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How to Get a Small Business Loan

Let our guide help you find the right Small Business Loan for your business.

Small businesses are the backbone of America. Small businesses employ more people than large corporations and make up the bulk of the economic activity conducted in the country.

However, small businesses don’t just spring up from the ground. It takes hard work, skill, dedication, and, most of all, capital to start or grow a successful small business.

The small business lending situation has been interesting in recent years. Government regulations following the economic recession of 2008, including things like portfolio defaults and risk limitation measures, have created a situation where banks are giving out fewer small business loans, as these loans can be risky and other ventures can be more profitable for the bank.

The fact that banks have been offering fewer small business loans doesn’t mean that these loans have become harder to obtain. On the contrary, a wide range of different technologically based services has created a whole new specialized small business lending industry.
One thing that many small business owners have been saying lately is that it is hard to understand how to get a small business loan. Understanding the qualification process and being prepared for it helps increase the odds that your small business loan is approved, so we’ll cover the basics of getting approved for a small business loan.

There is also some confusion about the different types of small business loans. It is important to get the type of loan that best suits your small business. Getting a sub-optimal loan means your business isn’t making as much money as it could, and could slow your company’s growth. Understanding the right type of small business loan could mean the difference between the success of your business, or your own economic ruin.

Small Business Lenders

There are two primary types of small business lenders, banks, and alternative lenders. Each has its respective qualities and benefits and disadvantages, so let’s get a better look at the different types of small business lenders.

Banks

Banks are the traditional small business lenders. They offer loans to small businesses and make money on interest. Lots of businesses still get loans from banks for various reasons, and they’re one of the first places most small business owners check when they are looking for an infusion of capital.

Alternative Lenders

There are also several different alternative lending options for small businesses. Financial firms have begun lending against things like invoices and business assets. Other companies and organizations use the power of technology to offer small business loans using a digital application and approval process.

Short Term and Long Term Small Business Loans

While there are lots of different small business loans, they can be broken down into two main categories, short term loans and long term loans. Short term loans are intended for things like meeting payroll, slight upgrades, purchasing supplies and inventories, and more.

Long term loans, on the other hand, are often more substantial and intended to be paid back over a number of years, instead of a number of months, as is the case with short term loans. Long term loans are used for major expansions, large vital operating equipment purchases and upgrades, and startup.

Short Term

Merchant Cash Advance

Merchant cash advances are loans paid out ahead of sales. These loans are paid back out of the percentage of daily sales. For example, a gas station might use a merchant cash advance to obtain their next order of fuel, and then pay the loan back as percentages of their daily sales. This helps merchants have the operating revenue they need in between swings in their liquidity cycle.

Factoring

Factoring is a broad term that can be used to cover a number of different types of accounts receivable financing. These loans operate by lending based on money owed to a small business by their customers. The lender pays most of the value of the account, the customer pays their balance to the factoring company, and the company pays the rest of the account to the small business, minus a discount rate.

Asset-Based Lines of Credit

Asset-based lines of credit are similar to factoring products. However, they take inventory into account in addition to outstanding accounts receivable. One of the other differences is that the asset-based line of credit lender does not take possession of the receivables or re-route payments, which can make them more popular than factoring for some industries.

Dynamic Discounting

Dynamic discounting is a specialized form of supply chain finance. Product or inventory suppliers and their buyers match early pay discounts. The dynamic discounting firm organizes suppliers and buyers to get discounts for buyers and boosted cash flow for suppliers. Buyers are thus able to save money, and suppliers are able to confidently clear their inventory and use faster turnover to increase their profits.

Other Short Term Lending Products

There’s a few other types of lending products, including PO financing, which is like invoice factoring but for purchase orders instead of invoices issued. Revenue-backed lines of credit, with credit available and paid back by a percentage of daily takings. There are also other financial products for small businesses that combine several different aspects of these short term lending products, and are usually industry specific.

Long Term

Term Loans

A term loan is a standard loan that can be obtained from a bank or alternative lender. The term is usually from 1-5 years, and payments can be weekly, monthly, or on another payment schedule. They carry a lower interest rate than short term products, but have more stringent qualifications. Term loans can be given to the business itself, or given to the business owner as a personal loan.

