A business loan can provide the funds to expand operations, day-to-day expenses, and purchase new equipment. If you have never applied for a business loan, you might be unconfident about where to begin or which documents are needed.
Here is a simple guide that walks you through estimating your options and preparing your business loan application.
What is a business loan?
It is a financial arrangement in which a lender provides funds to a business entity, generally with an agreed-upon interest rate and repayment duration.
It’s intended to support the company’s operational needs, growth, or other specific purposes and has to repay over a specified period.
What are the required documents for a business loan?
Follow are the required documents for a business loan.
Personal and economic details
- Name
- Address
- Phone number
- Date of birth
- Social Security number (SSN)
Business licenses and enrollment
- Articles of incorporation
- Franchise agreement (If applicable)
- Business licenses and permits (If applicable)
Legal Copies
The lender may want a copy of the commercial lease agreement if your company operates outside your home.
Business scenario
- Executive summary
- Company explanation
- Market analysis
- Detailed explanations of your services
- Marketing strategy
- Funding request
Economic copies
- Business bank statements (Up to one year)
- Personal and business tax returns (recent three years)
- Most recent and projected balance sheet, income, and cash flow statements.
- List of current accounts receivable
- Schedule of business debts
Can we get a business loan with bad credit?
Getting a small business loan is possible, even with bad credit. It is because your credit score matters less than the overall financial health of your business. Many loan lenders need a minimum 500 credit score, at least six months in business, and more than $30,000 in annual income.
Steps to get a business loan
Follow the below steps to get a business loan.
Determine Why You Need Funding
Decide why you need financing for a business loan.
- Purchase new supplies. Some loan lenders offer equipment loans. This type of loan has designed to help you purchase business equipment, like machinery or office furniture. The equipment secures the loan, so the lender will seize it if you fail to repay.
- Borrow a small amount of money. Consider applying for a microloan if you need to borrow a small amount. The U.S.SBA (Small Business Administration) has Microloans that allow qualified applicants to borrow up to $50,000. In addition, not-for-profit organizations offer microloans, such as Kiva and the Women’s Microfinance Initiative.
- Launch a business. Since most lenders have a minimum time in business requirements, finding one that will issue you a startup loan for a new business can take time and effort. If you’re starting, you may have to apply for a microloan or a business credit card.
- Spend on day-to-day processes. A working capital loan, a short-term loan used to cover daily expenses, like rent and payroll, can help you cover temporary cash flow problems.
- Borrow money on a need base. A business line of credit could be a good option if you need to know the amount you need to borrow. Once a lender issues you a line of credit, you can withdraw up to a certain amount to cover business expenses and only pay interest on the amount you borrow.
Check Your Eligibility for a business loan.
Before applying for a loan, you need to check eligibility.
- Check Your Credit Score: To qualify for the best rates, you generally need a FICO Score of 670 or higher and a business credit score above 80. Check your credit score before going to apply and know where you stand. You can build your business credit by responsibly opening accounts with vendors and paying off invoices promptly.
- Time in business: You generally need to be in business for six months to one year to qualify for an online business loan and at least two years with traditional banks. If you don’t qualify, you could wait until you become eligible or look at startup business loans.
- Yearly income: Many lenders require a reliable income stream for small business financing, with annual minimums as low as $36,000 up to $480,000. Consider applying for business credit cards or microloans if your revenue could be higher.
- Personal assurance & Collateral: Collateral, such as real estate, equipment, or cash, reduces a lender’s risk with secured business loans. If you default, the lender can retake your collateral as a form of payment. A personal guarantee allows a lender to go after your assets if you fail to repay your debt.
- Refund duration: Most lenders limit your loan to 30% of your annual revenue to ensure you can manage repayments. LendingTree’s business loan calculator can help estimate your business loan payments with added interest, keeping in mind that some lenders require weekly or even daily repayments. Whatever the payment schedule, review your budget to ensure you can keep up.
Compare business lenders’ choices.
Compare different kinds of business loan lenders.
Traditional banks
You can apply for small business loans with a traditional bank, including term loans, commercial real estate loans, lines of credit, and SBA loans.
While traditional banks offer the lowest business loan interest rates, they usually have stricter criteria and a longer application process than online lenders.
Microlenders
A microloan can help startups, low-income businesses, or those with a damaged credit history access the cash they need to launch, grow or expand their business.
Nonprofit organizations and government agencies typically fund microloans, providing up to $50,000 with flexible terms, low-interest rates, and minimal fees.
Some popular microloan lenders include Accion Opportunity Fund, Grameen America, Kiva, and LiftFund.
Small Business Administration (SBA) lenders
The Small Business Administration (SBA) partners with lenders nationwide to offer various loans for small businesses. The most popular option for general business expenses is the SBA 7(a) loan.
With funds going up to $5 million and an interest rate capped based on the loan amount, repayment term, and whether you opt for a fixed or variable rate.
Online Loan lenders
Online lenders, also called nonbank or alternative lenders, utilize digital underwriting technology to approve or deny business loan applications with record speed. For example, Fundbox claims to make a funding decision in as little as three minutes.
If you can’t gain approval from a traditional bank, you might have a better shot with an alternative lender since they tend to look beyond credit scores.
Collect the Documents which has required for Business loans.
Gather all necessary documents to get a business loan.
- Personal and business tax returns
- Business licenses
- Articles of incorporation
- Personal and business bank statements
- Profit and loss statements
- Financial statements
- Business plan
- Building lease
Finally, Submit Your Application
These details may ask by loan lenders.
- Business name
- Social Security number (SSN)
- Preferred loan amount
- Loan purpose
- Business Tax ID
- Annual revenue
- Personal details for all business owners, such as name, date of birth,
- Business roadway address
- Phone number
- Type of business
- Date the business was established.
After submitting your application, you have to wait for an authorization. If your loan has been sanctioned, a lender sends you an agreement of loan to sign before giving your budgets or a line of credit from which you can draw.
How to choose the most profitable business loan
Consider the following factors before taking the loan.
- Loan Interest rates. Is the rate variable or fixed? How much interest will you pay over the life of the loan?
- Extra Fees. Are there additional fees, such as origination, prepayment, and late penalties? Add these to the loan amount to ensure the loan is worth the total cost.
- Terms and conditions. How long do you have to repay the loan? Do repayments start immediately?
- Funding quickness. How quickly will the funds hit your bank account? Check it.
Conclusion
Getting a business loan can be essential to achieving your ambitious goals. Recognize to estimate your business requirements and search the loan opportunities. Gather all required documents, and enhance your credit score.
You must prepare an effective business plan, select the perfect loan lender, and apply for a business loan. With careful plans, you can improve your chances of getting a business loan and move your business toward success.
FAQs
A business loan is a financial product lenders supply to entrepreneurs and business owners to support various business-related activities, such as starting a new venture, growing functions, or managing day-to-day payments.
It depends on your business’s annual gross sales, creditworthiness, current debts, the type of financing, and the chosen lender. In general, lenders will only provide loans up to 10% to 30% of your annual revenue to ensure you have the means for repayment.
These loans are open through banks, credit unions, online lenders, and even microlenders specializing in smaller loans.
Business loans are a great financing form that helps build your credit score. You’ll now receive the funds you need while establishing a positive credit record.