- There are many types of financing available, from traditional bank loans to microloans.
- Your credit score is important for getting a business loan, but so is your total income.
- The time you have spent in business is more important than the number of employees you have.
- Learn more about Personal Finance Insider.
Taking out a loan for your business can provide an infusion of cash needed to move a stalled project forward or fund other business goals. Whether you are a startup or already well established, there are many financing options available to you.
Before taking out a loan, make sure you have a detailed plan for how you will use the money and a budget for how you will pay it back. Be careful about accepting funding to solve an immediate, short-term problem.
“We work with many business owners who are looking for a loan to help with urgent cash flow issues and sometimes they don’t think long term about how they are going to pay off their debts,” says Matt Brewster, Vice President capital access to Hello Alice, an online platform that helps businesses get started and grow. “If you accept short-term financing of any kind, shop around for the best rates and fees, pay it back as soon as possible, and don’t become too dependent on it.”
Here are seven things experts say you need to know to get the right business loan.
1. What types of financing can you choose?
You should determine what you are using the money for before applying for a loan for your business, as there are a variety of loan types.
“There are many types of loans, from SBA loans to traditional term loans, lines of credit and more,” says Gina Taylor Cotter, senior vice president of global business services for the online lending platform. Kabbage. “All of these may come with different terms, rates, repayment options, and even different financial institutions.”
Noah Grayson, Strategic Funding Advisor at Estate bees, says business owners should research and weigh the pros and cons of all available financing options. You may also consider contacting a business loan specialist or direct commercial lender who offer many options.
“Business loan options are plentiful, and it can be really easy to get financing for businesses,” says Grayson. “However, getting the right financing for your business is critical, and taking expensive financing just because it can be obtained quickly and easily is usually not the best option for a business owner.”
2. What are the basic eligibility requirements?
Many lenders have a minimum time in business to qualify for a loan product, usually between six months and five years. Loans for established businesses are generally dependent on historical information, including your and your business’s credit history, tax returns and historical financial statements.
Getting a loan as a new business is harder, says Brewster, because start-up loans often require a stronger business plan and financial projections because they have no track record to base a decision on.
“Many financial institutions have loan eligibility guidelines that include a minimum annual or monthly income,” Brewster said. “Non-profit micro-lenders, typically community development financial institutions and others, specialize in providing micro-loans of $50,000 or less to small businesses. They can be a great resource for small businesses .”
3. What are the main elements taken into account by lenders when making a decision?
Lenders typically look at your time in business, credit scores (business and personal), cash flow, collateral, and the industry the business is in. You may also have a better chance of approval if you have had a relationship with the lender before.
Grayson emphasizes three key factors that lenders prioritize before making lending decisions: ability to repay the loan, need for the money, and how it will meet a critical business need or growth. , and the overall creditworthiness of the business and the business owner.
“The number of employees in the business, or the amount of gross income (income received before expenses) is not as important as the net income of the business (income after expenses) and the length of time that a business has been in business,” says Grayson. “The higher the net income of the business and the longer the business has been in business, the more financing options the business will have and the more favorable the terms will be.”
4. Does the size of your business matter?
Usually, the size of a business is not as important as its age or the revenue it generates. Don’t feel like the number of employees you have is holding you back from applying for a loan.
“Don’t be discouraged if you’re just getting started or if you’ve been in business for decades,” says Cotter. “Research your options and find the partner that best fits your business.”
5. Does your credit score matter?
In short, yes. Credit scores are essential in helping lenders determine the likelihood of you repaying your loan on time and in full.
“The credit score is a critical component,” says Grayson. “Commercial lenders will offer the best financing terms to business owners with a high credit score, but more importantly with a history of indebtedness and on-time repayment. A high credit score alone does not guarantee access financing the business.”
However, unlike personal loans where your creditworthiness may be the only thing a lender considers, small business lenders also consider a business’s income. Revenue is another data point that can illustrate a company’s ability to repay the loan, Cotter says.
6. What documents do you need to provide?
To get a business loan, you may need some of the following documents:
- Bank statements for the company and possibly the owners
- Tax declarations and bank statements for the company and possibly the owners
- Financial statements, including an income statement, balance sheet and cash flow statement
- Legal documents such as articles of incorporation and business licenses
- Identification forms to subscribe and validate the company
“You may need additional documents for specific types of funding,” says Brewster. “For example, if you are applying for invoice factoring (borrowing against money that customers owe you), you will need to provide your working capital accounts, accounts payable and accounts receivable, and possibly specific invoices .”
7. What should you keep in mind during the application process?
Depending on the type of loan you are applying for and your particular financial situation, the approval process can be long and require a lot of effort on your part. Go into it knowing why you need the money and stay steady throughout whatever challenges you may face.
“Be prepared and persistent,” says Brewster. “Having a strong convening in your business strategy and all your documents in place is a good first step. Then you have to persevere. It can take a lot of ‘no’s before you get a ‘yes’ for a financing product which is best for your business.”
Grayson emphasizes that research is the most important tool for success with a small business loan.
“There are programs that look attractive but may be more financially beneficial to the person trying to sell them to you than they will be to your business,” says Grayson. “Work with a reputable and experienced lender or financing professional, but arm yourself with as much knowledge and research as possible so you have the tools to select the financing that’s right for you.”