SBA Loans

SBA loans are loans issued by certain banks which are backed by the Small Business Administration. SBA loans are unique in that the government guarantees most or all of the loan amount. That means that should the borrower fail to pay back the loan, then the government will cover it. The result is lower interest rates because these loans are less of a risk. The trade-off is that the application process for an SBA loan can take a long time, months or even years.

Equipment Financing

Equipment financing is when a bank or lender allows you to lease equipment for your business, or provides loans to purchase equipment which use the equipment as collateral. Borrowers will usually have to pay a certain amount up front, and the specific terms will depend on credit score.

Venture Debt

Venture debt is debt floated by a venture capital company to help a small business. It can be used to lengthen the runway for a startup and is also occasionally used as bridge financing for small and newer businesses to help prevent a down round. One of the main appeals of venture debt is that it is not as heavily regulated, usually doesn’t require equity, and doesn’t have any corporate governance requirements.

Qualifying for Small Business Loans

Now that you know the different types of small business loans, you’ll have to understand what you need to do to qualify for them so you can use these products to help grow your small business. There are a few different factors that companies look at when determining eligibility for different small business loans.

Specialized loan products will require the type of account or transaction record the loan product is based on. For example, invoice factoring requires that your small business has a certain amount in outstanding invoices. The company may also require that you factor a certain percentage of your invoices with them every month.

For more generalized loans and equipment financing, lenders will want to look at a number of different factors for qualification, including personal and business credit scores, lender requirements, proper documentation, a strong business plan, and collateral.

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Credit Score

Every person has a credit score ranging from 300-850, and business can have a credit score as well, which usually ranges from 0-100. Credit scores are a measure of how reliably someone will pay their bills, and thus indicate how much of a risk giving that person or business credit will be. Some products, like invoice factoring, will look at the credit of your customers, but most look at your personal score and your business score, if it has one.

Traditional loans and SBA loans want to see your personal credit score so that they know that you, as the business owner, have a solid track record of paying your bills. Online lenders will be more forgiving when it comes to your personal credit score, and will place a greater emphasis on business model and revenue.

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Lender Requirements

Specific lenders will also have specific requirements that you’ll have to meet. For example, most companies and banks won’t offer term loans to companies that do less than $150,000 in revenue. Companies might also have equity requirements, different credit score minimums, and more. After determining the type of loan your small business needs, make sure you do thorough research into the different requirements potential lenders have so you can be confident you’ll met them.

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Proper Documentation

The next requirement for a small business loan is to have the proper documentation. You’ll want records of your expenses and revenue, and as many years of business records as you can put together. You’ll want to have your personal and business balance sheets, copies of leases, inventories, lists of assets, and financial projects.

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Strong Business Plan

One of the biggest things that lenders look at when considering a small business loan application is the business plan of the applicant. Having a strong business plan that takes into account different scenarios, tracks your planed revenue and growth, planned expansions, different actions taking into account different revenue possibilities, and so on. A strong business plan is the best way to demonstrate that your small business will be able to pay back the loan and interest so the lender is taking minimal risk.

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Collateral

Finally, lenders will want to know what kind of collateral you can offer. Having something valuable such as machinery, inventory, real estate, or some other good can increase the chances you get approved for the loan and can also the loans cost. Just remember, if you put something down as collateral, that thing becomes the property of the lender should you default on your loan.

Choosing the Right Small Business Loan

When it comes to figuring out the right loan for your small business, it helps to understand what you need the loan for and what industry you operate in. There are lots of financial institutions that offer specialized products for specific industries. For example, there are many companies that do invoice factoring for trucking companies.

Using a financial product specific to the industry you operate in is a good way to figure out what loan you need.

You can ask other business owners about their experiences, and the lender will usually have a better understanding of your business and industry.

The second consideration you should take into account is what you need to loan for.

If you are looking for quick cash to cover payroll or to purchase raw materials for a large purchase order, then the short term financial products will be best for you. However, if you’re looking for lots of operating capital to get started, given yourself a longer runway, or make a major expansion, the longer term loans will be right for you.

The third thing to consider is how quickly you need the money.

