Small Business

Steal This Checklist: How to Get a Small Business Loan in 2022

2/3/22 Brian Cedeno

You’ve spent weeks, and maybe months, getting everything just right.

Maybe you’re excited about that new office space in the business center of your city, or maybe you’ve talked to the right people that will sell you products straight from the manufacturer.

Perhaps you are just getting your business off the ground, or maybe you have hit a rough patch due to market conditions. Whatever the case may be, you’re determined to jumpstart your business journey and get things done your way, confident that you’ll be able to start your venture ahead.

Now, the next hurdle you’re probably facing is whether or not you’ll be able to fund this journey. A small business loan can help you get through the tough financial periods, allowing you to work on growing your business.

You’ve gathered everything you think you need so you can approach banks and other institutions, assured that they will align with your business idea, and give you the cash you need to move forward. However, if you’re unsure about where to go or who to talk to for small business loans and what to do with them, then we’re glad that you found this guide.

In this guide, we’ll cover what small business loans are, how to qualify for a business loan, how to get a loan with your existing business history, what can affect your ability to get a loan, what personal assets you can use to secure a loan (if your credit is bad), and clear up any questions you might have about small business loans.

Table of Contents

  • Understanding how business loans work
  • An overview of getting a small business loan
    • What do you need to apply for a business loan?
    • What type of small business financing are you applying for?
    • How much are you applying for and why?
    • How do you qualify for a business loan?
    • Who are you borrowing from and in what state?
  • Download checklist on how to get a small business loan (PDF)
  • What do I need to get a small business loan?
  • Conclusion

 


 

Understanding How Business Loans Work

If you own a small business, there is a good chance you will need some extra capital at some point. While some people are familiar with how a personal loan works, a business loan might function very differently for your situation.

Small business loans are types of financing provided by financial institutions to early companies for business purposes. If you decide that entrepreneurship is for you, you’ll learn quickly that being a business owner takes a good amount of money to start. A business loan is a good solution for those that have developed an early business idea, created a product that needs launching, solved a common problem using a unique service, or just want to become their own boss.

Depending on your lender, there are various types of financing available that rely on how you’ll be using the loan. Therefore, the way a small business loan will work for you is based on the type of loan in question.

 


 

A Guide on How to Get a Small Business Loan

Before you begin to look online for lenders available, it’s best to know what to expect when you start looking around for the best loan deal. Let’s take a look at a few things:

Application Process for Small Business Loans

The business loan application process is very similar to other documentation you’ve probably done before for credit products, such as mortgage or personal loans. When you approach a financial institution, they will provide an application asking for standard personal information as the business owner. This includes your personal credit score on your credit report, your financial history (including past debts), any credit inquiries, and all of your checking accounts.

On your application, small business lenders may ask questions regarding your business structure and the management of your business operations. This is vital in getting approved for a loan as a risky business outlook is a risky investment for the lender. You’ll need to have a clear outline of your experience, your industry expertise, your business contingencies (in the event of a disaster), your business history, and any benchmarks regarding business growth projections.

Regardless of the type of loan you want, you need to apply for it through a lender. Whether you qualify depends on the requirements that the lender establishes. Typically, there are standards set for a business loan application such as how long you have been in business, proof of cash flow, a personal credit score report, and business credit score parameters.

Types of Small Business Loans Available

There are numerous loan types for small businesses that need some extra cash for their operations. However, your situation should determine which loan type would work best for you.

But before applying for a loan, you should have a good understanding of the differences between each of the loan types and what is best for your situation. The most common ones are:

1) Small Business Term Loans (Fixed/Variable Rates)

These types of loans are typically offered by financial institutions, such as corporate banks, community banks (credit unions), and non-banking lenders. After loan approval, you’ll receive a lump sum of capital that you’ll pay back at a fixed interest rate or a variable interest rate with scheduled repayment loan terms.

