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How to get a business loan
What to expect during the application process and how to cut down on time and stress.
Applying for a small business loan can feel very daunting. And while it’s true that the process can involve months of submitting documents, paperwork and forms, it can go very smoothly if you’re prepared and know what to expect ahead of time. Read through our guide below to help you find the right lender and make the process more manageable.
How to apply for a business loan in 6 steps
Step 1: Compare lenders
Start by looking for lenders that offer the type of financing your business needs. Immediately rule out any provider that your business can’t qualify with. Then pay attention to the loan’s cost, how much you can borrow, terms and turnaround time. You should also look at customer reviews to make sure it’s a lender you feel comfortable working with.
Step 2: Determine how much debt your business can handle
The easiest way to determine the debt your business can afford is to calculate your Debt Service Coverage Ratio (DSCR). This will allow you to determine how much flexibility your business has at the end of every month to cover any new debt it takes on. You should also check your business’s profit and loss statement to ensure your incoming revenue will be large enough to cover loan repayments.
Step 3: Get prequalified
After you’ve narrowed down your selection to a few lenders, see if your business can prequalify to get an idea of the rates and terms you’re eligible for. Many online lenders let you do this by filling out a quick form. If you’re applying for a loan with a bank or credit union, consider getting on the phone with its lending department to find out what you’re likely eligible for.
Step 4: Gather your documents and information
Being prepared can cut down on how long it takes to apply. Have basic information about your business ready before you start the application, including its annual and monthly revenue and tax ID number. Many lenders also ask applicants to submit copies of their business tax returns and bank statements.
If the loan requires a personal guarantee from each business owner, have personal bank statements, tax returns and other information about your own assets and liabilities on-hand as well.
Step 5: Complete the application
Often the application itself only takes around half an hour to complete. The more prepared you are, the less time it will take.
Many lenders let you fill out the entire application online. But some banks and credit unions might ask you to stop by a branch to fill out the rest of the application in person. Some might also ask business owners to go in for an interview.
After you submit your initial application, your lender might ask you to submit additional documents.
Step 6: Review and sign your loan documents
Take a close look at the terms and conditions before signing off on your loan. If there’s anything you don’t understand, ask your lender or an expert to explain what it means. That way, you won’t be hit with any surprises down the road.
Compare business loans
Use our curated list of business loan providers below to help narrow down your options. You can sort the table by interest rate, loan term or minimum credit score required. You can check the compare box below two or more providers to compare their features side-by-side.
6 steps to take before applying for a business loan
Even if you’re sure your business needs funding, a business loan may or may not be the best solution. These steps can help you decide if it’s the right choice — and help you know what features to look for as you shop around.
1. Determine why your business needs financing
There are some situations where a loan might be expensive and risky. For example, startups looking for seed money might not be able to find a loan. Even if you do, you may not be able to pay it off if your business doesn’t meet its financial projections. And since you’re it could be extremely expensive. Some other options to consider are investors, crowdfunding and other startup-friendly options.
Knowing why your business needs money can help you decide what type of business loans to apply for. If you need money for a one-time project or expense, a term loan could be the way to go. If you need something ongoing, consider taking out a line of credit.
2. Check your business’s financial health
Taking a close look at your business’s finances can help you decide if taking on debt is the right move. It can also give you an idea of what types of loans your business might be eligible for. There are a few key numbers to know, including your business’s current ratio and debt service coverage ratio (DSCR).
- Your business’s current ratio is its assets divided by its liabilities.
- Its DSCR is its annual net operating income divided by its debt obligations for the year.
Both can give you a sense of whether or not your business can take on more debt. If your business has a current ratio below 1.2 or a DSCR below 1.25, you might have trouble handling repayments on a new loan.
3. Know your personal credit score
Lenders tend to consider the personal credit score of all owners with a significant stake in the company more often than they look at your business’s credit score. They do this partly because personal credit scores are more standardized than business credit scores.
Generally, you and all other business owners need to have a personal credit score above 680 to qualify for a loan and excellent credit to be eligible for the largest amounts and lowest rates. However, it’s possible to get a business loan with a score as low as 580 with some alternative lenders — though it will likely be much more expensive.
4. Calculate how much your business needs to borrow
Knowing how much you need to borrow helps you decide where to start looking. Online lenders typically offer financing between $5,000 and $300,000, depending on the type of financing. Banks can finance your business with millions of dollars. Microlenders offer small-dollar financing as low as a few hundred dollars.
