How to Get a Small Business Loan

A Practical Guide for Business Owners Looking for a Loan in 2019 and Beyond

For businesses of all sizes, there comes a point when some major changes need to happen. Unfortunately, many small business owners struggle to get financing. 

If you’re currently looking into investing to grow your endeavors, it’s time to consider a small business loan.

Whether you have a small business that’s ready to take the next big leap or you’re just getting started, small business loans are an important hurdle to jump.

Getting a Loan to Grow Your Business

Loans for small business help to sort out many different challenges. For example, they’re often used to start or expand a business.

In many cases, entrepreneurs employ them to handle the day-to-day expenses related to execution of the activities, including employees’ salaries and maintaining inventory.

According to a report made by the Small Business Administration, bank loans for small businesses reached $600 billion in 2015. There is a strong market out there for financing – and yet, there is plenty of reason to be prudent.

But getting a loan is not a straightforward process nor in paperwork as in visiting different banks to get the ideal number of installment and interest rate. Still, preparation will make the process so much easier.

It’s important to make a strategic plan, from determining exactly what you need the money for, to handing in your application.

PUTTING TOGETHER A BUSINESS PLAN

As an entrepreneur, you’ve got first-hand knowledge on the importance of planning. Fortunately, this same appreciation will come in handy when you’re preparing to see a lender.

Remember, when you go to see a lender, they’ll always be one step ahead of you. They’ll know about your credit score, your cash flow, all your expenses, and more. This is why you need to have a solid idea of what you need from the loan. Beyond that, there are certain must-haves that most lenders will need.

So, let’s start with the basics. Ask yourself what you specifically need the money for: new hardware, more inventory, software updates, consolidate manpower, expanding product reach and training the staff are some valid ideas for considering a loan – and they are enough reason for a lender to approve a credit for you. Even if you’re just having a rough time and need the extra money while you get back on track.

But before you get too excited, remember that the credit terms change with the lender you visit. That said, here are four universal requirements you’ll need to be aware of when applying for a loan:

  • Credit Score: A business credit score is no different than a personal one. Both indicate how likely the individual or company is repay a loan – that is what is called the creditworthiness. The business credit score usually ranks from 1 to 100. You can consult for free your personal or business credit score in Equifax or Experian. For your business credit score you will need the EIN number.
  • Your Annual Revenue: Annual revenue can be found in your financial statements. Financial statements are documents aiming to establish the relationship among income, cash flow, expenses and assets. It offers a quick overlook of the industrial activities, management and future plans.
  • Your Cash Flow: Cash flow is included in the company financial statement. In summary, cash flows show the amount of money available to pay debts, the operational costs, value of assets and earnings.
  • How Long You've Been In Business.

Each of the criteria mentioned above impact the number of lenders you can choose from, the number of installments for the loan and the interest rate.

For the typical small business loan, you’ll need an income of at least 25% higher than your expenses to pay it off without having to worry.

THE TYPES OF LOANS

There are several options when it comes to business financing in the US:

  • Special Business Administration (SBA) Loans
  • Term Loans
  • Business Line of Credit
  • Business Credit Card
  • Invoice Financing
  • Invoice Factoring
  • Merchant Cash Advance

The SBA lists out several types of loans. One of the most popular is the standard 7(a).

You can choose to go for an SBA-backed loan if you’re willing to meet more stringent requirements for a lower interest rate.

Here are some of your other options:

Term Loans

Term loans for businesses are very straight-forward. They aren’t very different from personal loans, except for differences in requirements. 

A term loan involves a lump sum being loaned to the borrower’s business, to be repaid over a fixed repayment period.

SBA Loans

Loans guaranteed by the SBA carry specific requirements for both the lender and the borrower.

They are the most mainstream option, and they offer better interest rates than you’ll find elsewhere.

Business Line of Credit

A business line of credit provides a business with funds up to a specified credit limit. Once you draw money, you must pay back what you’ve drawn as per your arrangement with the lender.

