Sometimes, extra funding is needed to get your startup off the ground, and you may not be familiar with the process of how to get a business loan. However, the process of applying for a small business loan can be daunting for some borrowers. There are several types of small business loans, so how can they know which one is right for their startup?
How You Can Get a Small Business Startup Loan
Before you begin the startup loan application process, there are a few things you need to consider:
1. Determine Your Funding Needs
Ask yourself why you’re considering a small business loan in the first place. Are you looking for funds to cover day-to-day operations or a new piece of equipment for your business? Are you seeking a physical location for your business or looking to expand your current establishment?
For immediate cash flow, most lenders will give you a working capital loan for up to $500,000. A long-term commercial real estate loan can provide your startup with up to $5 million. Note that short-term loans will have higher interest rates.
2. Check Your Qualifications
Depending on the type of loan you need, you’ll need to have a favorable credit score. 680 is considered the baseline for many startup loans. However, if you’re pursuing a business line of credit or business credit card, a score of 560 is considered acceptable. There are some ways you can get a business loan with no credit check, however.
Qualifications will also vary depending on the lender. Most online lenders will require your startup to be in operation for at least a year. To get a loan from a bank, your small business needs to be established for two years. Some agencies, like the SBA, also require you to have substantial equity to apply.
3. Choose the Right Startup Loan
Most first-time borrowers look for flexible loans like a merchant cash advance or a business line of credit. These types of loans are best for immediate funding, with some offering cash flow in as little as 24 hours after approval. However, for most of these loans, quick approval also results in higher interest rates.
If you’re comfortable with a long-term commitment, a business-term loan will adequately suit your startup’s needs. You can borrow more money from the lender and benefit from lower interest rates.
4. Find the Right Lender
Most first-time borrowers will go straight to the bank looking for a loan. However, banks can be very wary of approving some business owners, especially if they have low credit scores. Banks also reject your application if you can’t provide any suitable collateral.
Online lenders are a little more lenient when it comes to loan approval. If you have a low business credit score, the lender will explore other options like working with your personal credit score. Online lenders are also more willing to take projected successful sales into account along with existing figures.
If you’ve exhausted all these options, you can also pursue an SBA loan. However, the SBA has strict requirements on how you can use your funds once approved. Additionally, some types of businesses aren’t eligible for SBA loans at all.
Requirements to Apply for a Business Loan
While exact requirements will vary depending on the lender, most of them require:
- A minimum of two years in business
- Three years of personal tax returns
- Two years of business tax returns
- Three years of personal and business bank statements
- Any necessary purchase agreements
- A balance sheet with your startup’s debt-to-income ratio
The balance sheet should also include all of your personal and business assets. Additionally, it’s a good idea to include financial projections of your business for the future.
Tips for How to Get a Loan to Start Your Business
If you haven’t been keeping your tax documents or income statements in order, now is the time to start. Inability or unwillingness to provide essential papers could trigger red flags for the lender.
If your credit score is low, try to pay off other debts or bills before you apply. If this isn’t possible, there’s no shame in finding someone with a better credit score to be your cosigner. Having someone to vouch for your character could boost your credibility in the lender’s eyes.
Most lenders also appreciate an outlined plan of what you intend to do with the funding. While not required, it signals your accountability to the lender and increases your chances of approval.
Where to Easily Get a Small Business Loan
Because of the added convenience and current global situation, many small business owners are securing loans through online lenders. However, with so many options available, how do you pick the best lender? Additionally, some borrowers may be wary of trusting an online lender for fear of being scammed.
Lendio is one of the leading online market places that can help you find a lender for small business loans. They have a nationwide network of lenders, so it will be easier to find one that will work with your credentials. It will also save you time since you will have to fill out only one easy online application. This means that in 15 minutes and preparing the documentation only once, you can reach the over 75 lenders in Lendio‘s network, which will improve your chances of getting your business loan approved.
Lendio is a very reputable business with great customer reviews and has so far has facilitated over 216,000 loans to small businesses in need, amounting to over $10 million.
FAQs About Small Business Loans FAQs
After you’ve gathered all your necessary documents, you can either submit them online or present them to the lender in-person. Most online applications take as little as 15 minutes while applying at a bank could take up to an hour. As long as the lender doesn’t need any additional information, expect a few days for approval.
You should apply for a small business loan as early as possible. While some lenders can approve your funds within a few days, long-term funds might take up to six weeks to arrive. This could lead to your business accruing debt and lowering your credit score.
It depends on where you choose to apply. A bank typically won’t approve your application if you can’t provide collateral, but you have other options. Most online lenders can grant you a loan without collateral as long as you meet certain conditions.
You’ll need to have an above-average credit score as well as proof that you can make loan repayments. You might also be able to secure a loan without collateral if you’re borrowing less than $25,000.
Most lenders will require you to have a good credit score, detailed financial statements, a solid business plan, and evidence of healthy projected business growth.
Most lenders offer a quick and easy application process, especially if you can submit documents online. However, that’s not where most people get stuck. The most common grounds for rejection are insufficient cash flow and a low credit score.
Even if you have all the necessary qualifications, sometimes a loan is rejected for other reasons. Changing jobs or unusual banking activity (such as large monetary gifts or donations) could raise the lender’s suspicions. It’s estimated that banks reject 80% of startup loan applications, so don’t be discouraged if you aren’t approved immediately.
Applying for Your Small Business Loan
Even if you don’t have the best credit history or current cash flow, there’s a small business loan for you. There are plenty of options available if you apply through Lendio and access their lenders’ network to increase your approval chances.