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How to Get a Business Loan

Money, money, money. This is the lifeblood of your business. When you are in good financial standing the future is bright. If you are lacking in this area, it is time to turn things around once and for all.

While there are many methods of securing financing, a business loan is often times the top choice among companies of all sizes and industries.

It doesn’t matter if you are starting a business or require money for growth, understanding the pros and cons of a business loan will help you decide which steps to take next.

Of course, there is more to obtaining a business loan than contacting a bank, telling them who you are, and waiting for the funds to arrive. There are many details to consider, such as the process for choosing the best lender and the terms and conditions (such as the APR). And that is just the start.

Before we discuss the process of getting a business loan, there are three questions you need to answer:

  1. When do you need the loan? If the answer is now, don’t delay in starting the process. If the answer is “sometime down the road,” you should still learn more. When you start your search well in advance, you can best deal with any challenges that arise. Better yet, you have the opportunity to learn more about your options while forging relationships with lenders and brokers.
  1. Why do you need the money? Answering this question will help you decide whether or not you truly need a loan. Maybe you need a loan to purchase equipment. Maybe you need a loan to expand your office. It is important to have a clear idea of why you need the money, as well as what you are going to do with it.
  1. How much money do you require? If you don’t answer this question early on, you could find yourself seeking too much or not enough financing (more on this below). This is not a mistake you want to make. Fortunately, once you know why you need the money, you can make a solid estimate as to how much will suit you for the time being.

Note: if you have any other preliminary questions, it is best to answer them before contacting lenders and applying for a loan.

How to Get a Business Loan

You now understand which types of questions to address before seeking a business loan. It is time to learn more about the process, including what is expected of you, how long it takes, what you will need, and much more.

Here is a seven-step guide to success:

1. Online or Local Bank?

The way you search for a business loan will have an impact on how the process unfolds.

Many years ago, your only option was to contact local lenders, meet with them in person, and explain why you need a loan. This is still an option in today’s day and age, and there are still business owners who prefer this strategy.

Conversely, the option of applying for a business loan online also exists. Using the internet allows you to connect with more lenders (local and national), while also speeding up the process.

There is no right or wrong way of applying for a business loan. It is a matter of preference for the most part. However, keep in mind that a bank loan is much more difficult to qualify for than an online loan, so if you have any financial weak spots, your best bet might be to start your loan search online. 

The best thing you can do is consider both your online and local options. By comparing the pros and cons of each process, you will find yourself in position to make an informed and confident decision as to how you should move forward.

2. Know What Lenders are Looking for

When applying for a business loan, it is good practice to look at the situation from the lender’s point of view. This will help you understand how to present yourself in the best possible light.

Not every lender shares the same standards, however, lenders typically require the following:

  • That you are using the loan for a good reason. There is a big difference between telling the lender you need money to expand your office, and conveying that you will set-up a pyramid sales system. There are just some loan purposes that are harder for lenders to fund, such as acquiring another business or buying out a business partner. Be sure to ask a lender before you apply whether or not they are willing to work with your loan purpose. 
  • Solid personal credit history and score. Lenders feel that they are making small business loans to the owner, so they want to know what your personal history of handling debt is like. Having a credit score over 700 will put you in a good position to find a loan. Lenders will always want to know things like if you have had a bankruptcy, any collection proceedings, a foreclosure, and more. This will indicate how well you’ve handled debt in the past, and speak to your future as a borrower with them. 
  • Ability to pay back the loan. This is what matters most. When a lender issues a business loan, they must be confident that the borrower will pay back the money on time. If this does not happen, even if it is a secured loan, the lender has to put a lot of time and money into collecting. They will evaluate your ability to pay back the loan by looking at your company’s annual revenue, cash flow, and profitability. You want to make sure all these figures look good before applying. 

Note: we recently published a post outlining things you should never say to a small business lender. It is well worth reading if you will be communicating with lenders in the near future. It could save you from saying the wrong thing, thus hindering your chance of an approval.

3. Important Information to Collect

Many business owners shy away from a loan because they don’t want to deal with the process. It takes a lot of time to prepare financial documents, and you’re already busy enough running your business. But, if you come to the table prepared, it will help you save time during the process.

Some lenders require more documents than others, but below are the most popular requests. You should prepare the following as far in advance as possible:

  • Business bank statements.
  • Personal and business tax returns.
  • Information regarding any other debt you are carrying, such as existing business loans, personal loans, and personal and business credit cards.
  • Comprehensive business plan. This should include information on what you intend to use the money for.
  • Cash flow projections for a minimum of one year.
  • YTD Balance Sheet.
  • YTD Income Statement.

