How to Get a Small Business Loan

17 May 2024
How to Get a Small Business Loan

Running a business takes a lot of hard work. To continue to finance one’s dream, a small business owner might find themselves in need of more cash to continue operations or to expand.

Finding funding can be challenging, but there are many good options, most notably loans. Loans are not a one-size-fits-all solution; there are many different types, and the process of identifying the right loan and filling out an application can be downright overwhelming.

Here is an overview of what you can expect when you start the process of getting a small business loan.

Choose the right type of small business loan

Understanding the nuances and complexities of the different loan types can help demystify the process. Before you begin, ask yourself the following questions:

● What does my company need to fund, and how much do I need?

● How much can I afford for payment installations?

● Am I prepared to present a well-thought-out business plan to lenders?

● Can I manage repayment under current interest rates?

● Is my personal and business credit standing in a healthy position?

Once you answer these questions, you can start to narrow down the many loan options and determine your eligibility.

SBA loans

Small Business Administration loans are backed by the federal agency, so lenders that may otherwise deny a loan application are more willing to extend credit. There are several loans under the SBA umbrella, including 7 (a) loan program, Microloan program, CDC/504 loan program, and Disaster loans.

Small businesses can borrow anywhere from $500 to $5.5 million if they meet eligibility rules. These loans usually don’t result in fast approval as the process can take months, but borrowers can usually obtain more favorable rates and terms.

Traditional loans

Need faster access to cash? If so, then a traditional loan might be the better option. Approval is quick, and borrowers can usually have money within a few days. Under this umbrella, there are many different types of loans, including, but not limited to:

● Term loan

● Business line of credit

● Business credit card

● Equipment loans

● Secured or unsecured loan (be sure to understand the differences)

● Working capital loan

● Invoice factoring

● Invoice financing

● Merchant cash advance

Be sure to carefully weigh the pros and cons of each traditional loan option. Traditional loans are not a one-size-fits-all solution. Some loans may work well, but others may have unfavorable terms or very high-interest rates.

Alternative lenders

Business owners who cannot wait for the stringent SBA application process to be completed or are struggling to qualify for the right type of traditional loan may find the solution in an alternative lender.

Alternative lenders are those that are not traditional banks or credit unions. They might be online financial institutions, private direct lenders, crowdfunding, or another unconventional way to secure funding.

Criteria are usually less rigorous than traditional loans. However, interest rates may be higher. Be sure to carefully evaluate and read the terms of the loan very carefully.

Evaluate lenders based on your business loan type

After you’ve narrowed down the viable loan opportunities, sit down and do a careful analysis of each option. Be sure to check these factors:

● List all the loans you know you’ll qualify for and eliminate those you won’t from the list.

● Evaluate each lender’s minimum requirements to qualify for a loan.

○ Business and personal credit score minimums (and how they affect interest rates)

○ Check your company’s debt-to-equity ratio

○ Look at your annual revenue

○ Consider how long you’ve been in business (this matters to lenders)

● Explore current interest rates and whether a lender is offering fixed or variable rates.

● Factor in the number of installments and length of the loan.

● Consider whether the lender requires application fees.

● Determine if you need to supply collateral and what kind.

Try not to pressure yourself into accepting the first loan you qualify for – leave yourself time to carefully weigh all options, so you don’t inadvertently put yourself in a financial situation your business can’t handle.

For example, if you know your winter months are slow in terms of sales, don’t base your monthly repayment on what you can afford during the busy summer months. Only consider feasible loans.

Gather information like your EIN to apply for a small business loan

Most business loans will require borrowers to have an employment identification number (EIN). An EIN is a tax ID, much like a Social Security number, but is used for businesses.

If you don’t have a solid credit or no credit history for your company, an EIN is very helpful. While you’ll need to supply your SSN as well, your company will have more credibility if it has an EIN.

If you don’t have an EIN, it’s easy to apply for one! All you’ll need to do is supply some basic information and submit your application. Once issued, your EIN will also empower you to hire employees and open business bank accounts, along with offering other advantages.

Submit your application for a small business loan

The final step in getting a small business loan is to carefully proofread your application and ensure your information is completely accurate. A simple omission or typo can delay your ability to obtain a loan.

After you have verified everything on the loan application is in order, you can submit it. Depending on the loan type, you may hear back quickly, or it may take some time.

Once the lender approves your loan application, read the terms of the loan very carefully. Make sure you understand all the terms before you sign on the dotted line. You don’t want to inadvertently put yourself in a shaky financial situation.

Use the loan to build your small business!

Congrats! You received approval for your loan. Once you secure the money you need, you can leverage it to improve your company and put it in a more competitive position. Having the option to obtain a loan allows you to use it to build, expand, or buy necessary equipment, empowering you to strengthen your company.