5 Steps to Get a Business loan

Lenders will look at how long your business has existed. To qualify for online small-business loans, you must have been in business for at least one year. Most bank loans require you to be in business for at least two years.

5 Steps to Get a Business loan

1. Find out if you are eligible for a loan for your business

How do you rate your credit?

What length of time have you been in the business?

Lenders will look at how long your business has existed. To qualify for online small-business loans, you must have been in business for at least one year. Most bank loans require you to be in business for at least two years.

Are you making enough money?

Lenders often require that you have a minimum annual income. This can be anywhere from $50,000 to $250,000. Before you apply, calculate your income and determine the minimum required by a lender.

Are you able to afford the payments?

Take a look at the financials of your company, especially your cash flow. Then determine how much you can borrow each month. Online lenders may require you to make daily repayments.

Darden states that to comfortably repay your loan each monthly, your income must be at least 1.25 times your expenses. This includes your new repayment amount.

Let’s say that your monthly income is $10,000 and you have $7,000 in rent, payroll, and other expenses. This rule states that you should be able afford $1,000 monthly loan payments, since $10,000 equals 1.25 times $8,000 in total expenses.

Although it is risky to put up collateral, it can increase the amount you are able to borrow from lenders and help you get a lower interest rate.

Even for unsecured loans, lenders may require personal guarantees. If your company cannot repay the loan, you will personally repay it. In some cases, a lender may also take possession of your car or house.

2. Decide the type of loan that you require

  • You are looking to start your own business. The lender requires cash flow to repay the loan. Companies that are just starting out won’t be able to get business loans. Instead, you’ll have to rely on other types of startup financing , like business credit cards and personal loans.
  • You need to be able to handle your day-to-day expenses. A business line of credit could make sense. Flexible funding allows you to access the financing when you need it. This can be used to pay for unexpected costs such as repairs or payroll.
  • You want to grow your business. A traditional term loan or government-backed loan may be a better option. SBA loans, for example, can exceed $5.5 million. Many lenders also offer specific products to fit a growing company’s needs, such as loans for equipment or vehicle purchases.

3. Compare small-business lenders

There are three main sources for getting small-business loans: online lenders, banks and nonprofit microlenders. Although each may offer multiple products, one product might be more effective than the other in some cases.

When to get a business loan from online lenders:

Online lenders provide small-business loans and lines of credit from about $1,000 to $5 million. These loans have an average annual percentage rate of 6% to 99% depending on the lender, type and size of loan, repayment term and collateral required.

Although these lenders don’t have APRs that are as low as traditional banks, approval rates for them are higher than banks and they can fund faster than banks — sometimes as fast as 12 hours.

When banks can lend a loan to a business:

Traditional banks offer term loans, lines credit, and commercial mortgages for property purchases or refinance.

The U.S. Small Business Administration offers general loans to small businesses through banks. It also has a 7(a) loan program, microloans for short-term emergencies, and loans for larger companies. According to the Congressional Research Service, the SBA offers loans up to $5.5 Million. 7(a) loans average $533,075 per year. SBA microloans average $13,000

Although getting funded can take longer than with other options, banks usually have the lowest APR.

How to obtain a microloan for your business:

The loans are also small in size, which is by definition “micro.” However, these loans can work for startups and smaller businesses that don’t have the collateral or poor credit history to qualify for traditional bank loans.

4. Calculate the cost of obtaining a loan for your business

Make sure that you have all the required documentation before you submit your application. These files can be found quickly and easily to speed up the process of getting small-business loans.

Depending on your lender, you may need to submit the following:

5. Get a loan for your business

You made it! You’ve now decided which loan type and lender is right for you. It’s time to submit your application.

Begin by looking at similar options that are based on the loan terms and annual percentage rate (or APR). APR is the best way to determine the total cost of a business loan over the year, as it includes all fees and interest rates.

You can apply for any of the loans that you are eligible for by providing the documentation you have.

Credit bureaus do not distinguish between personal and business inquiries. If you use your personal credit history, your credit score could be affected when applying for a small business loan, which is why it’s important to go with your best bet.

Questions frequently asked

You will need a strong personal credit score, solid business financials, such as revenue, at least a year in business and in some cases collateral to qualify for a small-business loan at a bank. Online lenders require less stringent requirements. Consider business credit cards if you are just starting out. See our list of startup funding options.

It can be challenging to qualify for a small-business loan without a strong personal score (starting around 700) and a solid cash flow from your business. Those are among the common reasons why your business loan application can be denied.

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