How to Get a Business Loan in 7 Steps

Business loans are not the only way that businesses can get money for starting up, buying real estate and equipment, purchasing inventory, meeting payroll, and other business expenses. Many startups raise venture capital by offering equity in the company in the form of different classes of stock, in exchange for cash.

Inventors and entrepreneurs who have a great new idea sometimes get their seed capital through crowdfunding. There are even companies that got their start with a grant from a government program or a charitable foundation. The majority of companies, however, get their funding through business loans.

How to get a business loan

Let's take a closer look at the seven steps for getting a business loan.

1. Choose what kind of loan you want

When you are just starting out, your business credit and your personal credit tend to be the same thing—even if you have formed an LLC or a corporation. Small business lenders make judgments on business loans on the basis of personal credit reports, at least until the business is up and running. But there are certain kinds of financing that you can get even in your startup period.

Conventional bank lending vs SBA loans

There are no hard and fast limits on conventional lending, but you will need an established relationship with the lender to be considered for funding. The SBA offers express loans in amounts up to $350,000. SBA 7(a) loans (referring to the section of the law that authorizes the program) can be guaranteed up to $5.5 million.

SBA loans allow long-term repayment, up to:

• 10 years for inventory for a retail business or working capital for any kind of business,
• 10 years for equipment, and
• 25 years for real estate.

The SBA, however, is not the actual lender of the money. The SBA only guarantees repayment of a percentage of the loan, up to 75 percent. SBA loans are also available at favorable interest rates based on the prime rate or LIBOR, or the SBA peg rate. Loans of $25,000 or less, or for seven years or more, come at higher rates of interest. SBA loan rates can range from prime plus 2.25 percent to prime plus 4.75 percent.

Conventional loans and SBA loans differ in a number of very important ways:

• A conventional small business loan usually requires both demonstrating cash flow and putting up property for collateral. Only a percentage of the appraised value of property, usually 80 percent, can be used to collateralize the loan. SBA 7(a) loans do not require any collateral at all.
• Banks want an audited financial statement that shows that you can afford to make your payments. In fact, they usually want proof that you have 125 percent of the cash flow you need to make your payments. SBA loans can use projected cash flow figures.
• Collateral and cash flow are not enough for traditional lenders. They may decline a loan simply because there are certain industries they do not invest in. The SBA funds loans for businesses in almost any industry, even an online business.
• Conventional lenders will look for collateral that will more than cover the amount of their loan. SBA rules state that a loan shall not be denied strictly because of a high loan-to-value ratio. The SBA also does not require borrowers to put their ownership in the company at risk.
• Conventional lenders usually require a 20 to 25 percent down payment to buy real estate. SBA loans usually only require 10 percent.
• Conventional lenders may extend debt financing for real estate for only five to seven years, expecting borrowers to refinance their loans long before the property is paid for. SBA loans usually extend 10 to 25 years.
• Many entrepreneurs want to buy real estate with room for their company and room to rent to other businesses while they are growing. Conventional lenders usually do not finance this kind of arrangement, but the SBA approves loans for up to 100 percent of the cost of real estate as long as the borrower occupies at least 51 percent of the space.
• Refinancing to reduce monthly debt payments is usually impossible with conventional lenders but is often possible with an SBA loan.
• Balloon payments are common with conventional loans, but they are prohibited for SBA loans.
• On-demand loans, which require repayment in full, even if you have been making all of your payments on time, are not allowed by the SBA.
• Loan servicing requires annual submission of tax returns and audited financial statements to meet the terms of the loan. Failure to submit these documents puts the borrower in default of the loan. Conventional lenders usually require annual audited statements that may cost tens of thousands of dollars in CPA fees to prepare. The SBA is usually satisfied with tax returns if the loans are being repaid.

The SBA may finance intangible assets such as goodwill. Conventional banks may recognize them on your balance sheet if they are allowed by Generally Accepted Accounting Principles (GAAP), for purposes of loan servicing, but they almost never lend money to acquire them.

The SBA offers microloans, disaster loans, and a special real estate financing option known as a 504 loan. Just know that you personally, not your LLC or your corporation, will be on the hook for repayment if your business fails to make the required payments on your loan.

2. Make sure you are qualified for the kind of loan you want

Lenders look at three factors to determine whether you are qualified for a loan.

Credit Score

Banks prefer to lend to businesses and individuals who have excellent credit, a credit score of 720 or higher. Applicants with excellent credit are more likely to be approved than applicants with just good credit, scores between 690 and 719.

The SBA also uses the FICO Small Business Scoring Service to check your SBSS score. You will need 155 or higher on their scale of 0 to 300 to get through prescreening, but there may still be a lender who is willing to work with you if some other aspect of your loan application is sufficiently attractive.

Don't have a good or excellent credit score? You will pay more interest, but there are lenders who specialize in lending to businesses with a poor or limited credit history. Companies like bluevine, ondeck, and Triton Capital can often make loans when the SBA and conventional lenders cannot.

You may also be able to get a business loan from a non-profit microlender.