A fixed-interest rate loan carries an unchanging amount of interest and is best for a large purchase or long-term financing project, such as funding a major business expansion or refinancing debt. A variable-interest-rate loan may initially carry a lower interest rate, but fluctuates with market rates and can change over time. These types of loans are very popular with financial institutions, with online lenders competing for customers through annual promotions.

2) Short-Term Loans

These loans are a condensed version of the traditional term loan. Short-term loans are great for those applying to borrow a smaller amount of cash and have an urgent need for cash flow.

A short-term loan functions the same way as a term loan, with the borrower receiving cash after signing off on agreed-upon loan terms and a repayment schedule. The difference is these loans come in smaller loan amounts, are paid off over much less time, and carry much higher rates than traditional term loans. These loans can be good for people who don’t qualify for a traditional loan.

Interest rates can vary depending on the state in which the business is in, the type of business (incorporation), and individual circumstances. Some short-term lenders may charge a penalty for early payoff, while others (such as LoanMe) do not. The loan term is typically anywhere from 10 days to six months.

3) Working Capital Loans

If you do not need a major cash injection that’s meant to be repaid over time, but instead need to cover the costs of everyday operations and processes, then a working capital loan might be best for you.

A working capital loan is provided to fund a company’s short-term operational needs, such as business overhead, inventory management, rent, or payroll. These loans are not meant to be used to buy long-term assets or investments; working capital loans feature shorter loan terms, lower loan amounts, and the annual percentage rate (APR) may be lower than a traditional long-term business loan. That said, qualification requirements also may be less demanding than for long-term business loans, especially through online lenders.

4) Business Line of Credit

Very similar to business credit cards, a business line of credit is an accessible way for a business owner to draw cash against a revolving credit account up to a certain borrowing limit.

The business owner can access a credit line during the draw period, which usually is up to five years, and can use the extra funding to accelerate any business activities. Credit limits can range anywhere from $2,000 to $250,000 and are usually revolving, meaning as you pay off the balance, you free up the loan amount to borrow against again.

While a line of credit acts the same way as business credit cards do, credit lines can offer a lower-interest alternative to credit cards. This form of financing is also usually unsecured, meaning you don’t have to put up collateral such as a vehicle or home. If you don’t want to risk losing your valuables to secured loans, then this is an opportunity to gain access to cash.

5) Small Business Administration (SBA) Loans

Small Business Administration (SBA) loans are small business loans provided through the U.S. Small Business Administration, a federal government agency that supports small business owners and entrepreneurs with resources to grow their business, such as grants, federal contracting, and long-term financing.

These loans are guaranteed by the SBA, meaning if you aren’t able to make your payments to business lenders, the SBA will pay out the guaranteed amount. The SBA guarantees 85% of loans that are $150,000 or less and 75% of larger loans, and interest rates can range from 5.5%-8.0%, depending on the loan amount and loan terms. To be eligible for loan assistance, your business must also be engaged in (or propose to do business in) the United States.

These loans are difficult to qualify for, as you must have been in business for at least 2 years, have a credit score above good, and be able to demonstrate a history of sufficient cash flow for your business. However, if you do qualify, you’ll gain access to diverse SBA loan options not available to the average small business owner, from SBA 7(a) loans (financial assistance for small businesses with special requirements) and Paycheck Protection Program (PPP) loans to SBA disaster loans.

6) Business Financing for Women and Minorities

Aside from the loan options offered by traditional lenders, there are programs available for minority groups, such as federal grants.

Unlike loans, federal grants are government funds to be used for specific business purposes that you don’t need to repay, nor risk personal or business assets for. In most cases, minority small businesses are funded by special interest groups that have created goals to help with business growth. Minority groups can be based on race, gender, personal status, or even location.

The SBA also offers grants through its 8(a) Business Development program, a nine-year program created to help socially and economically disadvantaged small business owners to start their business journey. Businesses that participate in the program receive training and technical assistance designed to boost their ability to succeed in the American economy.

