Starting or expanding a small business often requires capital. While bootstrapping with personal funds is possible for some, many entrepreneurs need to apply for financing. Small business loans allow you to access lump sums of cash to jumpstart your venture or take it to the next level.
With so many options to choose from, the loan application process can seem daunting. Here’s a comprehensive guide to demystify small business lending so you can secure the funding you need.
Types of Small Business Loans
The first step is understanding the main categories of small business financing so you can identify the best fit:
Backed by the government, Small Business Administration (SBA) loans offer affordable terms and the ability to borrow higher amounts than conventional business loans. The two most popular types are 7(a) and 504 loans.
Conventional Bank Loans
Conventional small business loans come from traditional banks and credit unions. They provide accessible financing but usually have higher rates and standards.
Short-term financing like merchant cash advances give you fast access to smaller sums of money. The payback periods are under 18 months.
With invoice financing, you can leverage the value of outstanding customer invoices to obtain working capital loans. The invoices serve as collateral.
Equipment financing allows you to borrow money specifically to purchase necessary business equipment like machinery and vehicles.
Business Lines of Credit (LOC)
A business line of credit (LOC) provides revolving access to funds up to a set limit. You only pay interest on the amount used.
After deciding on the loan type, the next step is making sure you meet the requirements. Typical eligibility standards include:
- Time in business – Most lenders require at least 1 year of operations. Startups may need to provide detailed projections.
- Annual revenue – Minimums range from $50,000 to millions depending on loan size.
- Personal credit score – A minimum score in the 600s is typical, but higher scores get better terms.
- Collateral – Loans above a certain amount require pledged assets to secure the debt.
- Cash flow – You need to show consistent cash flow to handle repayments.
- Business plan – A solid plan is mandatory for startups and often required for bigger loans.
Gathering the right records in advance will make the application process easier:
- Business financial statements – Several years of profit/loss statements and balance sheets.
- Federal tax returns – Personal and business returns for the past 2-3 years.
- Bank statements – To show cash flow history and current account balances.
- Business plan and projections – If it’s a startup or you need a large loan amount.
- Identifications – Documents verifying your identity and legal business registration.
- Collateral details – Records of assets pledged as collateral like property deeds or equipment titles.
How to Apply
With your materials and eligibility criteria checked, it’s time to submit your application. Follow these steps:
1. Choose a Lender
Research lenders and select ones that offer the loans and terms best suited to your business. Get pre-qualified to find the lender most likely to approve you.
2. Submit Loan Application
Complete the loan application providing all required details and documentation. Be thorough and accurate.
3. Allow Processing Time
Underwriting, risk assessment, and approval processes take 1-3 weeks. Follow up on any additional items the lender requests.
4. Accept Offer
If approved, the lender presents a loan offer listing rates, terms, fees, and conditions. Review carefully before signing the final agreement.
5. Receive Funding
Once all conditions are met, the lender disburses the loan funds into your business bank account within a few days.
Tips for Approval
Follow these tips to strengthen your loan application and chances of success:
- Maintain a clean credit history
- Lower your debt-to-income ratio
- Build robust financial records
- Craft a winning business plan
- Provide ample documentation
- Use collateral if possible
- Connect with the lender relationship manager
- Be patient and persistent
Proper preparation, detailed applications, and smart financing choices lead to small business loan approval.
FAQs on Small Business Loan Applications
What credit score is needed?
Most lenders require a minimum score in the mid 600s, but higher scores above 700 get better loan options. Improving your credit before applying helps approval odds.
How long does it take to get funded?
The entire process from application to funding takes 1-6 weeks on average depending on lender workload and how promptly you provide documents.
What collateral is needed?
For loans under $100,000, collateral is usually not required. Bigger loans typically need a lien on business assets like real estate, accounts receivable, or equipment.
What are the repayment terms?
Repayment terms vary by loan type but usually range from 6 months to 7 years. Short-term loans have accelerated repayments while long-term loans stretch over years.
Can startups get approved?
Yes, startups can get loans through the SBA and some alternative lenders. Providing a solid business plan and projections helps outweigh the lack of operating history.
What happens after applying?
The lender reviews your application materials, runs credit checks, analyzes risk, verifies documents, and makes an approval decision. You may need to provide more details during underwriting.
Seeking Financing for Your Business? Apply for Small Business Loans Today
Access to capital is critical for entrepreneurs to start, operate, and expand successful ventures. Small business loans enable you to get the lump sums of financing your company needs to reach the next level. Despite intricate requirements and processes, virtually any creditworthy business can get approved with the right strategy. Follow this comprehensive guide to demystify lending and apply for the best small business loans to meet your growth goals.