is the best way to understand the total cost of a business loan for the year.
From the loans you are eligible for, choose the one with the lowest APR (as long as you are able to handle the regular loan payments) and apply with the documents you have gathered.
Note that the credit bureaus do not differentiate between requests for business and personal information. If you use your personal credit history, your credit score could be affected when applying for a small business loan, which is why it is important to choose your best bet.