Even so, you can continue drawing the money until you’ve reached the credit limit. Lines of credit are unsecured loans that offer you a flexible way to borrow for your expenses.

Business Credit Card

Business credit cards are revolving lines of credit. These cards usually carry very high limits. You can continue drawing money and paying it back as long as you reach the minimum amount in payments and don’t exceed the credit limit.

Business credit cards also offer rewards for owners such as travel benefits and office supplies. Reason why they are best used for expenses such as flights and any ongoing business expenses.

Invoice Financing

For business working in long term with customers – said for example, retailers, they can access to loans against the amount owed by customers. In this way, business owners use the invoices as collateral for the loan.

Invoice financing is typically fast, and for short-term investments. The main drawback is that this is usually an expensive option.

Invoice Factoring

Invoice factoring allows you to get a loan for an invoice that has yet to be paid. If you’ve made the sales you need to make and are waiting for the money, this is an excellent option.

If you need the money now, you can sell your invoices to a factoring company, and they’ll collect the payment when the invoice is due.

This is a great option for a business owner who needs their invoices paid off fast. Just keep in mind that not all of your partners would be impressed if you chose this option. You also lose control over your invoices and you must pay more than you would with other options.

Merchant Cash Advances

Merchant cash advances are a great way to loan some quick cash, but they often come at a high cost.

A merchant cash advance is an upfront sum of cash given to you in exchange for portion of your future sales. Lenders who provide these loans don’t actually market them as loans most of the time.

So, you can use this option to get a large sum of cash in exchange for a percentage of your future credit and debit sales. However, be warned that merchant cash advances often come with APRs in the triple digits.

LENDERS FOR SMALL BUSINESSES

The most common place to get small business loans is through a bank.

You should know what kind of loan you’re looking for before you choose a lender, of course. One lender may offer you a great deal on invoice financing, but they might not be able to give you an SBA approved loan, for example.

If you’re looking for the best rates, you should try to pursue an SBA loan through a bank. However, if you’re looking for a lower bar of entry and faster access to a loan, you’ll often want to look elsewhere.

Here are some of the places many people get their small business loans:

Live Oak Banking Company

Loan Type: SBA loans
Loan Amount: $75,000 to $1 million
APR: 5.5% to 8.25%
Loan Term: 10 to 25 years Approval Time: 45 days on average

The Live Oak Banking Company is the largest SBA lender in the US by volume. They’ve approved over $1 billion in loans so far, and they offer loans to businesses in most of major industries.

This bank offers great deals for growing businesses with solid finances. However, the number of loans approved is considerably lesser than other lenders, and they have a high bar of entry.

The Live Oak Banking Company does have a few shortcomings. First of all, not all industries can qualify for their loans. Their SBA requirements are also quite stringent.

Lastly, they take a month and a half to approve SBA loans, which is ok, but not so great if you’re in a rush.

BlueVine

Loan Type: Business line of credit
Loan Amount: $5000 to $250,000
APR:15% to 78%
Loan Term:6 or 12 months Approval Time: 12 hours on average

BlueVine is an online lender that offers a few loan options. For now, we’ll just be looking at their line of credit. BlueVine, like many online lenders, markets itself as a simple and fast option for business owners.

You can apply for a business line of credit with them and pull your first loan on the same day.

While their APR is atrocious, BlueVine is a good option if you’re in a hurry. They also have lower requirements when compared to their competition.

Bad credit isn’t a huge concern at BlueVine, as they’ll take more interest in your company’s financials than they will with your credit score. Their cut-off for lines of credit is a credit score below 600.

The main downside to BlueVine is their APR. If you have any trouble paying them back, you’ll be punished severely for it.

Fundbox

Loan Type: Invoice financing
Loan Amount: $1000 to $100,000
APR: 10.1% to 78.6%
Loan Term: 12 or 24 weeks Approval Time: One business day

Fundbox’s invoice financing, otherwise known as Fundbox Credit, is a fast option with very low requirements. This option carries the high APRs that are typical of online small business lenders, but it’s still a safe distance from being the most expensive option.

