One of the most feasible ways to kickstart your small business — and establish a stable financial foundation you can build from — is to secure a business loan. However, while you may just as easily decide to venture into your personal bank for the funds you seek, today’s market actually offers way more loan options than business owners may realize.
To that end, it’s essential that you take stock of the market and carefully consider the process involved in how to get a business loan. Once you know the steps involved and what you intend to direct the loan money toward, you’ll be far better equipped to identify the ideal loan option for your business. Let’s take a closer look at what you should know before you get started.
Know What You Need to Get a Business Loan
Of course, as you pursue a business loan, there are certain practical requirements you’ll need in order to present a compelling investment for any lender. While it may be possible to find a lender who will work with you otherwise, you’ll be doing yourself a disservice if you don’t check the below items off your list before you start searching for a lending partner you want to get into business with.
A Solid Credit Score
Most reputable lenders will need to carefully consider your credit report before they take action. This makes sense, since they’re taking a financial risk on your business when they decide to approve your loan application. It’s certainly worth clearing up any issues (such as outstanding debts) that may be holding down your credit score before you reach out to lenders.
In the financial world, few criteria speak to your credibility as much as your credit report. A simple investigation into your credit report can often uncover what’s standing between you and an attractive credit score.
Decent Cash Flow
The liquidity of your cash plays an incredibly important role in a lender’s decision to grant you a loan or shuffle right past your application. In fact, in many cases it’s the very first element a lender looks for in an applicant.
To prevent problems in your business down the line, determine your cash flow before you begin tracking down potential lenders, and make a plan to calculate it regularly. This will greatly minimize the chances of a rejection and truly open the possibilities of finding the best loan out there for your business.
Applying for a business loan isn’t just asking a lender to provide the funds you need. In essence, the process itself reflects on who you are as a business owner and the long-term prospects of your business. Therefore, you really ought to have streamlined and organized your business before you approach lenders.
This guideline definitely includes the paperwork comprising your application, but it also extends to other elements of your infrastructure. Presenting a thorough business plan or detailed reports (depending on what stage your business is in) will demonstrate a serious commitment to your business and instill a sense of trust in lenders.
Know Your Options for Getting a Business Loan
Now that you’re prepared with all the elements you’ll need to find the best loan for your business, it’s time to decide exactly which type of loan you want. As we mentioned earlier, the market offers a ton of loan options for business owners nowadays, and you’ll want to at least be knowledgeable of what’s on the table before you nail down a specific path. Doing so will guide you toward the right lender… and hopefully bring you that much closer to securing your funds.
Traditional Bank Loans
Even though we just pointed out the breadth of loans out there, that doesn’t mean you shouldn’t consider traditional bank loans. While they don’t feature the same government guarantee as those granted by the Small Business Administration (see below), these loans are far less strict and typically carry much lower interest rates.
If you manage to get approved, the process usually goes relatively smoothly. The downside here is that these bank loans can feature shorter repayment periods, and they might even include balloon payments. This means the borrower must repay any outstanding principal sum all at once at the end of the loan period.
Small Business Administration (SBA) Loans
Since the major distinguishing factor with traditional bank loans — both at large commercial banks or smaller lenders — is the absence of an SBA guarantee, it makes sense that the other major category you’ll want to consider centers on SBA loans. The organization’s primary option, the 7(a) loan program, remains a good bet.
Not only is this among the simplest and most commonly approved, but it’s also the most flexible option you’ll find in the SBA’s offerings. 7(a) funds can be directed to a wide variety of objectives, such as working capital, purchases (like equipment or land), construction and even debt refinancing. With a maximum of $5 million, these loans can be secured through any number of participating lenders.
While traditional bank loans and SBA loans make up the majority of business loans, they are far from the only ones you can consider. For short-term financing, you might want to look at working capital loans. If you have a specific need for office equipment, you can pursue a loan tailored to that as well.
Of course, opening up a line of credit might be enough to sustain your business for smaller, day-to-day purchases. Merchant cash advances could offer a similarly fast solution. The bottom line here is that you need to consider all possible avenues before you nail down which loan would most benefit your business.
Know Who to Turn to for Getting a Business Loan
Once you know what kind of loan you need, it’s time to assess the lenders who might be able to assist you. We’ve alluded to these options earlier, but let’s run through the lenders you’re most likely to encounter as you narrow down which ones offer your chosen form of loan, and which ones represent the kind of organization you can depend on going forward.
- Traditional commercial banks: This is probably the most obvious answer — don’t underestimate the sheer might of some of the largest commercial banking organizations such as Wells Fargo, JP Morgan and Citibank. While they may involve more loan underwriting criteria and longer approval processes than their smaller counterparts, their available resources are often considerable, and their offerings for small business funding continue to grow.
- Community banks: The major banks may be omnipresent, but community banks often have more incentive to work with local businesses. Naturally, this bolsters their willingness to offer small business loans to customers. In many cases, community banks in your own city may have better interest rates and overall loan programs for your business.
- Direct online lenders: In recent years, online lenders have begun cropping up as impressive competition for the more established banks. Through a simple online application process, you may be able to secure thousands (or hundreds of thousands!) in business financing. Sites like Fundera and LendingTree are prime examples of this; you can also look into alternative business financing providers like Sky Bridge Business Funding.
- SBA guarantors: Any lender that offers loans with SBA guarantees can be considered an SBA guarantor. This may include institutions from any of the above categories. For more information regarding SBA loans, see our discussion of them above.
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