5. Schedule time to apply
Having a realistic understanding of how much time you and your employees can spend on an application could help you decide what type of lender to go with — or if a loan is even worth the time.
Applying for a loan with an online lender could take anywhere from minutes to days, whereas applying with a bank could take months. You might also get your funds sooner with an online lender, but the rates are usually higher than you could get with a bank loan.
Online lenders also don’t typically offer loans in amounts as high as banks and other traditional lenders. And those that do, often require extra documentation and have a longer underwriting process. If you’re looking for a $500,000 business loan or higher, expect to invest a significant amount of time in the application.
6. Understand the loan options in your industry
Even if your business is in perfect financial health and you have excellent credit, you still might have trouble qualifying for a loan if you’re in a high-risk industry or are a nonprofit. But in general, your business may qualify for one of these common types of business loans:
- Term loans. Business term loans are typically unsecured and ideal for covering a one-time expense. You receive a lump sum — typically anywhere from $5,000 to $5 million — that you pay back plus interest and fees over 5 to 25 years.
- CSBFP loans. The Canada Small Business Financing Program (CSBFP) Loan is a government-backed loan offering up to $1,000,000 in funding and some of the most competitive interest rates. To apply, you’ll need to head to your local bank, credit union or registered financial institution and ask if they offer CSBFP loans. While government-backed, the decision to approve your loan ultimately lies with the financial institution.
- Equipment loans. An equipment loan can be used to cover the cost of equipment or machinery. These are secured by the asset your business purchases, which means you may have access to a lower interest rate than with an unsecured term loan.
- Working capital loans. Working capital loans can be used to cover the cost of day-to-day business. These tend to have short terms and are for smaller amounts.
- Invoice financing. You can use your invoices to finance a loan. Rather than waiting for a client to pay you, you borrow an advance against a future invoice for a small fee — usually around 3% of the invoice amount.
- Lines of credit. Similar to a credit card, you receive access to a credit line that you can draw from as needed. Depending on the lender, you’ll either be on the hook for fixed installments over a set term or minimum monthly repayments.
- Business credit cards. While not technically a loan, a small business credit card can be used to fund short-term expenses. Interest rates tend to be high, but they can help build your business’s credit history while giving you access to quick funding.
- Short-term business loans. Short-term business loans — typically invoice factoring, invoice financing and merchant cash advances — are ideal for businesses that need emergency funds fast. While they’re typically easier to qualify for, they’re more expensive than the other options on this list. And repayments are usually due daily or weekly over a few months.
What happens after you apply for a business loan
Here’s what you can generally expect after submitting your application.
Some business lenders offer quick approval decisions based on preliminary information. These lenders tend to require authorized connection to your bank accounts in order to see proof of your revenue and evaluate your cash flow.
If the lender doesn’t offer this kind of preapproval, you’ll likely be contacted by a loan officer to discuss your application in more detail. At this point, you may be asked to submit additional documentation such as tax returns.
Getting your money
How long it takes to receive your funds varies depending on your lender. Many online lenders can transfer the funds to your business’s bank account as soon as the next day. Banks and credit unions can take anywhere from a few days to around a month to release funds.
How you use the money from your loan is just as important as getting it in the first place. The best ways to make the most out of your loan include buying new equipment, expanding your marketing reach and covering cash flow halts.
Repaying your loan
With a business term loan, your business is responsible for making full repayments on principal and interest until it’s fully paid off. With a line of credit, your business can withdraw from the credit line as it needs. Some lenders turn each withdrawal into a short-term loan, while others add it to your balance and require a minimum monthly repayment — similar to a credit card. Other types of financing have different repayment methods.
If it’s possible, consider signing up for automatic repayments — often called autopay or auto debit. That way, you won’t have to take time out of your day each month to make repayments.
What happens if I can’t repay the loan?
The default will be noted on both your business and personal credit reports if you aren’t able to repay your loan. You might also be on the hook for nonsufficient funds (NSF) fees and overdraft or late payment fees depending on the terms of your contract.
If you backed the loan with your business assets, real estate or the equipment you were purchasing, your lender can repossess these items to recoup the damages. And if you agreed to a personal guarantee, you may be responsible for covering the full cost of your loan through your personal income and assets.
To prevent these consequences, talk to your lender immediately if you’re worried about missing repayments. It may be willing to adjust your repayment plan or extend your loan term to prevent you from defaulting.
