Small business loans are, nonetheless, a necessary part of bringing your business to the next level. On this page, we’ll give you an overview of some of the loan options, the steps you need to take, and what you can expect out of the small business loan application process.
Borrowing for your small business can seem daunting. Hopefully, we’ll be able to clarify the process a bit for you here.
Is Your Business Eligible?
The first question you need to consider is whether or not your business is eligible to receive a loan. An application for a small business loan can be a lengthy process, and there’s no sense in trying to apply if you don’t meet the requirements.
Your Credit Score
Your personal and business credit score are the first elements you need to look at when determining eligibility. If you or other business owners have poor or bad credit, you’re going to have a hard time securing a loan from any reputable lender.
The same goes for your business’ credit score. If you’ve left some debts unpaid, acquiring an SBA loan will be next to impossible. Lenders want to see good or excellent credit scores from all business owners and the business itself.
There are countless online resources for checking your credit score. We recommend keeping track of it, even if you’re sure you’ve paid all of your debts on time. These reporting systems aren’t foolproof, and errors happen. Check your credit scores before you start an application for a small business loan so you can report and correct any problems you may find.
You can obtain a small business loan through several sources, so the lender requirements vary on a case by case basis. We suggest researching possible lenders outside of those backed by the US Small Business Administration, just in case you aren’t able to meet their strict requirements.
Remember, though, that small business loans are just like any loan out there. If the lender is more lenient on their requirements, the cost of the loan is going to be higher. When the lender has strict requirements, you’ll often receive one of the best deals you can.
Company history, company size, your business plan, and profitability all factor into whether or not a lender will view you as qualified. You might not have to meet all of their requirements, but if you don’t, you need to be outstanding in another area.
If you’re aiming for an SBA loan, you need to meet their size requirements, make a 10% down payment, offer collateral, and meet a list of other qualifications for them to consider you. Some small businesses can’t meet these strict standards and opt for the easier route of obtaining an online loan instead.
If you’ve ever applied for a home loan, then you know the amount of documentation involved in the application process. A small business loan is similar, though you’ll need a few more pieces of information to apply.
Banks require more documentation than online lenders do, and you should expect to collect the following pieces of documentation as a minimum for a bank loan.
- Income tax returns for both you and your business
- Income statements and bank statements for both you and your business
- Any licenses you may have
- History of experience running or managing businesses
Banks often require more forms of authentication when it comes to income. There is a high level of risk when banks lend to small businesses, so they want to make sure their investment is safe.
Online lenders usually don’t give you the same hassle as banks will. The application process is much shorter, and they can get you money considerably faster than a bank can. A profitable business and a good credit score are often enough for an online lender to approve you for a small business loan.
Finding a Loan Provider
Once you have everything in order and are sure you will qualify for a small business loan, it’s time to decide who to go with. There are a lot of options out there, but you should prioritize lending institutions that regularly issue small business loans.
They’ll have much more experience in the area and are generally more understandable when it comes to special considerations you might need.
You can use traditional lending institutions such as banks and credit unions, or you can find an online lender that is willing to give you a good rate on your business loan.
Each option has its benefits and downsides, but the best selection will vary depending on your personal and business financial situation.
Using a Loan Broker
Depending on time constraints, you might want to consider using a broker to help service your loan. An application for a small business loan can be a headache and will take a substantial chunk out of your day-to-day management duties.
A good loan broker will have an idea of which lenders can offer you the best rates, and eliminate any problems that come with getting denied for a loan. These brokers should know the small business loan market like the back of their hands, and shouldn’t send your application to lenders that will deny you.
Of course, a loan broker will charge you a fee. The adage is true, though: time is money. Any time you spend trying to apply for loans is the time you could be spending growing your business.
A loan broker is usually a good idea if you or your partners have never been through the small business loan process before. Make sure you find a reputable broker with a good track record. If you do, they should be able to find you the best rate while eliminating hurdles along the way.
Small Business Loan Timeline
The timeline of when you decide to apply for a small business loan until the money is in your account will depend on which type of lender you choose. Banks will almost always take longer to approve you than online lenders will. If you use a broker, though, they might be able to cut your wait time significantly.
There are a few stages that are universal to applying for most small business loans. Below is a general overview of what you can expect.
Preparing Your Paperwork/Selecting Your Lender
This process can be quick and painless or difficult - depending on whether or not you’ll qualify for most loans. A loan broker can help you here and may save you a lot of time if they’re skilled enough.
Either way, the above steps we listed above should help you understand what you’ll need to do to apply. This is the application step and only the beginning of the loan process.
Letter of Intent
The letter of intent is the first point of contact once the bank has approved you for a loan. This letter includes the amount that you qualify for along with the terms of the loan. Lenders may handle these differently, so this is another place where a loan broker might be able to help.
Once you agree to the terms, you can sign a return copy of the letter and send it back to the bank. The letter will also include any percentage deposit you may need to make. There might be some other fees attached as well, depending on where you get your loan.
After the lender receives the returned copy of the letter of intent, they will start the underwriting process. This usually takes a few weeks - again, depending on the lender. The lender will inquire about your business plan, financial situation, and other pertinent details regarding your ability to pay them back.
Commitment and Closing on the Loan
Once the lender takes all of the proper precautions, they’ll send you another letter with the final terms and steps you need to take. You’ll usually have to make another, refundable down payment that usually works out to about 5% of the loan amount.z
Finally, after everything is set in stone, the lender will send you a form to sign, and you’ll officially have a small business loan.
Applying for a Small Business Loan
Filing an application for a small business loan can be lengthy and difficult if you’re not prepared. In the end, it will take away valuable time you could be using to run your business. Unfortunately, small business loans are necessary for most companies who are trying to vault themselves to the next profit level.
This guide should give you an outline of what you can expect from the process. Borrowing from traditional small business lenders requires a certain amount of knowledge, which is where a loan broker can be helpful.