Revenue

Many commercial lenders simply don't do business with companies that are not taking in $250 thousand, $500 thousand, a million, or multiple millions of dollars in revenue every year. Estimates of future revenue are not likely to be considered unless they are already contracted (in which case you can get money through a process called factoring).

Low revenues don't preclude the possibility of getting a business loan at some institutions. SBA microloans and short-term business financing may be available.

How long you have been in business

Online lenders usually work with borrowers who have been in business for at least a year. Banks look for two years of audited financial statements.

3. Calculate the payment you can afford

To be sure you can make your payments on time, your total income should be at least 1.25 times your total expenses, month by month. Include your loan payment in your monthly expenses. For example, if your business takes in $20,000 a month, and you have rent, payroll, and overhead costs of $14,000 a month, you can afford to make loan payments of $2,000 a month. Leave at least a 20 percent margin for unexpectedly low revenue or high expenses.

4. Decide how you want to collateralize your loan

Getting a business loan from a conventional lender is almost impossible without collateral. Lenders want a lien on real property or equipment that they can seize if you cannot or do not repay your loan. They want to be sure that the proceeds from the sale, less the costs of selling the seized collateral, more than covers the amount you owe on your loan. It is usually not a good idea to count on the proceeds of a bank sale leaving any cash to go back to you.

When you put up property as collateral, you risk losing it. But the lender will almost certainly give you a lower interest rate.

Lenders may also require your personal guarantee to give you a loan. That means that they can take your collateral and still sue you for any balance remaining on your loan. They can force you into bankruptcy. In some states, they can come after your house, your cars, and your retirement accounts.

5. Compare lenders

Once you have evaluated your borrowing needs and your borrowing power, it is time to look for a lender.

Here are some guidelines for the kind of lender you will need in different situations.

• Banks are a good option if you have good or excellent credit, you have been in business for two years or longer, and you can wait to get your funds. Banks will do a thorough investigation of your creditworthiness before they lend you money. But they offer lines of credit, short-term loans with a balloon payment, installment loans, and financing for real estate and equipment.
• Online lenders are best for borrowers who don't have collateral, who haven't been in business very long, and need cash now. There are online loans for as little as $1,000 and as much as $5 million. Interest rates range from prime plus 2 percent to over 100 percent, and collateral may be required.
• Microlenders offer micro loans, usually under $50,000. They usually work with businesses that have a poor credit history, or that have not been in business very long, or who don't have collateral. They will need to see tax returns and financial statements, and they may require a business plan. They charge a higher APR than banks. But they make loans when other lenders do not.

6. Gather your documents

Depending on your lender, you will need to have business and personal bank statements, business and personal tax filings, financial statements from your CPA, your business plan, and your articles of incorporation, franchise agreement, and lease agreements. Having all of these documents handy saves lots of time.

7. Apply for your loan!

Now you are ready to apply for your loan. Start with the lender who offers the lowest APR, and use your documents to complete your application. Keep in mind that every application will result in a hard pull of your credit report, slightly lowering your credit score, so start with the most promising opportunities first.

Understand the business loan application process

When applying for a business loan, it is important to be aware of and prepared for all aspects of the process. Each lending institution may have different requirements, so it is important to understand what is expected from you when making an application.

What to expect

Most business loan applications require the borrower to provide personal information such as name and contact information, proof of income, current debts or other personal and business loans, and a list of assets that can be used as collateral.

Some small business lenders may ask for additional documentation such as tax returns or pay stubs if necessary. Once all required documents have been submitted, the lender will review the application and determine whether or not to approve it.

How long does it take?

The length of the business loan application process can vary depending on the type of loan requested. Generally speaking, processing times can range from a few days to several weeks or even months. Factors such as credit score, income level, the amount borrowed, and repayment terms can all affect how long it takes for an approval decision to be made.

In addition, if further documentation is needed for verification purposes or if there are any delays in processing paperwork due to holidays or other factors, this could increase the timeline further.

Common roadblocks and how to avoid them

One common roadblock in the business loan application process is submitting incomplete paperwork or providing inaccurate information on your application form.

Before launching a business loan application, it is important to check that all forms are correctly filled out with accurate data in order to avoid any potential issues down the line.

The more organized you are when submitting your documents and verifying your identity, the smoother your experience will likely be during this process. Also, ensuring you meet all eligibility requirements prior to making a business loan request might help save time during this process.

Tips for getting approved for business loans

Some unique ideas to help you get approved for small business loans include:

Improve your credit score

Improving your credit score is one of the most important steps in getting approved for small business loans. Having a good credit score will give online lenders more confidence in your ability to repay the loan and will often result in better terms.

One way to improve your credit score is by making timely payments on all of your existing debts, such as credit cards and other personal or business loans. Paying off any past due or delinquent accounts can also help to raise your score.

You should also check for errors in your credit report and take steps to dispute them if necessary. Another way to increase your score is by keeping your balances low on current revolving accounts, such as lines of credit or store cards. You can also maintain a low debt-to-income ratio.

Increase your revenue

Your revenue plays an important role when applying for a business loan. Online lenders want to see that you have a steady income stream that can support small business loan payments and provide security against potential losses.

Increasing your revenue means demonstrating the ability to generate enough cash flow to pay back small business loans with interest.

