Are you a small business owner looking to get your company off the ground, fund new research, or expand into new states? If so, applying for small business loans could potentially provide the capital you need to make those dreams come true.
Every year, millions of entrepreneurs just like you are applying for small business loans from traditional banks and alternative lenders.
To increase your chances of approval, it helps to know the procedure to follow before, during and after the small business loan application process. Read on to learn the 10 steps to take when you’re ready to get started.
1. Know Your Options When Applying for Small Business Loans
Today, there are more small business lending opportunities than ever before. As you begin this journey, take the time to understand all of the ones available to you. Different loans will vary depending on their interest rates, amount, and terms.
A few of the most common types of small business loans include:
- Accounts receivable financing
- Working capital loans
- SBA small business loans
- Small business term loans
- Equipment loans
- Small business credit cards
- Small business lines of credit
There is no one-size-fits-all loan type. The ideal one for you will meet your immediate and long-term business needs and help fund your most important goals.
For instance, if you only require short-term business financing, a small business credit card is appropriate. On the other hand, if you’re looking to purchase a major piece of machinery, an equipment loan would work best.
2. Research Your Lenders Prior to Applying for Small Business Loans
Just as there are multiple loan types available, there are also different types of lenders. These usually fall into one of three main categories, including:
- Alternative online lenders (MCA)
- Commercial banks and credit unions
- SBA-backed lenders
- Traditional funding companies
Again, the specific one you should partner with depends on the individual needs of your business. As you do your homework, make sure you understand the fine-print terms behind each lender’s loan proposal.
Generally, alternative online lenders such as MCAs will offer the most flexible terms, but their interest rates will be much higher than others. At the same time, commercial banks and SBA-backed lenders may have more favorable rates, but stricter lending requirements, including certain credit score requirements.
3. Understand Your Credit Score
Speaking of credit scores, do you know yours?
Almost every lender will take a look at your credit history and risk profile before extending you a loan proposal. This is to protect their interests and help them gauge your likelihood to default on a loan.
If your credit score is sub-par and you can afford to wait, it’s better to apply for a small business loan once you bring it up. The steps involved to do so include tackling your existing debts, establishing a consistent payment schedule, correcting errors on your credit report, and others.
In addition to reviewing your credit score and credit report, lenders will also check into the stability of your business, taking a close look at:
- Your outstanding loans
- The business’s current debts
- Your current business assets
- How long you’ve been in business
- Your company’s investors (if any)
Ideally, these figures will all work in your favor. If your business assets are solid and your debts are minimal, lenders will be more confident in your ability to pay your existing obligations and add a new one.
4. Prepare Your Financial Statements
While different lenders have their own requirements, most will take a close look at your financial statements before extending an offer.
While alternative lenders might not require an extensive amount of documentation, banks and traditional lenders will. The documents to compile can include your:
- Balance sheet
- Income and loss statements
- Cash flow statements
- Previous tax returns
- Articles of incorporation
- Personal financial statement
Using these documents, they’ll analyze several metrics, from your gross margin to your debt-to-equity ratio. Be prepared to answer any questions on these topics and provide additional documentation as required.
5. Gather Your Business’s Details
In addition to your financial health, lenders will also need to know basic details about your business. It’s important to have this data on hand when you are applying for small business loans so you can avoid delays and errors.
Some of the key details you’ll need to provide include:
- Your official business name
- The business’s licenses
- Your legal business structure (sole proprietorship, partnership, corporation, S corporation)
- A list of your executive officers and their credentials
- Your Federal Tax ID number
- Your business’s state filings (Certificate of Incorporation, good standing certificate)
- Copies of all insurance policies (key man, general liability)
These are only a few of the forms that might be required of you during your small business loan application. Make sure you understand what’s required before you begin.
6. Fine-Tune Your Business Plan Prior to Applying for Small Business Loans
As excited as you might be about your business idea, a lender will require more than an enthusiastic monologue. You should be prepared to explain, in concrete detail, why you need the funds and how you plan to use them.
This is where a robust, well-rounded business plan comes into play. In addition to details about what your business does and why it’s important, this plan should also include specific information on your loan request.
Key details to add include:
- Exactly how much funding you require
- How you will use the loan (capital expenditures, expansion, hiring, etc.)
- The strongholds you have in place to prevent a default
Simply showing up and asking for money can derail your plans and cause a lender to question your legitimacy. Make sure your plans are clear, along with your intent.
7. Optimize Your Online Presence
Your customers aren’t the only ones checking out your small business online. Your lender will also take to the internet to learn more about what you do and what people are saying about your company.
That said, now is the time to go through and double-check your website, social media pages, online business profiles, and other digital components. Make sure all the information is accurate and up to date, as well as sleek and professional looking.
From there, take a close look at your online reputation. Be sure to check your ratings, feedback, and reviews on sites such as Yelp, Google My Business, Better Business Bureau, and other heavy hitters. If there are any major strikes against your brand, take steps to resolve those issues if possible.
While you’re at it, make sure your personal profile pages are cleaned up and accurate as well. As the principal owner, lenders are likely to check into your online profile, too.
8. Determine a Potential Guarantee for the Small Business Loan
To increase your chances of receiving the most favorable terms on your loan, you should be able to provide some sort of guarantee that you can repay the loan.
Many lenders will allow or require that borrowers give a security interest on their company assets to act as this guarantee. This might include your commercial property, equipment, accounts receivable, or another asset.
Be wary of lenders that require your personal guarantee as the business’s principal owner. Agreeing to this not only puts your business assets at risk but your personal ones as well. If you can avoid signing a personal guarantee, then do so.
9. Compare Different Terms When Applying for Small Business Loans
Before applying for small business loans and signing on the dotted line with any lender, it’s important to get a few options and compare the different interest rates and terms.
This is especially the case if you’re trying to decide between a traditional bank loan and one from an alternative lender. There are a few key differentiators that can help you gauge whether or not a loan is best for you.
As you compare, pay special attention to these key terms:
- Interest rates and the potential for fluctuations
- Loan origination fees
- Interest payment timelines
- Required securities or collateral
- Principal payments or amortization schedules
- Loan default circumstances
- Loan usage limits
- Pre-payment penalties
- Operating covenants imposed
- Other associated fees (underwriting, administration, loan processing)
Taking the time to compare all of these metrics might require significant effort, but it’s necessary. Otherwise, you could become blinded by dollar signs and not understand the true terms of the loan you’re considering.
10. Stay Persistent
In the event that your loan request is denied, or the terms you receive aren’t as favorable as you’d like, stay the course.
In many cases, your current credit rating might be getting in the way of being approved for a small business loan. If this is true, take the time to build it back up and apply again in a few months.
In the meantime, you can also educate yourself as much as possible about how the applying for small business loans process works. The more prepared you are, you’ll be able to know exactly what lenders are looking for. This way, you can improve your chances of walking away with the funds you need.
Learn More About Applying for Small Business Loans Today
Are you interested in learning more about how applying for small business loans works? Are you ready to take the first step and successfully apply for a business loan today?
If so, you’ve come to the right spot. Our quick and easy application process takes the guesswork, and the leg work out of finding the loan option best suited for your needs.
Our team of qualified and experienced financial advisors will review your application, put you in touch with the right lenders, and help you obtain the best terms available. Apply today to get started on applying for small business loans!
