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A business loan can provide the funds you need to expand operations, cover day-to-day expenses and purchase equipment or inventory. If you’ve never applied for a business loan, you might be unsure about where to begin or which documents are required.
Here’s a simple guide that walks you through the process of evaluating your options and preparing your business loan application in five easy steps.
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1. Decide Why You Need Financing
There’s more than one kind of small business loan. Deciding why you need financing will help you choose the right kind of loan. Here are a few common scenarios:
- Buy new equipment Some lenders offer equipment loans. This type of loan is designed to help you purchase business equipment, like machinery or office furniture. The loan is secured by the equipment, so the lender can seize it if you fail to repay the loan.
- Borrow a small amount of money. If you need to borrow a small amount of money, consider applying for a microloan. The US Small Business Administration (SBA) has a Microloan program that allows qualified applicants to borrow up to $50,000. In addition, there are not-for-profit organizations that offer microloans, such as Kiva and the Women’s Microfinance Initiative.
- Establish a business. Since most lenders have minimum time in business requirements, it can be tough to find one that will issue you a startup loan for a new business. If you’re just starting out, you may have to apply for a microloan or a business credit card. You may find it easier to qualify for a business credit card than other types of business loans since approval is based on your personal credit score.
- Pay for day-to-day operations. A working capital loan—a short-term loan used to cover daily expenses, like rent and payroll—can help you cover temporary cash flow problems.
- Borrow money on an as-needed basis. If you don’t know the exact amount you need to borrow, a business line of credit could be a good option. Once a lender issues you a line of credit, you can withdraw funds up to a certain amount to cover business expenses and only pay interest on the amount you borrow.
2. Check Your Eligibility
Although business loan requirements vary, here are four things lenders are likely to consider when reviewing your small business loan application:
- Credit score. When you apply for a business loan, a lender will review your personal and business credit scores. They help the lender assess the likelihood you’ll repay your loan. In general, the higher your credit score, the greater your chances of loan approval and receiving a low interest rate.
- Collateral and/or personal guarantee. Some lenders require you to pledge collateral—something of value, such as equipment or inventory—it can seize if you default on the loan. Some lenders may also require a personal guarantee, meaning you have to secure the loan with personal assets, such as your savings, home or other valuable possessions.
- Time in business. A traditional bank typically requires a business to have been in operation for at least two years, while an online lender usually requires only one year. If you’ve been operating your business for less than one year, don’t get discouraged. Some online lenders will approve qualified applicants who have only been in business for six months.
- Annual revenue. Your total annual sales are also a relevant factor. Before applying, ask a lender what the requirements are and review your business finances to see if you meet them.
3. Compare Business Lending Options
There are several places you can find small business loans. Here are three of the most common types of lenders.
Onlineers offer a variety of loan products lend to small business owners, including term loans, merchant cash advances, lines of credit and microloans. Loan approval rates were higher for online lenders than traditional banks as of 2019—80% versus 74%, respectively—according to a 2019 Small Business Credit Survey by the Federal Reserve.
One reason for this is that online lenders often have less stringent requirements than traditional banks. As a result, you may find it easier to get approved for a business loan with an online lender if you have less-than-stellar credit. In addition, online lenders often have much faster turnover—some may issue funds as soon as the same business day.
A major downside of taking out a business loan with an online lender, however, is that it often charges higher interest rates than a traditional bank.
Related: Average Business Loan Rates: What Will You Be Charged?
Traditional banks provide many of the same types of business loans as online lenders. The main advantage of applying for a small business loan with a bank versus an online lender or microlender is that it typically offers lower rates for well-qualified applicants.
One disadvantage of applying for a business loan with a bank is that it often has more stringent eligibility requirements. If you have a bad personal credit score (a FICO score less than 580), you will likely have a hard time qualifying without a co-signer—someone who agrees to repay the loan if you fail to meet your payment obligations.
Traditional banks might also not be the best option if you need quick access to funds—applicants were most frustrated by long wait times, according to a 2019 SBCS survey. For example, SBA loans through a bank can take several weeks to months to process.
Microlenders are typically not-for-profit organizations that issue microloans up to $50,000 to qualified applicants, often designed to provide financing for business owners who don’t qualify for traditional business loans. Microlenders usually have less stringent eligibility requirements.
For example, the microlender Kiva does not have a minimum credit score requirement. Instead, it approves applicants based on “social capital.” To qualify, you have to get a certain number of people to lend money to you through Kiva’s platform before your loan request becomes public on their website.
Related: Business Loan Calculator: Estimate Your Payments
4. Gather the Required Documents
Once you understand your lending options, gather the required documents. A will likely ask for these lend items:
- Personal and business tax returns
- Business licenses
- Articles of incorporation
- Personal and business bank statements
- Profit and loss statements
- Financial statements
- Business plan
- Building lease
If you’re unsure what documents are needed, contact the lender before applying.
5. Submit Your Application
The final step is to submit your small business loan application. Depending on what lender you’ve decided to work with, you can do this online or in person.
Here’s some information a lender might ask for:
- Your name
- Business name
- Social Security number (SSN)
- Desired loan amount
- Loan purpose
- Business Tax ID
- Annual revenue
Once you submit your application, you’ll have to wait for an approval decision. If your loan is approved, a lender will send you a loan agreement to sign before issuing your funds or a line of credit you can draw from.
Frequently Asked Questions (FAQs)
What credit score is needed for a business loan?
Sinceers have different eligibility requirements, the personal credit score you need to qualify for a business loan varies. That said, minimum credit score requirements may range from 500 to 680.
The business credit score needed to qualify also varies from lender to lender. Plus, it depends on the type of loan you’re applying for and what business credit score a lender uses. For example, when it comes to SBA loans, you’ll typically need a minimum business credit score of 155 to pass the SBA’s pre-screen process. However, most lenders set their minimum score requirements between 160 and 165.
How can I get a business loan with no money?
Although most lenders have annual revenue requirements, it’s possible to get a business loan if your business doesn’t have any money. Some lenders offer no doc business loans—loans that don’t require verification of business income. To qualify, you’ll likely need to have excellent credit and provide a personal guarantee.
Can I get a business loan with bad credit?
Although you’ll likely find it tougher to get approved for a small business loan with bad credit, it’s possible. Some people specialize in offering business loans to lenders who have bad personal credit scores. However, if approved, a lender will most likely charge you a higher interest rate.
To receive a lower interest rate and boost your approval odds, consider applying with a co-signer who has a good credit score (at least 670, according to FICO) and decent income, if possible. A co-signer is someone who agrees to repay your loan if you default. Before you ask someone to co-sign for you, make sure they understand that a missed payment can cause damage to their credit.