There are a few ways to increase sales, like marketing campaigns, adding new products or services, or increasing prices. You could also try finding new customers or partners that would make your business more successful in the future.

Build a strong business plan

When you want to borrow money from a bank or other lender, it is important to have a good business plan.

This plan should have details about how you will use the money, how you will manage risks, what kind of return online lenders can expect, and projections for the future of the business. Any other relevant information should also be included.

Including industry research and market analysis data in your presentation to online lenders shows that you have done your homework. This will help you understand current trends and what it takes for success in this area.

Find a cosigner or guarantor

A cosigner is a person who agrees to pay back the small business loan if you can't. This means they are responsible for the money you borrowed.

A guarantor is someone who agrees to pay the lender back if you can't. They are fully responsible for the small business loan and don't need any money from you beyond what was agreed upon with the online lender.

Finding someone who meets these criteria may require searching through family members or friends who have suitable financial standing but it could potentially increase chances of approval significantly if successful so this option should not be overlooked if available.

Secure collateral

Finally, having collateral is also a critical factor when applying for a small business loan. This could be in the form of physical business assets or liquid funds that can help provide added security against potential losses should you not be able to meet your repayment obligations.

Lenders want to ensure they are protected against any unforeseen circumstances so having.

Alternatives to traditional business loans

Here are some alternative financing options for businesses that are not eligible for traditional bank loans but still need capital:

Crowdfunding

Crowdfunding is a great alternative to traditional small business loans. It involves raising money from a large number of people through the internet.

Crowdfunding platforms such as Kickstarter and Indiegogo have become popular in recent years, allowing businesses to launch campaigns to attract backers who are willing to contribute money towards their projects.

The biggest benefit of crowdfunding is that it does not require repayment of capital. Instead, backers receive rewards for their contributions.

Also, crowdfunding does not require business credit checks and can be used for any type of business venture, making it an attractive funding option for businesses with limited access to traditional financing sources.

As with any form of fundraising though, it requires a lot of effort in terms of creating and marketing campaigns in order to reach the right audience.

Peer-to-peer lending

Peer-to-peer lending is another option for businesses that are looking to borrow money without going through a bank or other financial institution.

With peer-to-peer lending, borrowers can post loan requests on online marketplaces like Lending Club or Prosper and then investors choose which ones they want to fund.

This method allows borrowers to receive funds quickly since there’s no need for lengthy paperwork or business credit checks as there would be with traditional lenders.

On the downside, interest rates on these small business administration loans tend to be higher than those from banks and other financial institutions due to the risk associated with peer-to-peer lending. Besides, some platforms charge service fees that may impact the overall cost of borrowing.

Merchant cash advances

Merchant cash advances (MCA) are also becoming increasingly popular among small businesses seeking alternative forms of financing.

An MCA is essentially an advance payment made against future sales; meaning that repayment amounts are based on a percentage of future business credit card payments received by the business over an agreed-upon period.

The key benefit here is that the amount repaid will fluctuate depending on how much money comes in each month. This means that if your business has a slow month you won't get hit with huge payments like you would with other small business loan options.

One drawback, however, is that merchant cash advances tend to have high-interest rates so you should carefully consider your options before taking one out.

Microloans

For businesses that need only small amounts of capital, microloans can be a good alternative to traditional business loans.

Microloans typically range from $100-$25,000 and often come from nonprofit organizations or microfinance institutions rather than banks or other large financial institutions. This means they tend not to require collateral or personal guarantee when issuing small business loans.

Microlenders are often able to offer lower interest rates to entrepreneurs than what larger banks can provide. This is because microlenders' main focus is on helping smaller businesses succeed instead of making money from them. So, if you are an entrepreneur who does not qualify for more traditional forms of financing but still needs money to start a business, working with a microlender may be a good option for you.

Just like with any other type of small business loan, it is important for borrowers to take time to research potential lenders before agreeing to anything. This way, they will know what terms they are agreeing to before signing anything.

Always stay on top of your payments

One way to finance your small business is to make sure you pay your bills on time and achieve your SMART goals. This will help you no matter what type of loan products you decide upon.

If you want to have a good personal credit score, you should pay your bills on time and keep track of all the money you owe. It helps you get access to more traditional finance options in the future if you need them.

Some lenders offer lines of credit based on your accounts receivable, which makes it easier to get more working capital. To make this happen, make sure you send out invoices quickly and follow up on monthly payments promptly.

Ultimately, there are a variety of ways to finance your business and the option you choose should depend on your specific needs. There are different types of small business loans you can get when you need money.

Some loans come from a bank, some come from other people, and some come from businesses. Make sure you understand what the small business loan will be used for and what will happen if you cannot pay the loan back before you decide to get one.

Moreover, by staying on top of payments businesses can build up better personal credit scores, which may make access to more conventional forms of financing easier in the future.

With Mailchimp’s suite of tools designed specifically for small businesses, such as our Cash Flow Management service and Accounts Receivable feature – managing finances has never been simpler.

So if you're looking for an all-in-one solution when it comes to finding alternative methods for funding your business then look no further than Mailchimp.