4. Make Your Life Easier

When you know what you are doing, when you are prepared for anything that could come your way, the process of obtaining a business loan will be less stressful. On the other hand, if you don’t setup yourself up for success, you could soon be faced with a variety of struggles and challenges.

Making your life easier comes down to two things: being thoughtful and being truthful.

To expand on those two points, consider the following:

  • Be careful of the lender or service you use. It doesn’t matter if you are shopping direct through a lender or through a broker, you must know that you are dealing with a reputable organization. This will put your mind at ease.
  • Don’t fight the system. As a business owner, you know what it is like to deal with people who are disorganized and don’t want to follow your professional guidance. Do you want to turn into that person when seeking a loan? Rather than fight the system, know what is required of you and do your best to provide it upfront.
  • Ask for help. There will be times when you have questions. There will also be times when you need the assistance of a professional. Contact your lender and broker for help.

As noted above, you can begin to prepare yourself well in advance of actually applying for a loan. This will take a huge burden off your shoulders once you finally decide to take action.

5. Understand How Much Money you Need

The more the better, right? Wrong. This is not the way to approach getting a business loan. When you borrow money you have to pay it back, with interest. You don’t want to take on a larger loan than you need. But you don’t want to come up short, either.

Small businesses come in many sizes and forms. From a one-person startup to a company with 50 employees, the needs of one organization are not going to be the same as another. There is no such thing as a “standard” business loan in terms of the loan amount. That’s because it comes down to what your business can afford.

Generally speaking, it will be very difficult to qualify for a loan that is greater than 8 to 12% of your annual revenue. Lenders use your revenue to gauge how big of a loan you can afford. That being said, if you are getting a loan for a very specific reason, say, to purchase a piece of equipment, you are going to want a very specific amount from lenders. Do you think your business will be able to qualify for the full amount? What happens if you can’t? You need to decide going in whether or not NOT receiving the full loan amount you need will make or break this transaction.

On a separate note, some lenders will offer you more money than you applied for. Don’t get greedy. If you don’t need the extra money, don’t take it. It’s not worth the interest you’ll pay!

6. Prepare Your Application

Just the same as any other type of loan, from a mortgage to a car loan, you are required to prepare an application. There is no easy way to put this: this is not the most exciting part of the process. In fact, it can be challenging for those who don’t enjoy the financial side of business.

But don’t let anybody tell you that it takes many weeks (or longer) to prepare an application. You are required to provide detailed information on yourself, your business, and the loan (amount, type, etc.), but you should already be familiar with most of what you are being asked.

Do you require help? If you need any help during the application process, you don’t have to look far. The lender is more than willing to provide you with assistance. The same holds true if you are working with a broker. Never forget that lenders and brokers want you to secure a loan. This is how they get paid. For this reason, you can expect all the help you need, every step of the way. As long as you are open and willing to ask for assistance, it is available.

7. Stay in Touch

Once you narrow your options, choose a lender, and prepare and submit an application, everything is off your plate. The ball is no longer in your court. At this point, the lender is in charge and all you can do is wait.

Ask your lender upfront when to expect a decision. This will give you a clear idea of the timeframe and when you should know if your loan application was approved or denied.

Along the way, you should remain in touch with your primary contact. Does the lender need more information? Is there anything you can do to expedite the process?

When you make yourself available you can avoid delays in processing your application. You also show the lender that you are serious about closing the loan, which is something they want to see.

Lenders Favor these Types of Borrowers

There are things you can do to make your business more appealing to lenders. This includes:

  • Show a strong personal credit score. This comes into play along the way, with many lenders considering anything above 620 acceptable. Unfortunately, this is not always good enough. Most lenders want to see a score of 700 or higher. If you show a score of 800, you are in a really good position.
  • Time in business. If possible, wait until your business is two years old to apply for a loan. The more financial history you have to show, the better.
  • Know the industry risk. Did you know that the government ranks each industry by risk? The higher the risk the more difficult it is to obtain a loan. There is nothing you can do about this, but you might as well know where your industry stands.

There is a lot of information in this article, some of which is sure to have your head spinning. Fortunately, all of this can be broken down into two important points:

  1. Know the process, including what is expected of you.
  2. Do whatever it takes to put your best foot forward.

When you do both these things, your business is in the best possible position to secure a loan.

Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith is Editor-in-Chief at Fundera. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
Meredith Wood