Short term loans and products from online-only lenders are usually faster when it comes to disbursement, but SBA loans and term loans will usually have lower interest rates, but might take longer to get approved and disbursed. That means these loans will be cheaper, saving your business money, but you won’t get the cash you need quickly. That’s why they’re best for long term expansion and startup funds, and why shorter term products are best for companies looking to buy inventory or cover payroll.

Best Uses for Small Business Loans

Some business owners may be wondering why they would seek out a small business loan. After all, if your business is profitable, why take out debt? The reason you take out a small business loan is because the return you’ll get will be greater than the debt you’ll take on.

Small business loans can be used for many different purposes. They give you the capital you need to increase efficiency and productivity on multiple levels of your business, or to expand your operations, staff, locations, inventory, and more. We’ll take a look at some of the most common and best uses for small business loans.

Expand Inventory

Any store owner can tell you that the products you sell can make all the difference in the success or failure of your store. However, acquiring inventory can be expensive, and can drain your operational budget, leaving you in a lurch if you face an unexpected credit crunch.

A small business loan can give you the liquidity you need to get a shipment of the next hot product, or find the hard to get items that will attract customers in your niche. Brick and mortar as well as online retailers benefit from having a better inventory on hand to offer customers, and more customers and more sales means you can make more money, exceeding the cost of the loan and growing your business.

More Manufacturing Capacity

If your small business produces goods for sale, either at your own stores or for other merchants, then you know how hard it can be to manage manufacturing capability. Orders always seem to come in at the same time, pushing the limits of what you can produce.

Small business loans let you hire more staff so you can run another production shift, or allow you to buy the equipment, space, or raw materials you need to have the confidence that you can handle anything that comes in.

Additionally, a greater manufacturing capacity could allow you to lower your overall costs by cutting down on overtime and letting you take advantage of economies of scale for your raw materials. All of this makes your business more profitable and successful.

Better Supply Chains

Getting the things you need to run your small business can be tough. The ability to buy in bulk and to buy what you need when the price is right makes your business process much more efficient. Small business loans can give you the operating capital needed to shore up your supply chain.

More money on hand means that you can take advantage of economies of scale for your supplies, either raw materials or retail goods. That means more products for less per product, which translates to a thicker profit margin for your business. As a result, you can increase your profit per sale, or you can lower your prices to challenge the competition.

A small business loan also gives you the ability to have cash on hand to buy when the prices are the best. There’s no restriction on how you spend your small business loan, so you can keep the cash around until prices drop and then take advantage to resupply at a steep discount.

Hire More Staff

In our increasingly technological and service based economy, having the right people and having enough people is an essential part of running a successful business. Adding staff can be difficult though, payroll taxes, training, insurance, and other costs add up. Moreover, if you want the best staff you’re going to have to pay a good salary. All of this rapidly adds up to make adding more staff an intimidating prospect for any small business owner.

A small business loan can be used to help cover payroll costs while the new positions you create become profitable. Increasing your staff can help you run more efficiently, add extra shifts, operate longer, add new departments and specialties to free up your time and energy, and more.

Open New Locations

One of the best ways to make more money from your small business is to expand your locations. However, opening a new location can be costly and time consuming. You’ll have to find the new space, pay for modifications, pay for inventory and staff, train, get the appropriate permits, and more.

Small business loans can give you the capital you need to confidently expand your business to new locations without creating the risk of overstretching your resources or capital. Growing your business can be almost as challenging as starting it in the first place, and having the extra cash on hand can keep your existing business safe from unforeseen drain created by the growing pains of a new location.

Get Paid Faster

Many types of small business loans, like invoice factoring, purchase order financing, and merchant cash advances, help you get paid faster. That means you can put money back into your business and take on new projects or grow faster than you ever could before. This is especially helpful for industries that have to wait long periods for clients to pay invoices, or that have smaller profit margins and larger upfront costs to do business. Industries like trucking, manufacturing, medicine, law, and more can benefit from factoring invoices or using purchase order financing to get paid faster.

Summary of How to Get a Small Business Loan

Now that you know what kind of loans options are available and have a better idea of the benefits and costs of small business loans, you’ll want to know how you can get one. There’s a few steps that you should take when applying or considering applying for a small business loan. These steps will not only make your loan application process faster and easier, but will also help you get a better overall idea of how your business is performing and understand where your strengths and weaknesses are.

