If you're looking to grow your business but don't have the capital to do so, a business loan could help you do just that.
Here is a breakdown of business loan requirements, types of loans, and how to apply once you’re ready.
Types of Business Loans
If you've never applied for business financing, you might quickly become overwhelmed by the options. Let's break down the most common types of loans, so you can decide which might be the best fit for your company.
Traditional Loans from Banks and Credit Unions
If your business has been in operation for a few years and you have decent credit, you might qualify for a business loan from a bank or credit union. Start with the place where you already have a checking account. Ask what business financing they offer and how to qualify.
Pros and Cons
For established businesses with solid credit, traditional loans can offer competitive rates. However, some banks have strict criteria that not every business can meet, such as having a certain threshold of annual revenue or being able to provide collateral.
SBA Loans
These are business loans guaranteed by the Small Business Administration. Often, they have the lowest interest rates of all the available options. There are several types of SBA loans (7(a), microloans, and 504), each with its own repayment terms and requirements.
To qualify for an SBA loan, your business needs to be in operation for two years or more, and you need to have fair credit. Some lenders look for credit scores of 615 or more, depending on the loan.
Pros and Cons
You aren’t likely to find lower interest rates than what SBA loans offer. However, you must have exhausted all other channels of business financing and not “been able to obtain the desired credit on reasonable terms” before qualifying for an SBA loan.
Online Loans
For businesses that struggle to qualify for bank or SBA loans, online loans can provide a business financing alternative. Online-only lenders look at factors other than credit scores, such as sales history and time in business. For example, Fundera offers loans of up to $5 million to businesses in operation for at least six months with an average monthly revenue of $10,000 and a credit score of 580 or higher.
Pros and Cons
Even businesses with less-than-excellent credit may be able to qualify for some online loans. The drawback is that greater flexibility usually comes with higher interest rates compared to bank or SBA loans.
Microloans
Microloans, as you may guess from the name, are loans of smaller value. You may need to pay them back in weeks or months, not years. They may also be easier to qualify for.
Pros and Cons
Microloans often target underserved communities, and they often come with lower interest rates. However, if you’re looking for a larger amount of money, say, over $50,000, microloans may not be a fit.
Equipment Loans
There are specific loans you can use to buy equipment. For these loans, the equipment you're buying acts as the collateral for the loan. If you aren't able to pay off the loan, the equipment could be sold to cover the debt.
Pros and Cons
If you're buying equipment, these loans can provide low-interest financing. Some equipment vendors offer their own financing, which makes it simple. An example is Element Fleet, which sells fleets of company vehicles. The company sells the vehicles and offers financing. The drawback is that these loans are only available for one purpose: buying equipment.
Merchant Cash Advances
If you accept debit and credit card payments, you may be able to get a merchant cash advance. This is an advance on future sales based on past card transactions.
Pros and Cons
Merchant cash advances can get you money quickly. However, the fees can be rather high, reaching 50 to 100% of the value of the advance.
General Business Loan Requirements
Lender requirements vary, but let's look at a few common business loan requirements.
Credit Score
Many lenders consider your credit score as an indicator of how likely you are to pay back the loan. Some may list their required credit score on their website; others leave it a mystery. Generally, the higher your credit score, the more financing options you'll qualify for.
Business Plan
Some business loan requirements include having a business plan, especially for bank or SBA loans. If you don't have one, consider creating one before applying for financing.
Financial Statements
Lenders will want to look at your profit and loss statements, and possibly sales reports, to understand how financially stable your business is.
Collateral
Some business loans require assets as collateral. These assets will serve as insurance for the lender; if you can't pay your loan, the lender could seize these assets and sell them to cover your debt. Collateral may be real estate, equipment, or cash.
Personal and Business Tax Returns
Lenders may also ask to see both personal and business tax returns. These can give the lender an idea of your financial situation and risk level.
Legal Documents
You may also be asked to provide business documents like permits and licenses, and, if you're incorporated, your articles of incorporation.
Preparing to Apply for a Business Loan
Getting a business loan takes time, and it starts by assessing your needs. Have a clear understanding of how you'll use the funds and how much you need.
Once you know how much you need, review the types of loans we've discussed here to decide which is a good fit. Review the requirements to make sure you qualify, and start gathering the documents you'll need to apply.
The Loan Application Process
Now that you know the type of loan you want to apply for, start researching lenders. Look at what each requires in terms of time in business, credit score, etc. But also look at customer reviews. You want to work with a lender with a good reputation and helpful customer service.
Fill out the application as required. Some lenders (like online lenders) may give you an instant answer on whether you're approved or not, while others may take a few weeks to process your application. SBA loans, for example, typically take weeks to process.
Once you've been approved, you'll need to sign the loan agreement, which outlines the repayment terms. After that, you'll receive the funds. Some lenders will electronically transfer funds the same business day, while others take longer.
Managing and Repaying Your Loan
Soon you'll start repaying your loan. Make sure to budget enough for your monthly payment. Consider setting up automatic payments so you never miss one and risk late fees or damage to your credit profile.
If there ever comes a time when you struggle to make your monthly payment, talk to your lender. You may be able to temporarily pause payments in case of financial hardship.
It’s smart to understand business loan requirements before applying for financing so that you find the type of financing that’s the best fit. Eventually, as your business gains more experience with credit accounts and builds a credit history, it could become even easier to get the financing you need when you need it.
