How to Apply for a Small Business Loan
If you need funds to finance a business endeavor or to augment your business income, you can take out a loan. However, the process is more than knowing how to apply for a business loan itself.
There are a lot that you should look into before going into the application process.
Why do you need it for? In applying for a business loan, the unwritten rule is knowing what it is for. Does your reason fit in the following general reasons?
Funding daily expenses
Sometimes, business is slow but the bill keeps on piling up. To avoid losing assets or losing credibility as a business entity, you can take out a small business loan.
Starting your business
You can take a great business idea and possibly make it your main source of income by borrowing money from a creditor.
Growing your business
Expanding your business is a big step for you, but is just a bigger hole in your pocket. A loan augments your revenue so you will have enough capital to take your business to the next level.
Settle other debts and payments
Debts such as unpaid taxes from the IRS can have serious repercussions, and a loan can save you from such problems.
What documents should I prepare in applying for a business loan?
Required paper works vary from lender to lender. However, at least for traditional financing institutions, you would need to produce the following documents:
Even with alternative lenders, you would need to fill out an application form. Here, you put basic information about yourself and your business, along with other information of interest such as the reason for applying for a loan. Make sure to provide complete information as failing to do so may mean loan disapproval.
In applying for a loan, this would highly speak for you in your absence. Here, you will highlight how your business earns and the financial health of your business. As a guide, simply make a checklist to see if you have included each part of the business plan:
- Executive summary
- Business description
- Audience (local/target market) and competitive landscape
- Product and/or service
- Sales, marketing, and promotion
- Management team
- Financial data and analysis
Personal and Business Credit Report
Lending officers look at these and other documents to calculate the risk of lending you money. A good credit score (650 and above) means better interest rates, and scores below this mean the opposite.
If you are looking to improve your credit rating, you can pay off some, if not all, of your debts. Needless to say, there should be no discrepancies in your credit reports as this will definitely alarm your creditors. Worse, you may not be granted the loan.
Income Tax Returns
Tangentially related to your business plan, you need to show proof of the figures you have indicated there. One of the most fool-proof way to do so is through income tax returns.
As how much you pay depends on your income, they will see here how much you earn, or in their eyes, your capacity to settle your debt if approved.
While not applicable for all, collaterals are usually needed for big loans. It can be anything of value, usually a car or a house.
Putting up a collateral against your debt makes it secured, so chances are you would be offered lower interest rates with this. However, in the event that you default on a loan, you will have to surrender whatever property or asset you have as collateral.
What are my funding options?
There are many funding options to choose from should you decide to apply for a small business loan. These have been arranged depending on the degree of stringency on qualifications, with the first one having the strictest requirements.
One of the benefits of deciding on a brick-and-mortar place is convenience. They usually have many branches so accessibility is no problem.
However, since the recession, their lending policies have become very strict. For one, they generally only grant loans to bigger businesses as evident in their loan products.
Also, they require outstanding personal and business credit scores. As this rating is basically your past diligence in paying your loans as well as the amount you were able to borrow, you are basically automatically disqualified if you have only borrowed money once or twice for yourself or your business.
Newer businesses should also apply elsewhere as most banks only accept those who have been running for at least three years. Should you decide that bank is the right option for you, you have to wait 30 to 60 days after you submit all the requirements before knowing the results.
Credit unions are owned by its members in a nonprofit status. Meaning, aside from the interest they earn from their accounts, they do not get anything else.
They require a good personal and business credit ratings, but these are not as high as the banks’. One of the main features of credit unions is that they are more likely to lend someone in their community who is a member.
Moreover, they have virtually the same application and funding as a bank, 30 to 60 days. Generally, a credit union is generally more lenient with the qualifications especially with people belonging to their community. This is considered a good option to go with as they have loan packages specifically for small businesses.
Usually found online or in pawn shops, alternative lenders are considered a savior for people with bad personal or business credit rating, or with an immediate financing problem. Their application is usually done online, so you can apply even at the comforts of your home.
What makes an alternative lender very attractive to small businesses is the turnaround time. For credit unions and banks, you have to wait for at least a month. However, some of alternative lenders can guarantee funding in as soon as 48 hours.
