How to Get a Small Business Loan

You’ve got plans to take your business to the next level and shore up company financials, and to do that you need an infusion of cash. How well you prepare to seek this funding — and how carefully you evaluate potential lenders — will have a major impact on your chances for success.

Review this information to help you make a strong case for potential lenders and to decide if a loan offer is right for you.

Define your plan

Lenders will want a clear sense of how you intend to use the funds and how you will pay them back. Before applying for a business loan, be sure you know the following:

• Your purpose for seeking financing.

  Having a specific plan helps communicate to lenders that you will put the money to good use. Be prepared to explain what the funds will be used for — for instance, to upgrade equipment, to shore up working capital or to refinance existing debt — along with how much money you need.

• How the money will earn you money.

  Some lenders may want to know how the borrowed funds will strengthen your business as well as your ability to repay. Perhaps replacing a key piece of equipment would allow you to double your output, or maybe refinancing debt would help significantly improve your cash flow. Providing realistic financial projections can help you better understand and communicate to lenders how financing will benefit your company.

• How you will repay.

  Lenders will ask for information that demonstrates your ability to repay a loan or line of credit, such as your yearly sales, monthly expenses and personal financial details. Providing this can help assure lenders that your business generates the cash flow required to make payments.

How to qualify for a small business loan

It’s important to review a copy of your personal and business credit reports before you apply for a loan, as many lenders consider both of these credit profiles. Experian®, Equifax® and TransUnion® provide personal reports; the first two bureaus also maintain business reports. Business credit reports include information from vendors and suppliers that shows a company’s payment history; they also include court filings and other public records that show whether a business has ever failed to repay a debt. Personal reports are important because lenders often require business owners to guarantee a business loan in case the business is unable to repay.

Once you review your reports, correct any errors or outdated information by contacting the reporting agency. Look to improve your score by asking vendors or suppliers that aren’t listed to report your payments — though some companies provide this information automatically, many others do not. Aim to pay down existing debt and keep revolving balances low, as high balances can hurt your score. If there are blemishes on your credit report — such as a delinquent payment — be sure you can explain them to the lender. View our article for "How to Build Business Credit" for more information.

Gather financial documents

Lenders’ requirements may vary as to what documentation they need from borrowers. Banks will typically ask for business and personal tax returns; they might also review balance sheets, income statements, cash flow projections and other financial statements. Marketplace lenders, which typically have a more streamlined application process, may require less documentation. To use your time efficiently, ask your lender which documents it will need to review. If you’re applying for Small Business Administration (SBA) financing, you can find a list of required documents on the SBA website.

Depending on the type of financing you’re seeking, you may need to consider putting up collateral. Traditional bank and SBA loans typically require borrowers to pledge property or other assets that could be sold to repay the loan if the loan cannot be repaid with cash. Other credit sources, such as marketplace lenders, typically require a personal guarantee — a written promise of repayment from the business owner if the business does not pay. Personal guarantees are not tied to a specific asset, but they do make a business owner personally responsible for meeting a loan obligation.

Understand the cost of capital

As you evaluate lenders and loan offers, it’s important to consider what your total costs will be, including interest and any fees. This is important for ensuring that payments will be manageable. Factors to consider include:

• Origination fee. This is akin to an activation fee for a loan. It may range from around 0.5 percent to 7 percent, depending on the type of loan and the borrower’s creditworthiness.

• Prepayment penalty. Some lending contracts may specify a fee that will be charged for paying ahead of schedule. In other cases, borrowers may be charged interest for the entire loan amount, even if they pay off early.

• Late payment fees. Along with knowing when these penalties are assessed and how much they cost, it’s important to understand the conditions under which a loan may be considered to be in default.

Calculating a loan’s annual percentage rate (APR) can help you determine your total costs for financing. The APR includes the interest rate, origination fee and other costs. Many lenders will disclose their APR; there are also free online calculators than can help you to compute it.

Know when you will need the money

If you plan to approach a bank for financing such as a traditional loan or an SBA loan, you will need to apply far in advance, as the application and approval process can take weeks or even months. It can also be advantageous to have a relationship in place with a bank before seeking financing, and this can take time to develop. If you have an objective with a longer timeline (e.g., buying a building or long-term equipment), the lengthier time frame may be workable.

Online credit sources, such as marketplace lenders, typically offer a much faster application and approval process. Funds may be delivered within days or weeks. This can be advantageous if you need funds quickly to take advantage of a strategic opportunity, meet working capital needs or refinance debt before an expensive increase in interest rates. Though the amount you are able to borrow may not be as high as with traditional bank or SBA financing, the flexibility can offer a significant advantage to some borrowers.

Consider service

Your relationship with a lender may last several years, so it’s important to choose who you work with carefully. Does the lender have a track record of working with small businesses? Are they personally receptive to your needs? Are they able to answer your questions and clearly explain the terms of their financing up front? If you feel rushed or confused — or feel that you aren’t getting proper attention and advice — it’s probably best to consider other options.

It’s also important to understand what will follow after you’re approved for financing. Will you be able to directly contact an adviser who’s knowledgeable about the specifics of your loan or credit line? How readily will you be able to access information and documentation on your account? Will you be able to make adjustments such as changing your payment date or paying off your balance early? Keep in mind that even if a deal looks good on paper, it may prove to be a headache if you don’t have the support you need.

Applying for credit may be one of the most important steps you take as a business owner. Thorough preparation can help you secure the funds you need to grow and compete. Choosing a lender that understands your needs and offers a transparent APR and clear payback guidelines can help you maximize the benefits of the funding.