So, you’ve found yourself in a position where you are considering whether or not your business plan could benefit from a small business loan.
At first, acquiring a small loan for business expenses may seem simple. However, think twice once you start reading about the many factors that may affect your eligibility and the tightening restrictions on loans and loan forgiveness programs.
This is why you must make a multi-step plan and adhere to it to acquire your funding.
- Start by looking at factors you can control, such as your credit score, debt to income ratio, and what assets you can use for collateral.
- Then, research lenders to find one that matches your needs and will continue to be a manageable debt in the future.
Finding the most appropriate and all-around beneficial source of funding for your small business expenses can seem daunting. But with a bit of research and reflection on your goals and business model, you can find a lender that will work for you.
Determine Your Eligibility
Eligibility for a small business loan is based upon several factors, which we will go over here. First, you need to gather all of the financial information you have access to including tax documents, quarterly reports, credit scores, and risk profiles.
Once you have the information organized, you can determine the likelihood of securing a small business loan for yourself before approaching a potential lender.
Lenders are much more willing to work with businesses adhering to the following qualifications.
- Your company has been up and running for at least one year, preferably two years.
- Your credit score is a minimum of 680.
- Your existing debts are paid promptly.
- Your debt to income ratio must be reasonably good.
- You have assets to use as collateral.
- Your business meets the lender’s requirements for an annual revenue minimum.
Suppose you do not meet all of these qualifications—more on that here. In that case, that doesn’t necessarily mean that you won’t qualify for a small business loan. It simply means it may take a bit more time and effort to find a good lender willing to work with you despite your elevated risk profile.
Determine What Type of Loan You Need
There are several different types of small business loans that you may qualify for. Here are some key details of the most common loan types:
- SBA Loans are amongst the most highly sought-after loans for small business owners due to their traditionally low rates and Small Business Association-backed funding. They are notorious, however, for their strict requirements and time-consuming process. Banks offer this loan type, and it is typically given out to local entrepreneurs and small business operators.
- Line of Credit loans are convenient because they offer you the option of only drawing the credit that you need from your lender, as opposed to agreeing with a lender on a lump sum that you will be responsible for managing over a length of time. This loan type requires monthly payments and typically an annual renewal unless you are ready to pay it in full.
- Term Loans are a popular option amongst small business owners who are already operating. These loans are to be used for expansion, expenditures for advertisement, and other business operations. They are for a set amount and are intended for businesses ready to expand or make a single large expenditure to increase their capital.
- Working Capital Loans are similar to term loans; however, they differ in that they are intended to cover the day-to-day expenses of running a business.
- Accounts Receivable Finance Loans are a line of credit based on your accounts receivable balance, which is income owed to you for services or products already rendered. Rather than paying monthly interest, your customer’s payments go directly to repaying the loan.
There are more loan types available than those listed here, but they are typically intended for particular niche businesses, marginalized groups, or specific types of relief such as natural disaster relief funding.
If your business falls under any of these categories, look for loans specifically secured for your demographic. You’ll have a higher chance of approval if you apply for niche loans that your business model qualifies for.
Research Lenders to Find the Right Fit
There are many different types of lenders, but some stand out against the crowd. The best lenders to familiarize yourself with include-
- Large Commercial Banks such as Wells Fargo are the most traditional small business lenders of the past. They continue to be one of the primary resources for small business funding despite the increase in lenders available overall. These loans tend to be rigorous but are also backed by the SBA.
- Local Community Banks or Credit Unions are notoriously enthusiastic lenders for local small business ventures. These loans are typically for smaller amounts than those issued by larger banks.
- Online Lenders are often one of the quickest and most direct ways to procure business financing to meet your small business goals. PayPal, for instance, can help you out with rapid access to cash advances, term loans, and working capital loans with decent terms.
Submit an Application with Your Selected Lenders
At this stage, you should have all of your financial documents together and organized. Now you’re ready to apply with the lenders of your choice.
If you are applying for an online loan, you’ll submit copies of your documents digitally. However, suppose you are applying in person. In that case, you will need to make physical copies of your documents for each lender reviewing your applications.
The Best Companies to Shop for Small Business Loans
We’ve compiled a short list of the top companies to apply with:
- Wells Fargo is an excellent lender for those with good credit.
- BlueVine is a top lender for those with poor credit.
- OnDeck is great for short-term loans.
- TD Bank is known for exceptionally fast loan disbursement.
Wait for Approval
Once you’ve applied for your small business loan funding, there’s only one step left- wait. So sit back, relax, and wait for the money to come in. In the meantime, give your most recent business plan another look over and brainstorm ideas on putting the incoming capital to good use!