Originally, they only serve as a last resort for borrowers. Today, they have various packages that can fit both sides of the spectrum, credit rating-wise.
What do creditors look at before granting me a loan?
Essentially, all of their requirements that they ask for serve to provide information on the following:
Personal and business credit rating
While not all creditors would require an excellent credit score to grant you a loan, they still have a threshold on what they can tolerate.
For example, to qualify for a loan in credit unions, you need a score of 650. For alternative lenders, however, they only require 500.
Aside from deciding on whether or not to consider you, they also use this information to decide on what interest rate to charge you as well as on the payment terms.
Years of operation
Your lender will also look at how long you have been in the business should you decide to apply for a small business loan.
If your business has been in continuous operation for a few years, they would probably see it as a form of stability. The fact that you have keep the lights on for so long means that you have the capacity to pay.
In applying for a business loan, the actual financial history matters more than scores as this presents your actual spending and paying activity.
From here, they can guess how you will diligently you will be in settling your debt in case your loan is approved.
How to apply for a small business loan?
1. Familiarize yourself with the different types of business loans
Before you even start to apply for a small business loan, you must learn about your options. Know what they are meant for. In familiarizing yourself with this, you must be able to answer the following questions:
- What lending institutions offer this?
- What is the prevailing interest rate for this kind of loan?
- How long before it matures?
- Is it secured or unsecured?
- How soon do I get the funding?
Your ability to answer these questions will help you in the next step.
2. Determine the right kind of loan for you
Now that you know which is which, look now at your own situation. What small business loan fits your needs? Base this from the information you got from the first step.
If you are looking for a long-term loan, of course, you to cross all short-term options out. The same goes for every other factor mentioned.
Unfortunately, it is possible that there is no perfect small business loan for you. For example, you cannot find a long-term loan that is unsecured. In this case, if you do not have anything to put up as collateral, look for the next best thing, which is applying for a series of short-term loans.
3. Shop for lenders
This step consists of two parts: a) deciding between banks, credit unions, and alternative lenders, and b) the actual creditor shopping.
As you know the major similarities and differences among your three options, you now have an idea where you qualify and which you prefer.
Then, you can go shopping for lenders. First, you have to make sure that they offer the kind of loan you need. After that, you can compare their features like funding time and interest rates.
4. Inquire about the particular product you are looking for
In applying for a small business loan, it is still best to inquire first before submitting your application. You may have questions that they have failed to address in their website. Now is the time to ask them.
If there is anything that you feel you cannot tolerate like relatively high interest rates despite your excellent credit rating, go to your second option.
5. Prepare the necessary documents
As mentioned in the previous section, you will probably be required a series of documents so gather and organize them. The same should be done for other requirements not mentioned there.
As always, make sure that the information you provide is accurate and complete to avoid any hassles. Check and double check everything before proceeding. Discrepancies will make you look unprofessional.
6. Submit your application
Now everything is set, you are ready to submit your application, the very highlight of applying for a small business loan.
Whether the documents need to be submitted online or in-branch, ensure that everything is in order.
7. Be prepared to specify how much you need and for what purpose
Even with complete documents, your lender may still want to acquire additional information about you or your business, including how much you need and for what you need it for.
You may have a number in mind, but you may want to borrow a little extra just in case. If you are borrowing for business expansion and the cost of raw materials increase, you may find that the loaned amount to be insufficient.
8. Get ready for your interview
When being interviewed for a loan, treat as a job interview or a first date. You should be professional because although the money you will get is not for your personal use, you are still representing your business.
9. Analyze the key terms of your business loan
Once you are approved for the loan, you do not have to get the money right away. You can still reject it and apply for the same loan on another creditor or present a counterproposal. Here are the main features to look for in the proposal:
- Interest rate (variable or fixed? Is it acceptable for you?)
- Payment terms (how much? Monthly or weekly?)
- Principal rate (when is it due? How is it repaid over the life of the loan?)
- Origination fee
- Other costs
- Defaulting the loan (under what conditions can they do it?)
- Limits of fund usage
10. Wait for their counterproposal
If you have decided to look for another lender, you have to go back all the way to step 3. However, if you made a counterproposal, just review the same features detailed in step 9.
Once you and your creditor have agreed on the terms, you can sign the agreement, and wait for the funding.
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