How to Get a Small Business Loan
Running one’s own business is an exciting venture, but one of the challenges many entrepreneurs face is how to obtain financing to expand upon the dream. This is true for startups or for business owners seeking to grow their companies. Loans are often needed to help purchase equipment and supplies, cover payroll, open new locations, or expand upon a current facility.
It’s common for business owners to feel overwhelmed as they begin to secure financing, as the process can be a lot of work and intensive. Those who proactively invest time in understanding the complexities associated with the process, are likely to have a smoother and quicker experience. Here we’ll take a look at the basic steps you should take when you initiate the loan process.
Tips before you pursue a loan
Before you take the first steps required to apply for a loan, here are a few tips you should consider keeping in mind.
● Determine what business needs or projects you’ll utilize the extra money to finance
● Write a well-thought-out business plan to flesh out your business needs or projects to show lenders
● Explore different small business loan opportunities and understand the different types of financing available
● Familiarize yourself with and keep a close pulse on current interest rates
● Check your business’s credit score and history (check your personal credit standing as well)
● If you haven’t done so already, separate your personal and business accounts
● Factor in your ability to commit to a repayment plan alongside your business needs
Choose the right type of small business loan to apply for
Businesses can obtain loans in several ways, including banks, credit unions, and online lenders. Before applying for a loan, it’s helpful to first calculate your financial needs, determine how much you can afford to borrow, and learn about the different loan options.
Loans are definitely not a one-size-fits-all option. You’ll find diversity in loan types and interest rates. In the final quarter of 2023, the average loan rate ranged from 5.89% to 12.23%, so the rate is one of the factors you should weigh into your decision, along with whether you’ll qualify for specific loans. Common types of loans available to small businesses include:
Small Business Administration (SBA) loans
The SBA offers several loan options to small businesses ranging from $500 to $5 million. The primary types of loans the SBA offers include:
● 7 (a) loan program
● Microloan program
● CDC/504 loan program
● Disaster loans
To qualify, small business owners must meet certain requirements, which will vary depending on the type of loan sought.
Traditional loans
Not all business owners will find SBA loans as their best option, or they may not qualify. If you fall into this category, you might find pursuing a traditional business loan to be appealing. Popular traditional loan options include:
● Line of credit financing
● Term loans
● Secured loans
● Unsecured loans
● Equipment loan financing
● Working capital loan
● Invoice factoring
● Merchant cash advance
Depending upon your needs, obtaining a business credit card may also be a way you can utilize it to fund your business ventures. In most cases, this isn’t the best option, but does make sense, depending on how much cash the business needs.
Alternative lenders
For business owners who find it difficult to secure SBA or traditional loans, alternative lenders are sometimes a viable option. Interest rates are usually higher, but if the return on the investment is strong for the project the money is spent on, it might be worth the trade-off of a higher interest rate.
Evaluate lenders based on your business loan type
Once you finish exploring your loan options, you’ll want to compare and contrast lenders based on the loan type. To evaluate your loan options, consider the following.
● Check a lender’s minimum requirements to qualify for their loan(s), such as your credit score, debt-to-equity ratio, time in business, and annual revenue the company earns
● List all the loans you actually qualify for so you know feasible loan options
● Consider current interest rates and whether they’ll be fixed or variable, along with the length of the loan
● Compare the different loan offers from a variety of lenders to help find the best opportunity, including looking at application fees and repayment terms
● Determine if you’ll need to have collateral – and what type
It’s important not to rush into a decision. Carefully weigh options and consider where you project your business to go during the time frame you owe money.
Gather information like your EIN to apply for a small business loan
To qualify for most business loans, you’ll need to have an Employer Identification Number (EIN). This numerical identifier is similar to a Social Security Number, but it’s used strictly for businesses.
Your EIN will be helpful if you don’t have a business credit history, although, in this scenario, you may also need to supply your Social Security Number to the lender as well. If your company is well-established, you can use your EIN to apply for your business loan since your business credit score will be attached to your EIN.
If you do not have an EIN, it’s easy to apply! Aside from gaining better access to business loans, there are a variety of other beneficial reasons why you should have an EIN.
Submit your application for a small business loan
Once you fill out your loan application, be sure to meticulously go over it to make certain all the information you’ve entered is accurate. Mistakes may result in problematic issues, including loan application denials. Once you’ve ensured your application is correct and in order, you can submit it. If your application is accepted, be sure to review the loan terms before you sign on the proverbial dotted line.
Use the loan to build your small business!
Congratulations! You’ve successfully obtained a loan. Now that you have the capital you need, you can use this money for the projects you desire to achieve. Whether you’re launching a new business or expanding an already established one, having extra cash on hand can go a long way toward achieving your goals.