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How to Get a Small Business Loan

Getting a small business loan is rarely easy, especially if you’re planning to start a new business or have just recently started one. But, even if you have been in business for years, with today’s economic climate, banks and other financial institutions have become a lot more selective. In fact, 82% of small business loan applications are currently being denied by the big banks. Why are banks saying “no” to small businesses? It’s partly because they’ve had to take more risk out of their portfolios (after all they are lending with our money), and small businesses are inherently riskier than large businesses. As well, it costs banks just as much to underwrite large loans (over $250k) as it does small loans. But, most small businesses don’t necessarily need a larger loan. So, what can you do if your business needs funding?

Luckily, hundreds of online lenders have popped up to fill the void left by the banks. These online lenders are approving more loans than the bank, but you are still going to have to invest some time in finding a loan. If you are wondering how to get small business loan, the best possible advice we can give is that if you understand what these online lenders are looking for, you’ll be better positioned to navigate your way through what can often be a very complex loan application process. Preparing as much as you can beforehand will help you save massive amounts of time down the road.

Six Steps for Getting a Small Business Loan

Here are six tips on ways you can improve your chances of getting your small business loan approved.

1. Create a compelling story about your business

You know your business has great potential – otherwise you wouldn’t have started it – but if you can’t quickly and clearly communicate that compelling story to a lender, it will be more difficult for that lender to understand how the loan you want could improve your business prospects.

So it’s important that you create and refine a story that describes your business and its potential in just a few sentences. You should be able to explain in a short “elevator pitch” why your business will grow, what your specific competitive advantages are, and perhaps most importantly, why you need a small business loan and what you’ll do with the money.

Before asking how to get a small business loan, be sure you can answer WHY you need a small business loan.

2. Consider SBA loans or financing

The Small Business Administration (SBA) offers loan programs that can sometimes make it easier to get the funding you need, at the lowest interest rates available outside the bank.

Although the SBA does not directly loan money, it does partially guarantee loans that a bank might not otherwise make. This allows bankers to be somewhat more flexible in issuing you a loan.

But while lending standards for SBA loans can be a bit looser than for standard small business loans, bankers will still require extensive documentation. The process of getting an SBA loan may not be easier than that required for a traditional loan, but the chances of getting approved can be higher, especially if you have collateral and a good business history.

For newer businesses, the SBA has a “MicroLoan” program, where funds are made available through non-profit community-based lenders, but the maximum amount you can borrow is $50,000.

3. Know what metrics matter

Evaluating your potential success in getting a small business loan has a lot to do with these three business metrics: annual revenue of your business, your average bank balance and your available collateral.

  • Annual revenue: Lenders are going to want to see that your business is making money. The higher your revenue, the better (after all, it shows you have the money to pay back the loan). An annual revenue of $250,000 is pretty solid, in terms of getting a loan. $500,000 is stellar. Having less than $250,000 won’t result in an automatic decline, but it could limit your options.
  • Average bank balance: You could be great at making money, but horrible at managing it. That’s why your average bank balance is also important to lenders. Lenders are going to want to see that you have some cash on hand, verifying you have a cushion to keep up with loan payments even if your sales dip for a bit. An average bank balance of $5,000 is a good start. $10,000 is solid. Keep in mind that the larger the loan amount you are seeking, the more cash on hand you will need.
  • Available collateral: In order to help offset risk, many lenders will require collateral. This way, if you are unable to meet loan payments, they have a way to make back their money lent. They will first look at your business assets (more on personal later) as possible collateral. Potential sources of collateral include business assets such as equipment, real estate and inventory.

4. Get your financial documents ready

In the end, your chances of getting a loan depend largely on being able to prove that you have the capacity to repay the loan and/or the collateral to secure the loan.

Some lenders will want to see:

  • Your business plan with projections of your future sales, profits, cash flow, income, etc.
  • Existing financial statements, including your balance sheet and income statement for the past few years.
  • Tax returns: Most lenders will want to see your business and personal income tax returns for the past two to three years.
  • Bank statements: Lenders will generally want to see at least two to three years of business bank statements.

If you are applying for an SBA loan, in addition to these financial documents, you should also prepare a resume for you and your management team detailing personal backgrounds, education, business experience, etc.

It also helps to research other businesses similar to yours. Your industry trade organization might have data on what average revenues, margins, and profits are like in your industry. If you can show that your planned operations compare extremely well against similar businesses, be sure to make note of this in your business plan.

5. Make sure your personal finances are in order

For most small business loans, your personal credit history and financial condition will be considered as part of the loan underwriting process. In fact, your personal credit history will be one of the most important factors in the loan application.

So before lenders check your credit, you should do so yourself. Order a credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) to make sure there are no inaccuracies in your credit report. Anything that raises a red flag can jeopardize your chances of getting your loan approved.

If you can, pay down any existing personal credit card debt. That will help your loan application look much stronger. And if you have collateral, such as a home, make sure you have a recent appraisal so lenders can accurately evaluate your assets.

6. Waiting may be your best option

One of the most important factors in the loan application process is the age of your business. As we said above, new businesses and those that are younger than 2 years are going to have a harder time getting a loan. Why? Lenders want to see your financial history over time, and if your history isn’t very long, then they won’t have much to go by.

That being said, if you have a strong personal credit score, you still might stand a chance. There are startup loan products available for those with exceptional credit scores.

Word of advice — if you are a few months away from hitting your 2 year mark, and you can afford to wait, waiting those few extra months to apply for a loan might be your best bet.

How to get a small business loan is something we are asked all the time, and it’s nearly impossible to answer. But, truth be told, if you work your hardest to get your personal and business financials in shape, keeping a close eye on what lenders watch, your chances of getting a loan (and a well-priced one at that) will increase substantially.

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