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How To Get A Small Business Loan

How to get a small business loan

Written by: Kelly Hillock

September 13, 2023

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How to get a small business loan
7 min read

If you are a small business owner, running into financial challenges are inevitable. From navigating emergency expenses and seasonal sales slumps to funding business expansion or equipment acquisition, capital influx is needed to sustain and grow your business.  In these scenarios, small business loans can serve as a lifeline, facilitating smoother operations and business growth. 

A small business loan can not only help preserve working capital and assist in debt consolidation, but it can also fortify the business’s credit score and ensure uninterrupted business operations.  

However, securing a loan isn’t about filling out an application and waiting. Due diligence is needed, as research and understanding about the loan qualification and application process improves your chances of loan approval. In this article, we will highlight the different types of business loans, loan qualification prerequisites and look at the process of obtaining a small business loan.  

Types of Loans Available to Small Businesses 

Traditional Banks and Lenders 

Small Business Administration (SBA) loans 

SBA loans are popular financing option among small businesses where the loan is offered through a traditional lender and backed by the SBA. This program aims to help businesses secure financing with favorable terms such as lower interest rates and longer repayment terms than other traditional financing. However, keep in mind that obtaining an SBA loan can be a lengthy process with stringent qualification criteria.  

Bank loans 

Large national banks, along with their smaller regional counterparts, provide various business loan options. While borrowing from established financial institutions can help you secure higher loan amounts at nominal interest rates, the background check and paperwork involved are usually rigorous. Also, banks might require excellent business credit scores along with collateral to secure the loan.    

Line of credit 

Banks can extend line of credit as an alternative to traditional loans. A line of credit offers small business owners the flexibility to draw funds when they need to, up to a predetermined limit. While the revolving nature of financing and swift access to funds make line of credit a decent option for business owners, it offers a limited amount of funding compared to loans and their interest rates are usually variable.     

Online Lenders and Alternative Financing Sources 

Working capital loan 

Many alternative lenders offer working capital loans that are intended to finance day-to-day business operations, things like rent or payroll, not long-term assets or investments. They provide quick access to cash and generally don’t require collateral, but interest rates may be higher than other traditional loans.  

Short-term business loan 

Short-term business loans are meant to cover immediate expenditures or to bridge some cash-flow gaps. They are beneficial for businesses with emergencies or unexpected growth opportunities, as they offer quick cash to funds. This loan type is suited for temporary financial needs, and typically must be repaid within 18 months or less. 

Equipment loan 

Equipment loans cater specifically to purchasing machinery or equipment for a business. The equipment is often held as collateral, reducing the risk for the lender. You may receive lower interest rates, but the equipment is at risk of repossession if payments are missed. 

Invoice factoring 

Invoice factoring involves selling your uncollected invoices or accounts receivable to a third party company at a discount in exchange for immediate cash. This can help with business cash flow without adding on debt. The downside is clear: you receive less than the invoice’s full value and you might still be liable to pay the factoring company if they fail to retrieve money from your customers.  

Requirements for Applying for a Small Business Loan 

A borrower has to fulfill several small business loan requirements for successful approval of the loan. Lenders typically scrutinize the applicant’s credit score and business history to assess their risk.  

Financial records such as income statements, annual gross revenue, and bank statements are often examined closely, as they reflect the financial health of your business. In addition, preparing a well-structured business plan can showcase your company’s current position in the market, highlight business development strategy, and help lenders forecast the profitability of your business. Lastly, the lender may also require some personal assets and guarantees as collateral to secure the loan.  

How Do I Get A Small Business Loan  

1. Determine the loan type and loan amount your business needs 

First and foremost, you must figure out the specific financial needs of your business. Once you determine why you need a business loan and how soon you need it, it can help you decide the loan amount and the type of loan you need.  

If you’re faced with sudden equipment breakdown, and require urgent funding to purchase a new equipment, you can rely on equipment loans from alternative lenders for immediate financing. On the other hand, businesses with an extensive expansion plan may prioritize lower interest rates over immediate access to funds and are likely to apply for a structured SBA loan, which have favorable rates but longer processing periods.  

If you craft a business plan that carefully outlines how the funds will be used and how the repayments would be made, you can not only gauge the loan amount you need but also the loan amount you can afford to repay.   

2. Compare small business lenders 

Choosing between traditional and alternative lenders will need a strategic evaluation; there is no way around it. Based on your business’s unique demands, here are some of the things to think about while selecting the right lender: 

  • Loan processing time: How quickly can the institution disburse the funds? 
  • Application complexity: Is the loan application process straightforward?  
  • Approval rates: How often do the lender approve and deny loan requests?
  • Interest rates: Are their rates competitive in the current environment?
  • Loan term: How long is the repayment period?
  • Repayment term: Are their conditions flexible to suit different business models and cash flows? 

Check if you meet the lender’s loan qualification requirements 

Matching your lender’s loan requirements are crucial for any loan approval. Common prerequisites that many financial institutions prioritize are a fair to excellent credit score, annual sales revenue of over $250,000, and at least 6 months in business operation.  

Additionally, some lenders may require collateral or a personal guarantee before providing funds. It is best to check both your personal and business credit scores, assess your annual revenue, and determine if you’re in a position to provide collateral or a personal guarantee prior to approaching any lenders. When you’re proactive, you have a better chance of successfully obtaining a business loan.  

4. Gather documents & apply for a business loan 

When you’re ready to apply, collect all your necessary documents needed for a small business loan. This would include your business plan, bank statements, income statements, income tax returns, and probably your Employer Identification Number (EIN). Once all these documents are in place, fill out the loan application.  

5. Wait for the lender to evaluate your loan application 

After submitting the application, all you can do is wait. Lenders will review your application, and evaluate if you meet their qualifications. In this stage, the lenders check your credit reports, and verify all the information you have provided. Many alternative lenders get back to you with the decision of loan approval or rejection within 24 hours.  

6. Accept the loan terms and get the funds 

Once approved, the lender will present you with all the loan specifics, like the loan amount, interest rate, loan period, and repayment terms. Ensure you read all the fine print before accepting the terms and conditions of the loan. After signing the loan agreement, the funds will be promptly delivered to your bank account.   

What should I do if my business loan application is rejected?  

If you are not approved for a business loan, reach out to the lender to figure out the reasons for loan rejection. Once you know why the loan was denied, then you can refine your approach or explore alternative funding avenues.  

H3: Reasons for business loan rejection  

  • Your credit score is not good enough:  

Your credit score is one of the most qualification criteria in the loan approval process. If you have a subpar credit score, there are a couple of options: 

Option 1: Work on improving your business credit score through timely existing debt repayments.  

Option 2: Explore business lenders who specialize in assisting businesses with poor credit scores.  

  • You haven’t been in business long enough:  

Startups, especially those in operation for less than six months, often face loan rejections due to the perceived higher risk. Seek out specialized lenders who cater to startups, as they often understand the unique needs and risks better.  

  • Your annual gross sales don’t meet the lending criteria:  

Meeting revenue benchmarks is important for most lenders. If your annual gross revenue falls short of the lender’s requirement, consider more diverse funding options. Business lines of credit, crowdfunding, or equity financing could provide the financial boost you need without the stringent criteria of traditional loans.  

About the Author

Kelly Hillock

Kelly Hillock is the content marketing manager for SmallBusinessLoans, where she writes and edits articles for small business owners. Kelly has over eight years’ experience in copywriting across a variety of industries, focusing on entrepreneurship and finance. She has a Bachelor of Arts in journalism from San Diego State University.

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