Ready to take your business to the next level? Getting a small business loan is probably the next logical step to bolster your current operation from good to great.
Small business loans are obviously for more than just starting a brand new business. There are a wide variety of loans that can help with almost any phase of your venture. To help you better understand how you can use a small business loan and how to get one, here are 10 steps to guide you through the process.
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Know the Exact Amount & Purpose: It seems so obvious, but this detail is often overlooked, especially by those getting a small business loan for the first time.Before you approach a lender or pursue a loan, ask yourself: What are the specific goals for that money?
Do you need to hire more people because of growth? Is there a piece of equipment you need but can’t buy outright? Do you need to expand or have a host of new costs to cover? How much will that really cost and how much should you ask for?
A lender will be asking you these questions, and depending on how well you answer them, you may or may not be approved.
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Know What’s Available: Once you know what you need and why, you will be better able to determine what type of loan would work best.Yes, there are many types of loans available to provide funding for small business use. You want to make sure you are getting a small business loan that best fits your specific situation.
Some loan type options include:
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Equipment Loans: These enable you to buy equipment and use the equipment as the security. They often require 20% down, and can sometimes come in the form of an equipment lease.
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Line of Credit: A business line of credit allows you to access funds as needed from the lender. These loans can help keep the cash flow consistent, even with unexpected expenses or delays in receiving payment from customers.
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Term Loans: This type is the more traditional loan of a set amount to be paid by a specific time. Interest accrues monthly. They cover typical basic business expenses and operations, and may be either secured or unsecured.
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SBA Backed Loans: You can pursue loans from banks that are backed by the U.S. Small Business Administration (SBA). The SBA backing means you can get much more favorable terms for interest rates and repayment.
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Know Your Lenders: Just as there are many types of loans, there are many types of lenders. The type of lender that will suit your needs best will depend on:
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How fast you need cash
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What you need it for
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What type of security you can offer
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State of your credit, financial records, and business
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There are pros and cons to each lending option. Getting a small business loan through a bank, especially if you pursue the SBA backed option, will take longer and demand better credit and records, but the terms they offer will be better. You could end up paying less interest, have more funds available, and be given a longer pay-off period.
Online loan providers can get you cash fast even if your credit is not that great, but they almost always have higher interest rates and may require collateral.
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Know Your Risk & Credit Profile: Before approaching a lender, review your credit and risk profile. These include your credit score, any current loans and debts, business assets, time in business, investors, and financial statements.Lenders will be looking for proof that you pay back your debts, manage money well, and that your business can generate the funds to pay the loan back.
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Know Your Online Profile: Lenders will be investigating your online presence to determine how your business is doing. Does it have an up to date and functioning website? Do your social media accounts reflect responsible behavior and a growing loyal customer base? How are your user reviews?Don’t underestimate the power and influence of your business’ online persona.
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Know the State of Your Financial Records: You will most likely have to provide much of this information, so knowing it beforehand will only help. Review the state of your financial records and make sure they are in order. It would also be wise to have a CPA audit or at least officially review them as well, and some lenders will require this.Nothing will look worse to potential lenders or damage your chances of getting a small business loan than incomplete and/or inaccurate records or missing data. Be ready to show documents and answer questions.
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Know the Terms: Before applying for loans to start a small business, or to get it through a trying spot, make sure you understand the terms before you apply and accept it!The last thing you need is high-interest rates and demands for personal collateral. Study, analyze and know the terms to make a wise decision when getting a small business loan.
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Know Your Security/Guarantee Options: A part of knowing the terms is knowing if and what they require as security or a guarantee. You need to know what you have to offer and how best to negotiate that process.It is also important that you know your options. Getting a small business loan without collateral is possible. You especially should avoid loans that demand a personal guarantee. This would put your personal life at risk, rather than just your business. Don’t do it.
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Know the Details: Finally, if you think you have found the right loan and lender, make sure you know all your business’ details, including federal tax ID, legal structure, names of executive officers, financial statements from the past few years, state filings, copies of insurance policies. These will be asked of you when you go through the application process, and you need them on hand to prevent a hiccup in the process.
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Apply: Once you’ve done your homework, found the best lender, confirmed that you qualify, and gathered all your paperwork, it’s time to apply.Some of the documents that you will need ready to submit include:
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Tax returns (business and personal)
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Bank statements
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Financial statements
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Legal documents (e.g. commercial lease, articles of incorporation, any franchise agreement, etc.)
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Once the loan is approved, be sure you set goals to pay it off in a timely fashion and keep the terms in mind. You never want to let interest rates to get away from you, and if you do a credit card or line of credit option, you definitely want to keep a tight rein on the spending.
Read more tips on getting a small business loan or Contact Us to get in touch with one of our expert analysts to help determine the right loan and best rate for your business today!