The main selling point for Fundbox is that its requirements are very lax. If you’ve been in business for at least three months and have $50,000 in annualized revenue, you’re eligible for their invoice financing service.

Another great thing about Fundbox’s invoice financing is that it’s simple and extraordinarily fast to get approved.

The first thing you need to do is create an account on their site. Next, you give them access to your invoicing software. They will use the information they receive to perform a soft pull on your credit score.

They then use all of this information to determine how much money you can borrow from them in an automated process. After that, you’ll be ready to start financing your invoices.

Like many online lenders, Fundbox is expensive. Their APRs are high and their terms are somewhat short, so if you have trouble paying them back, you may get stuck in financial quicksand. The only other downside is their low cap of $100,000.

GATHER THE PAPERWORK

Now that you’ve found the lender that’s right for you, it’s time to prepare the paperwork.

While specific requirements vary by lender, you can expect to be asked for certain things regardless of where you’re trying to get your loan.

When you’re going in for a small business loan, you will typically need to bring:

  • Photo ID
  • Personal & business income tax returns
  • Personal & business bank statements
  • Your business’s financial statements
  • Your business’s legal documents, such as your articles of incorporation

In some cases, it’s useful/necessary to bring:

  • Business licenses
  • Proof of relevant managerial or business experience
  • Collateral

Many lenders will ask for a financial plan for your business if they perceive you as having a limited operational capacity.

The specific type of paperwork you’ll need varies by situation. Let’s use the example of SBA loans, which are a quite mainstream option, but also one of the more stringent ones.

Here are the requirements if you’re applying for an SBA loan:

  • Your credit score
  • A down payment starting at 10%
  • Some collateral
  • Proof of repayment ability
  • At least two years in business
  • No delinquencies or defaults on debts owed to the US government

In many cases you can secure loans much faster and in a simpler manner. Just remember that you usually won’t get the best rates.

HOW THE APPLICATION PROCESS LOOKS LIKE

The application process for getting a small business loan is usually straightforward. The only hard part is that they come with longer checklists than other kinds of loans.

The process of preparing your business plan and paperwork must be done entirely by you. Beyond this point, it’s up to the lender to determine whether to finance your business expenses.

Reaching out to lenders is easy, especially if you opt for an online small business loan. Once you do reach out to them, you’ll need the basic paperwork discussed above.

Beyond the basic paperwork, you must make sure you meet any specific requirements laid out by the lender. These requirements can include you answering specific questions, paying an application fee, or whatever they require.

Once you’ve completed your application and sorted through all the necessary bureaucracy, you’ll have to wait for a decision. Lenders typically let you know how long the decision will take, but if they don’t you can always look online.

Waiting times can vary greatly, but in general online lenders will get back to you in a matter of days, while banks may take a few weeks or longer.

Before you sign off on a small business loan agreement, make sure you know what you’re doing. 

Ask the lender the following questions:

  • What is the APR and what is the interest rate?
  • Does the interest rate change over time?
  • Are there repayment charges?
  • What is the payment schedule?
  • Is there a closing day price? If so, how much?
  • Do you accept my preferred payment method?
  • Will you report my behavior to a credit bureau?

These are more or less the most important inquiries – don’t hesitate to ask more if you’ve got any other doubts.

Many lenders are experts at sneaking things into the fine print. For example, you may have to pay a cost upon signing up (the “closing day” price), a cost which will be rolled into your loan agreement, costing you a lot more in the long run.

Remember, stay sharp and don’t accept a bad deal. There are so many lenders for small businesses out there that you should never feel pressured to stick with one.

Good luck and happy hunting!

Thanks for reading our guide on how to get a small business loan. If you have any questions please leave a comment below and I'll help you out the best I can!
Kevin Horowitz
Loan Officer // Lead Content Manager

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