How To Apply For A Small Business Loan: Things To Know Before You Sign Up

How To Apply For A Small Business Loan: Type Of Loans, Kind Of Lenders And More

close-up photo of a small business loan application

Learn about how to apply for a small business loan including what options you have and the kinds of lenders from which to choose.

Small business loans are available in many forms and from a lot of lenders. There are traditional lenders and alternative lenders, but both are going to require much of the same information and have similar processes. You could get a small business loan for several reasons including hiring new employees, funding research, enhancing marketing efforts, and much more.

The process can be confusing and riddled with red-tape. A great place to start is the Small Business Administration. There is a great deal of useful information on their website, but it can still be confusing. They use a lot of accounting terms and banking language that many of us simply won’t understand. Let’s cut through the fog and jargon.

What Types of Small Business Loans are Available?

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The first stage is figuring out which kind of small business loan you should be trying to get. There are several different types of loans, and the options depend heavily on your business and business needs.

Small business line of credit – this is arguably the most sought-after type of small business loan. This loan lets you access funds from a lender as you need them. This may be a cheaper option since you don’t pay any interest unless you use the credit. Instead of paying interest on a fixed loan of, for example, $50,000 you would only pay interest on the amount of money you have actually used to date.

There are fees associated with setting up this type of loan, but in the end, it is much cheaper and a better option for small businesses that only need a little extra funding from time to time.

If you don’t use any of your credit or pay it off at the end of each month, you will still have to pay a few at some point to renew the line of credit. This renewal usually happens once a year and is similar to an annual fee attached to credit cards.

  • Working capital loans: This loan is used mostly to offset fluctuations in cash flow. These loans are better suited for companies that operate seasonally such as Christmas tree farms or any other farm for that matter. These loans tend to be short-term loans that vary in length from 1-year to 15-days.
  • SBA (Small Business Administration) loans: These loans usually have a low-interest rate and are secured by the SBA. Since the loan is SBA guaranteed lenders offer lower interest rates and more flexible repayment terms than most other types. However, it adds a lot of time and red-tape to the process if you use the SBA.
  • Small business term loans: Term loans have a specific amount attached to them. You can use for just about any business purpose. They’re typically set up on longer repayment schedules which is both good and bad. Payments are lower on a loan of $100,000 if you pay it back over six years, but you pay a lot more interest this way.
  • Equipment loans: These loans are used to buy equipment. Like buying a home or car, a down payment is necessary in most cases. Repayment is scheduled similarly to a car loan as well.
  • Small business credit cards: Technically this is a loan. If you need funds to buy office furniture, fuel, office supplies, or similar collateral materials; a credit card is a better option than seeking an actual loan. In most cases, a credit card is easier to obtain. Interest rates on credit cards can be very high compared to loans, so choose carefully.

What Kind of Lender Should I look For?

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There are more lenders today willing loan small businesses money than at any point in history. The trick is finding the lender that fits your needs and can loan you the money. Some lenders only deal in short-term loans or equipment loans while others may offer every type of loan. Some alternative lenders have their own small business loan programs, but that falls outside the scope of this article.

  1. Local community banks: Your local bank, where you’ve had a checking account since high school, is a great place to start. Community banks tend to want to work with local businesses. It’s in their interest to help you provided you have a solid business plan and a marketable product or service.
  2. Large commercial banks: These banks are less forgiving than community banks and don’t have any local ties. The process will be slower, but they have more money to loan.
  3. Direct online lenders: There are several budding online lenders to choose from these days. Most online lenders offer short-term loans, but the process is painless. In most cases, you only need to fill out a form online and wait for a response. You may still have to have collateral if your credit score isn’t perfect or you are seeking a large sum like $100,000 or more.
  4. Peer to peer lenders: These aren’t actually lenders. These tend to be websites where you can ask for a loan from a collective group of people that are willing to take a chance and loan you money. In some cases, a peer to peer lender is more like an agent that helps you find a lender based on your needs and credit score.
  5. Banks that offer SBA secured loans: These banks could be any bank from your community bank to a large commercial bank. The advantage to using a bank that provides SBA loans is they can make it easier. They’ll have staff that can help you understand the application process and walk you through it.

Once you choose a few lenders to approach, make sure your financial information is in order. They will consider your credit score and your credit report. You can have a high credit score and still get turned down for a loan if a lender thinks you are applying for too many loans at several lenders. Each time they check your credit score it gets added to your credit report.

Clear up any outstanding debts or loans you already have, unless you’re seeking a small business loan to clear up your current business debt.

Determine where your cash flow will come from and how you plan to pay back the loan. You need to know this and have a plan in your hand when you approach a lender. Draw up a list of any real property your or your business owns such as land, buildings, or vehicles. These can all be used as collateral if they have no liens attached to them.

What Information Do I Need To Have Ready?

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If you plan to be a successful business person you should already be organized. In the end, the lender makes the judgment call on any loan you may get. Your credit information and collateral are a big part of that decision. However, it’s still a decision made by people. Remember that people notice when you are not organized.

Have this information ready before you go to a lender if they apply to your business:

  • Name of your business
  • Tax ID numbers if applicable
  • List of executives, officers, or owners
  • Your businesses legal structure (LLC, C corporation, etc.)
  • Financial statements going back three years
  • Projected earning or projected financial statements
  • Business licenses or state ID information
  • How much money you are seeking and why
  • Collateral you have to secure the loan with
  • A business plan
  • Tax returns for you or your business going back three years
  • Bank statements if your lender isn’t your regular bank

If your business is new or just starting up, some of this information may not be available yet. If this is the case, have an answer ready for the lender. Explain why you don’t have financial statements or why you don’t have a list of business collateral. Not being able to answer the questions is much worse than simply saying you haven’t gotten the tax ID yet.

Review then Review Some More

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Review everything a few times, so you know all the details about your loan. Review every step you will need to take before going to a lender. Never assume it will be ok if you bring the information to them later. Present yourself as organized and dedicated when you sit down with a loan officer or bank agent.

Review every detail of your company’s website and social media presence. Lenders may review them to check out how your customers feel about you. They may also use them as a reference for a number of other things.

Review all your financial information. If there are any blemishes on your credit report, be prepared to explain them. You will have to account for any lapses in repayments of other loans or gaps in income.

Conclusion

Small business loans are out there, and you can get one. Do your homework and get organized. Decide which type of loan you need and research lenders. Spend some time on Google researching a lender before you approach them.

Author: Jon Stahl

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