Money exchanging hands for a small business loan

How to Get a Small Business Loan in 5 Steps

Getting a small-business loan can be anxiety-inducing, and requires some real effort, but the good news is that hundreds of these loans are made every day, and if you’re prepared, you’ll be able to qualify and grow your fledgling business. Obtaining a loan, whether for a startup or to sustain an established business, can help with costs, payroll, inventory, and other day-to-day expenses.

We’re here to explain to you how you can prepare to get a loan or other funding option, what you need to do, and walk you through the process.

Step One: Do Your Research

Going into debt should never be taken lightly, and you should put at least as much thought into getting your funding as you do into running your business–after all, the two are inextricably linked and the failure of one could mean the failure of the other.

So there are two main things you need to research before you start your journey: What types of loans there are, and What type of lenders there are.

What Type of Loans Are There For Small Business?

While there are many different loan (or funding) options–too many to list here–here are the main ones that a small-business owner will be looking into.

Line of Credit

A small business line of credit is similar to a credit card, in that it has an upper credit limit (for example, $100,000) and you get charged interest on the money that you have borrowed. The difference from a credit card is that a small business line of credit acts something like a checking account. The funds are in your bank and ready to use for whatever you need to use them for, just like a checking account, and it’s when you access them that the interest on them begins.

Typically, interest is paid monthly and the balance is often amortized over a number of years. There is often an annual fee for maintaining a line of credit.

Term Loans

Term loans are perhaps the most basic form of loan, where you borrow a set amount of money (say, $200,000) which can be used for any number of things but especially for expansion, renovations, buying property, purchasing equipment or other business operations.

Interest is paid monthly and the principal, at least with Small Business Funding is usually paid anywhere from 2 – 5 years. Term loans can be secured or unsecured, depending on the financials, credit of the borrower and the lender. These loans are typically reserved for large, one-time expenditures which the small business can quickly pay off.

SBA Small Business Loans

The US Small Business Administration offers low-interest-rate loans for small businesses, backed and guaranteed by the SBA. The good thing is that, because these are backed by the SBA, they generally have lower interest and better terms than other loans. The bad side is that SBA loans require a lot more hoops to jump through to get them, and are not the fastest turnaround by a long shot. Getting an SBA loan is wise if you have the time and resources to wait for several months, but bad if you need financing immediately.

Equipment Financing

While some loans are designed to be used for payroll and inventory, equipment financing is just what it says: it’s for purchasing equipment. Typically the purchased equipment is used as collateral. Interest on this financing option is paid monthly and the principal is amortized up to 5 years. Financing can be used to buy include vehicles, forklifts, computer hardware and software, and machinery.

Working Capital Loans

A working capital loan is a loan that the company uses to finance its daily operations. These loans are often used to pay for seasonal changes, such as ordering large amounts of inventory before Christmas or Back To School. Working capital loans are usually short-term, with payback due within anywhere from a month to a year, and such loans are typically under $100,000.

What Type of Lenders Are There for Small Business Loans?

Direct Online Lenders

Direct online lenders, or alternative lenders, such as Small Business Funding, make the process as quick and convenient as possible–with an emphasis on the quick. These lenders typically are best for fast small business cash advances, working capital advances (different from a working capital loan), term loans, and SBA working capital loan. These lenders typically work in the $5,000 to $500,000 range, and can often turn around a loan and have money in your account in a matter of days (depending on the amount, the terms, and the type of loan.)

Large Commercial Banks

These large traditional lenders, such as Wells Fargo or Citibank, have the reputation for stability and the power of scale working for them. They are, however, relatively slow when it comes to working out loan agreements and typically need to see considerably more documentation and paperwork.

Local Community  Banks and Credit Unions

These banks are often easier to work with than large commercial banks, especially if you have an established relationship and account with them. They also are often more willing to take a chance on a local small business as they have more of a small community focus.