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Research and Planning

The first step to getting a small business loan is to do some research. You’ll want to investigate several different things when you’re looking into small business loans. The research process can seem tedious, but you should keep in mind that thorough research is the best way to ensure that you pick out the optimal loan product for your small business.

First, you should decide what you will use your small business loan for. While it’s always good to have extra cash on hand, it’s often not worth taking on debt in order to have a large liquid reserve with no purpose or direction. There’s no point in learning how to get a small business loan if you don’t have a use for the loan.

You can use your loan for anything, equipment, staff, supply chains, it’s up to you, but you should decide based on what small business loan will work best for your business. A manufacturing business might want to establish an account with a purchase order finance company, while a consultant firm might look into invoice factoring so they can take on bigger projects faster.

After you’ve decided what you’ll use your loan on, you’ll need to research the different companies that offer products which fit your needs. A good place to start is looking for companies that specialize in your specific industry. These companies are more likely to have products designed to work best for your business. You should compare the different products, their terms, interest rates, fees, charges, and other costs. Additionally, you should start compiling a list of the different requirements for each product you’re interested in so that you can make the process as fast and easy as possible. Once you’ve selected the products or companies you’d like to use, it’s time to move to the next step, paperwork.

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Paperwork

The paperwork process is one of the most important steps in learning about how to get a small business loan. You’ll want to use your list of required documents from your research and make sure you have all of the necessary documentation for your loan application prepared and ready. Additionally, it’s important to note that the lists you get from a company’s website is usually the minimum documentation you’ll need. Therefore, it’s a good idea to go above and beyond when getting your papers in order.

Ideally you’ll have a complete financial history of your company available. At the very least you should have your figures and books for the last 5 years (or as long as you’ve been in business) prepared. Get tax returns and information, invoice figures, profit/loss statements, credit reports, business plans, changes to business plans, and anything else you can find for your business organized and prepared for submission if requested.

The process of collecting these documents can seem tedious, but it’s actually a great way to get a better sense of your business from a big picture perspective. This can be extremely useful for small business owners who get caught up in the day-to-day operations of their business and don’t often have a chance to take a step back. That’s why learning how to obtain a small business loan and going through the steps can be helpful to your business regardless of the loan itself.

In addition to paperwork documenting your past, you’ll want to have documentation about the future. Projections for earnings and expenses are a good start. Ideally you’ll be able to present a “with loan/without loan” projection to show how the loan would help your business. You should also make sure to explain why you’re confident you’ll be able to pay back the loan. This is the most important point, as lenders are foremost concerned with your ability to repay. Having a sound repayment strategy and explanation will go a long way in getting your loan approved and in getting the best possible interest rates.

Once you have your papers in order and a sound pitch for why you should get the loan you’re requesting, it’s time to start applying for a small business loan.

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Applying

No matter if you’re trying to figure out how to get a bank loan for a small business or what is the best peer-to-peer lender for a small business, you’re going to have to submit an application. Each lender has a different application process, so follow the directions from the loan officer or website. If you’ve already gathered the necessary paperwork, the application process will be fast and straightforward.

After you’ve submitted your application and paperwork, there’s nothing you can do besides wait. The lender will let you know if they need more information, and if they make such a request be sure to get them whatever they need as soon as you can.

Some lenders will take longer to make a decision on an application than others. Banks and brick and mortar lenders will frequently have the longest wait time, as they have more intricate and detailed processes to go through when evaluating a loan because of the broad nature of their business and company, as they engage in many different financial services and have to understand how each loan they make affects the other parts of the business.

Online direct and peer-to-peer networks will give you a response much faster, as these lenders usually use an automated process when making decisions about a loan. They also usually provide funding faster as well, usually in as little as 24 hours. That’s an important thing to keep in mind when you’re determining how to acquire a small business loan.

As you can see, there’s a lot to learn about small business loans, and even more that you can do with them. Small business loans create a wealth of potential for business owners. Having more capital on hand means you can do more things, and the more you are able to do, the faster you can grow and the more profitable your business can become. Therefore, small business loans can more than pay for themselves while making your business more efficient, productive, profitable, larger, and better.

If you’re interested in small business loans, check out some of the other information we have to see what the best loan is for you, and to find the best lender for your small business loan.