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.
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 loan from a non-profit microlender.
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.