Peer-to-Peer Lending Sites

These lending sites are just becoming popular, with the site acting as the middleman between two individuals. These have some success stories and some horror stories, as with all new forms of business. If you use these, be sure to have a lawyer go over the terms of the deal and make sure that everything is on the up and up.

Step Two: Get Your Finances and Credit in Order

Once you’ve determined which type of loan you’re looking for and which type of lender you want to pursue, then you need to make sure your financial house is in order. There are certain things that a lender–any of the above mentioned lenders–are going to want to look at. They are:

Credit Score

Lenders want to know that you’re going to pay them back, regularly and on time, and so they’re going to look at your credit score and credit history in detail. They want to see that you have a history of good payments on credit cards, loans, and vendor contracts.

Depending on the lender and the funding option, the lender may look at your business’s credit. In many cases, lender’s will be looking at your personal credit score (and the score of the principals in the company). So it’s wise to always be reviewing your credit score–long before the loan process begins.

Outstanding Loans

Lenders will also want to know what other loans you have and are currently making payments on. They want to ensure that your current income and revenue will be able to cover your operating expenses, your previous loans, as well as this current new loan.

Business Assets

You’ll want to make a record of any assets that your company has. Do you own your building? Do you own vehicles and equipment? How much cash do you have in the bank? These will all factor into the loan process.

Time in Business

While there are a few lenders who will make loans to startups, they are few and far between. Most lenders are more interested in companies that have at least a few years of business under their belts, both to prove the viability of the business as well as prove the credit history of the business and principals.

Financial Statements

Lenders are going to want to go over your financial statements including at least some of the following: your balance sheet, your profit and loss statement, and your cash flow statement. The lender will use these documents to make determinations about your gross margins, debt-to-equity ratio, accounts payable and receivable, and more. If you’re going for a large loan with a large commercial bank, odds are they’re going to want a CPA to have gone through your books (at your expense) to review them and prepare them for the application.

Step Three:  Prepare and Submit Financial Documents

When it’s time to submit your application, you’ll need to follow your lender’s specific guidelines and make sure that you are offering them everything that they request–missing even one item could get you rejected, or at least delay getting funded.

These financial documents could include any of the following:

  • Name of business
  • Federal tax ID
  • List of executive officers
  • Structure of company (are you an LLC? An S Corp? Etc)
  • Financial statements for the past 2-3 years and year-to-date financials for the current year (this includes balance sheet, profit and loss, cash flow)
  • Projected financial statements
  • Amount of loan requested
  • Business credit report
  • Potential collateral for secured loan
  • Business plan
  • Tax returns for past 2-3 years
  • Bank statements

Step Four: Analyze Loan Offers

If you’ve made it this far, congratulations! The hard work is mostly behind you! But now you have to do a little leg work to make sure that the offers you’re getting from lenders are something that you are willing to accept. Things you’ll want to look at:

  • What is the interest rate or payback on the loan? and if it’s a loan, is it variable or fixed interest rate? (Many loans vary over time depending on the prime rate.)
  • How often are you required to make a payment? (This could be weekly or monthly.)
  • When is the principal due? Is it amortized over the life of the loan?
  • What is the loan origination fee?
  • What other fees are included?
  • Are there any operating agreements imposed on you by the loan (such as a maximum debt-to-equity ratio, or a minimum cash threshold)?
  • Are there any special circumstances where you could default on the loan?
  • What collateral is required, if any?
  • Are there regulations on how the loan money is to be used?
  • Can the loan be pre-paid without penalty? If there is a penalty, is it reasonable?

Step Five: Accept a Loan and Get to Work!

Once you’ve submitted all your work, gotten offers (hopefully more than one) and analyzed the offers to see what is best for you, then congratulations! You’ve just successfully gotten a small business loan! Now you need to spend the money wisely, make your payments on time, and grow your business beyond your wildest dreams!

Now What…

While these steps may seem overwhelming, here are Small Business Funding, we try to make this process is easy and quick as possible.

So see what you qualify for, complete our online business application today.

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