How to get a business loan in 7 steps
How to get a business loan in 7 steps
A business loan can help you start or grow your business, but navigating the process and loan standards can be daunting if you don’t know how to get a business loan. Breaking it down into manageable steps — from understanding qualifications to finding lenders and knowing how to apply for a small business loan — can help you get the financing your business needs.

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

Lenders will ask you why you need a small business loan. Your answer will likely fall into one of three categories and will determine which type of business loan is right for you:
  • SBA loans or traditional term loans. These often have high borrowing limits — SBA loans can be as high as $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.

  • Seed fundingsuch as business credit cards and personal loans. These lenders need cash to fund loan repayment, so businesses in their first year are generally unable to obtain commercial loans. Instead, you will have to rely on other funding.

  • A business line of credit. This might make sense if you want to manage day-to-day expenses. This type of flexible financing allows you to tap into the financing needed to cover expenses such as payroll or unforeseen repairs, providing a useful safety net.

2. Determine if you qualify for a 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 above 680 at least, says Suzanne Darden, finance specialist at the Alabama Small Business Development Center. If your credit score falls below this threshold, consider small business loans for borrowers with bad credit or loans from a nonprofit microlender.

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.

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.

  • Some online lenders require daily repayments, so be sure to take that into account.

  • To comfortably repay your loan each month, your total income must be at least 1.25 times your total expenses, including your new repayment amount, Darden says. For example, if your business income is $10,000 per month and you pay $7,000 in rent, payroll, and other expenses, you should be able to afford a monthly payment of $1,000. Your income ($10,000) is 1.25 times $8,000 of expenses.

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

  • A secured loan requires business collateral, such as property or equipment, which the lender can seize if you don’t repay the loan.
  • Setting up collateral is risky, but it can also 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

There are three main sources of small business loans: online lenders, banks, and nonprofit microlenders. Each usually has multiple products, but one may be better in some cases than others.

When to get a business loan from online lenders:

Online lenders offer small business loans and lines of credit from around $1,000 to $5 million. 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 – up to 12 hours.

When to get a business loan from banks:

Traditional banking options include term loans, lines of credit and commercial mortgages to purchase properties or refinance.

Through banks, the US Small Business Administration provides general small business loans with its 7(a) loan program, short-term microloans, and disaster loans. The SBA makes loans up to $5.5 million, with 7(a) loans averaging $704,581 in fiscal year 2021, according to the Congressional Research Service. The average SBA microloan is $13,000.

The SBA also has a 504 loan program that helps promote community economic development by financing business capital purchases — such as land, buildings, or equipment — with long-term, interest-rate financing. fixed.
It can be difficult to get a loan from a bank for a small business due to factors such as declining sales volume and cash reserves. Add to that bad personal credit or no collateral, and many small business owners find themselves empty-handed.

Getting finance takes longer than the other options, but banks are usually the lowest option.

When to get a business loan from microlenders:

Microlenders are non-profit organizations that generally lend short-term loans of less than $50,000. The APR of these loans is generally higher than that of bank loans. 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.

Accion Opportunity Fund, Kiva and Accompany Capital are just a few examples of microlenders.

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

6. Gather your documents

Before applying, make sure you have all the required documents. Locating these files now and making them easily accessible will help streamline the process of getting a small business loan.

Depending on the lender, you will need to submit a combination of the following:

  • Corporate and personal tax returns.

  • Business and personal bank statements.

  • Business financial statements.

  • Commercial legal documents (e.g. Articles of Incorporation, Commercial Lease, Franchise Agreement).

  • Business plan.

7. Apply for a business loan

You did it! Now that you’ve determined the type of loan and lender that’s right for you, it’s time to apply.

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

Of the loans you qualify for, choose the one with the lowest APR (as long as you can manage the regular loan payments) and apply with the documents you have gathered.

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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