How to get a business loan in 6 steps

Getting a business loan doesn’t have to be a painful process – if you do a little homework. You can increase your chances of approval by understanding your business qualifications and then finding the best small business loan that meets your needs.

Here’s how to get a business loan in six simple steps.

We’ll start with a short questionnaire to better understand your unique business needs.

Once we discover your personalized matches, our team will consult with you on the process to follow.

1. Decide what type of loan you need to fund your business

If you want to finance a major purchase or business expansion: Traditional term loans are lump sums that you repay over time with interest and often have high borrowing limits — SBA loans can be up to $5.5 million, for example. Many lenders also offer specific products to meet the needs of a growing business, such as loans for the purchase of equipment or vehicles.
If you need funds for your living expenses: Business lines of credit are a flexible type of financing that lets you access the financing you need to cover expenses like payroll or unexpected repairs, providing a helpful safety net.
If you are looking to fund a startup: It may be harder for entrepreneurs to get a traditional business loan, but business credit cards and personal business loans can be good options if you haven’t been in business long enough to qualify for a loan. line of credit or a term loan.

2. Determine if you qualify for a business loan

You can get a business loan from a number of places, including banks, online lenders, and microlenders. Answer these questions to help you determine which type of lender you meet the eligibility criteria to qualify for a small business loan:

What is your credit rating?

You can get your credit report for free from each of the three major credit bureaus: Equifax, Experian and TransUnion. You can also get your credit score for free from several credit card issuers and personal finance websites, including NerdWallet.

Banks prefer to offer their low-rate business loans to borrowers with credit scores between good and excellent, or 690 and above.

How long have you been in the industry?

You must have been in business for at least one year to qualify for most online small business loans and at least two years to qualify for most bank loans.

Are you making enough money?

Many lenders require a minimum annual income, which can range from $50,000 to $250,000, for business loans and lines of credit.

If your income is not high enough to qualify for these loan products, consider turning to business credit cards or SBA microloans.

3. Determine what payments you can afford

Take a close look at your business finances, especially cash flow, and assess how much you can afford to repay each month.

Your total income should be at least 1.25 times your total expenses, including your new reimbursement amount, says Suzanne Darden, finance specialist at the Alabama Small Business Development Center.

For example, let’s say your business income is $10,000 per month. That’s 1.25 times $8,000 in expenses. If you already pay $7,000 in rent, payroll taxes, and other fees, you should be able to afford a monthly payment of $1,000.

Some online lenders require daily or weekly repayments, so be sure to take this into account – you’ll need enough cash to make payments when they’re due.

Estimate the cost of a business loan

Calculate estimated payments, then see if you qualify for a business loan

Get personalized small business loan rates to compare

with Fundera by NerdWallet

4. Decide if and how you want to secure the loan

Business loans can be secured or unsecured. A secured loan requires business collateral, such as property or equipment, which the lender can seize if you don’t repay the loan. Placing collateral is risky, but it can increase the amount lenders allow you to borrow and earn you a lower interest rate.
Lenders may also require a personal guarantee even for unsecured loans. That means you’ll personally pay off the loan if your business can’t, and it can leave a lender going after things like your house or car for nonpayment.

5. Compare Small Business Lenders

You’ll usually want to get the business loan that gives you the best terms. But other factors, like funding speed, may matter to your business, and different sources of funding may be better in some cases than others.

When to get a business loan from online lenders:

Online lenders typically offer small business loans and lines of credit of up to $500,000. The average annual percentage rate on these loans ranges from 6% to 99%, depending on the lender, the type and size of the loan, the length of the repayment term, the borrower’s credit history, and whether collateral is required.

These lenders rarely have APRs as low as those offered by traditional banks, but approval rates are higher and funding is faster than with banks – as fast as same day in some cases.

When to get a business loan from banks:

Through banks, the US Small Business Administration guarantees general small business loans with its 7(a) loan program, microloans, and disaster loans. The SBA also has a 504 loan program that helps finance the purchase of land, buildings, or equipment with long-term, fixed-rate financing.
It can be difficult to get a loan from a bank for a small business if you have been in business for less than two years or if you do not have a constant income. Add to that bad personal credit or no collateral, and many small business owners find themselves empty-handed.

Getting financing from a bank tends to take longer than getting a loan from an online lender, but banks tend to offer the lowest APRs.

When to get a business loan from microlenders:

Microlenders are nonprofit organizations that typically provide short-term loans of less than $50,000. The application may require a detailed business plan, financial statements and a description of how the loan will be used, making it a lengthy process.

Moreover, the size of the loans is, by definition, “micro”. But these loans can work well for small businesses or startups that can’t qualify for traditional bank loans due to a limited operating history, poor personal credit, or lack of collateral.

6. Apply for a business loan

Start by looking at two or three similar options to compare their loan terms and annual percentage rate, or APR. Since the APR includes all loan fees in addition to the interest rate, it is the best way to understand the total cost of a business loan.

Of the loans you qualify for, choose the one with the lowest APR and the best terms for you – as long as you are able to manage regular loan payments – and gather your business loan application documents. These may include:

Note that credit reporting agencies do not differentiate between business and personal applications. If you use your personal credit history, your credit score could be affected when applying for a small business loan, which is why it’s important to do your best.

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