Business owners often consider small business loans as a method of financing growth or expansion. But getting approved for a business loan isn’t always easy. Bankers look at several factors to determine whether to grant the loan and which small business loan rates are applicable. So knowing what a lender will look for in you and your application are the keys to success.
Here’s what you need to know to get the loan you want for your business.
Steps to Get a Small Business Loan
It can be difficult to qualify for small business loans because of the all of the documentation that’s required. Investing the time to prepare your loan application accurately and completely, however, could improve your chances of obtaining one of the best small business loans for your company. Here are the steps for getting a small business loan:
1. Determine What Type of Loan You Need
More than one type of small business loan exists, and you’ll need to narrow down your options and figure out which one to apply for. For example, the company might be better off with a business line of credit, rather than a longer-term loan, to fund seasonal fluctuations in sales. Accounts receivable financing, purchase order financing and small business credit cards are other kinds of loans available to a business.
2. Compile the Business’s Financial Statements
Gather all the financial statements related to your business. Include the income statement, balance sheet and cash flow for the previous three years. Review those statements for any variances that the bank might want explained, such as a decrease in revenues for several consecutive months. When considering applicants for a business loan, lenders prefer to see a pattern of consistent growth.
3. Check Your Business’s Credit Rating and Scores
For best results, request your report from all three of the major credit reporting companies — Experian, TransUnion and Equifax. Also check your Dun & Bradstreet credit report. Contact the companies to dispute any errors you find. Knowing what’s on your business credit reports is proactive; don’t wait to be caught off guard by your lender, or you might ruin your chances of getting the loan you want.
4. Check Your Personal Credit Rating and Scores
Getting a business loan could depend on your personal credit as well as your business’s credit. Check your personal credit rating and scores for accuracy, and dispute any errors you see in the information on file with the credit reporting agencies.
5. Gather the Documentation You’ll Need for the Specific Type of Loan
In addition to your financial statements, you’ll need to gather other relevant documentation. Documentation could include:
- Cash flow statements
- Bank statements
- Credit report
- Federal tax ID number
- State registrations
- Articles of incorporation
- State filings
- Financial statements of the business owners
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6. Complete a Business Plan for the Next 3 Years
Be prepared to share your business plan for the next few years. The plan should show that the company can pay the principal and interest on the loan you’re requesting. Keep projections realistic and conservative. Lenders are risk averse and need to be assured that the company can pay the monthly interest as well as the loan principal amount when it’s due.
7. Know the Factors That Lenders Consider When Deciding Whether to Grant a Loan
Lenders consider several key details when deciding whether to give out a loan. Factors include:
- Age of the company
- Net worth
- Other loans
- Background of the owners
Note that startups have a much more difficult time finding loans because of a lack of financial history.
8. Determine What Collateral Is Available to Back the Loan
Assess what belongs to your company and decide what you could put up as collateral. Collateral items could include company assets such as:
- Accounts receivable
For the purposes of obtaining the loan, the assets are valued at what they could be sold for if the company was going out of business, rather than book value. As a small business, you might have to put up some of your personal assets to secure the business loan as well.
9. Research Different Banks and Lenders
Just as you’d do when seeking a personal loan, you’ll need to do your research to compare different banks’ and lenders’ small business loan offerings. When you already have a relationship with a local bank, it might make sense to approach that bank for a business loan. Or you can start with other local banks that offer business loans and then branch out. The advantage of getting a loan from a local bank is that it makes it easier to have a personal relationship with your lender.
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10. Compare Loan Amounts, Fees, Interest Rates and Penalties
Consider all the costs of the loans, including any fees you’ll be charged. Fees can include:
- Credit report fees
- Application fees
- Packaging fees
- Origination fees
Government loans, such SBA small business loans, also have a guaranty fee that’s a percentage of a portion of the loan. And small business loan rates will vary as to the type of loan, creditworthiness of the business, what the loan will be used for, collateral and personal guarantee of the business owner.
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11. Complete the Loan Application
Because the application will be detailed, set aside enough time to complete it. And after you submit the application, be ready to provide more details, because the bank might require additional documentation or a personal interview to grant the loan.
12. Understand the Loan Covenants
Loan covenants are restrictions regarding what the company can or cannot do at the same time the loan is outstanding. Penalties could be imposed by the bank or the entire loan might become immediately due if you breach the covenants.
Getting a small business loan is a challenge. Preparation before you contact a potential lender is one of the keys to success. The more you know about business loans, the better your chances of finding the business loan that best fits your needs at a price you can afford.