Paying your loan back early
If your business can afford to, consider paying your loan back early to save on interest. However, some lenders charge early repayment penalties, so you might not save any money by paying your loan off early. You also can’t save with certain types of loans that come with built-in fees, like merchant cash advances.
Common mistakes to avoid when applying for a business loan
- Mistake #1: Not comparing loans
When looking at getting a business loan, many business owners may simply go with their existing bank and fail to compare the range of loan options available from other lenders. A business loan is an expensive undertaking, so it’s important to research as many loan products as possible to find the one that makes financial sense for your business.
- Mistake #2: Ignoring fees and comparison rates
When comparing business loans, you should always be aware of any fees or charges you’ll need to pay as part of the loan. While a certain loan product may have a low interest rate, it may also come with a number of hidden fees that may greatly increase the overall cost of the loan. When comparing different business loans, you should take note of the comparison rate as it factors in any additional fees or charges to show you the true cost of a loan.
- Mistake #3: Not understanding your other options
As well as secured and unsecured business loans, there are a range of other finance options that may be better suited to your business. These include:
- Mistake #4: Choosing the wrong loan amount
Before choosing a loan, you should have a clear idea about what you need the loan for and the amount you need to borrow. If you don’t borrow enough, you may run into cash flow issues and need to apply for another loan, which may not be approved. If you borrow too much, you may find yourself making costly interest repayments on capital that you aren’t using.
- Mistake #5: Not having a plan for paying off the loan
Once you’ve found a loan, you should develop a plan for how you’ll pay it off. You’ll need to factor the costs of the loan, including interest payments, into your business’s cash flow budget. Failing to repay a business loan may result in you losing your property (if you’ve used it as collateral on a secured loan) or leave you personally liable for the debt, so you should always have a clear and realistic plan for repaying your loan before you commit.
- Mistake #6: Not knowing your credit score
Lenders will check your credit score as part of their approval process. A bad credit rating is likely to get your application rejected, so you should always check your credit score and take steps to improve it before applying for a loan.
- Mistake #7: Not having a business plan
You’ll need to demonstrate how your business operates and how it will make money. If you don’t provide a detailed business plan and financial information, as well as what you need the loan for, the lender will almost certainly reject your application. This is especially important for new or growing businesses.
- Mistake #8: Not having your financial details up-to-date
If the financial details you provide are incomplete, inconsistent or out-of-date, the lender will likely ask you to resupply them or may reject your application outright.
- Mistake #9: Making major changes to your company
Lenders want to see that your business is stable and a reliable investment, so large changes to the business are likely to be seen as red flags. This applies to personnel changes, financial changes and changes to your business models or operations.
What is a business loan?
A business loan is any type of financing that’s used to fund business expenses — from paying staff wages to purchasing inventory.
Available through banks, credit unions and online lenders, your business typically needs to be at least 6 months old and bring in over $60,000 a year in revenue to qualify. Other factors like your personal credit score and relationship with the lender will also play a role.
Depending on the type of financing, you can find unsecured options that don’t require collateral or secured loans backed by your business assets or the item you’re purchasing. Interest rates can be fixed or variable, with repayment terms lasting anywhere from 6 months to 25 years.
How much can I borrow?
Depending on the lender and type of financing, you may be able to borrow anywhere from $5,000 to over a million dollars. The exact amount depends on how long you’ve been in business, your annual revenue and your personal credit score. What you plan on using the funds for and your existing relationship with the lender may also play a role. And some lenders might require collateral for larger amounts.
5 alternatives to a business loan
Not ready to take out a business loan just yet? Consider one of these alternatives:
- Personal loan. Some lenders will allow you to use a personal loan for business expenses. This can be ideal for startups and businesses struggling to meet minimum revenue requirements.
- Business credit card. For small cashflow needs, a business credit card may be a good option. It can help build your business credit score while earning points or cash back for every dollar spent.
- Grants. For free funding you don’t need to repay, you might want to look into business grants. You may be able to find opportunities through federal and state government agencies, as well as private corporations. Just keep in mind these can take months to apply for — and are generally quite competitive.
- Investor financing. Funding from an angel investor can help take your business to new heights. But you’ll have to be willing to give up equity in your company in return.
- Crowdfunding. Are you a startup or newer business thinking of expanding? You might want to look into crowdfunding — it’s a great way to judge interest in the area for your product or service and drum up funding.
Knowing what to expect during the business loan application process can help you cut down on the time and stress of applying. It can also help you decide if a loan is the right move for your business and for your time.
Learn more about how it all works and compare lenders with our business loans guide.
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