7) Secured Business Loan & Personal Guarantee

As an alternative to traditional financing options, there is another (but risky) option to know about for generating cash flow into your business, but it involves risking your personal or business assets. If you’re comfortable with this option, then a secured business loan could be for you.

A secured business loan requires a specific piece of collateral, such as business assets (company vehicle, commercial property, or expensive products) in exchange for funding, which the lender can claim if you fail to repay your loan. In the event you fail to repay your loan, the lender can recoup their losses by selling your collateral in the event of a default.

These types of loans are often easier to obtain and are usually equipped with lower interest rates since the lender has a way to get their money back. However, if you get approved for a secured loan under a personal guarantee, a creditor can’t seize your business property but can legally claim your personal assets, such as bank accounts, cars, and real estate, until the loan is repaid.

8) Accounts Receivable Financing

This form of financing, also known as factoring, involves selling your outstanding business invoices to a third-party lending agency for a small fee in exchange for a major portion of the outstanding balances.

After selling the invoices to the agency, it will become their responsibility to pursue the payee for collections. Once the factoring agency collects the invoices from the payee, your business will receive the remainder of the funds minus any fees after collections.

Invoice factoring enables small businesses to get paid their dues without wading through a lengthy loan application process, all the while allowing another party to front the risk on your receivables and providing your business with some cash flow.

However, it should be noted that the age and quality of the receivables will play a role in the amount of money you’ll receive. While quick access to cash is an advantage of factoring, you’re likely to pay more for this type of financing than others.

9) Equity Financing

Another alternative to getting a business loan is to raise capital by partial ownership of the business so you receive cash as part of the deal; this is called equity financing.

Unlike a traditional business loan (debt financing), equity financing doesn’t carry a repayment obligation. Instead, it involves selling a stake in your business in return for a cash investment, where investors (family, friends, or groups) can buy shares in the company to make money through dividends (a share of the profits) or by eventually selling their shares for a profit.

For those interested in getting investors into their business, there are multiple types of equity financing options available, such as angel investing, crowdfunding, venture capital funding, and more.

 


 

Mandatory Borrowing Limits for Lenders

When inquiring about a business loan, lenders will need to validate if you’re going to be a trustworthy person to lend to. This validation can stem from checking your business credit score, analyzing your personal credit history, requesting a personal credit report from a credit-reporting agency (or multiple credit bureaus), and other methods of validation.

Once they have all of the paperwork in front of them, you should expect to hear two important questions from your lender: “How much are you looking to borrow?” and “Why do you need this loan?”

These questions, while seemingly simple, are also two very important factors in determining your qualification for a business loan and the maximum loan amount they’re willing to lend to you; you will need to explain in detail why you need the money.

Let’s address the first question: figuring out how much you need for a business loan can be a headache because there are a lot of expected (and unexpected) costs that you’re looking to prepare for. Here’s a breakdown of what costs you expect to face, depending on your experience:

  • For new entrepreneurs, early startup costs such as staffing, technology, infrastructure, and equipment are probable expenses to consider.
  • Small business owners will likely have to face expenses such as leasing, overhead, consumables, and property.
  • Those familiar with business ownership will find themselves factoring in medium-enterprise costs, such as management, expansion, consulting, and liquidity.
  • While not directly affiliated with small business ownership, some may find themselves in a situation requiring funding to complete a business merger or acquisition of a business.

Lender Requirements on Needing a Loan

Now, let’s tackle the second question: whatever the reason may be, you’ll need to show the lender why you need a business loan. For this task, you will be expected to write a simple letter as to the reasons you’re seeking to obtain a loan, called a Statement of Intent.

Along with the letter, the lender will review any documentation that may have been left out – income tax returns, profit and loss statements, terms of sale, and any outstanding inventory.

While there is no standard small business loan amount, lending agencies will have their established borrowing limits and loan amounts based on your business credit score. For example, SBA loans can range from micro-loans of $50,000 to substantial loans of $5 million.

It’s up to you to determine how much you need and how much you can reasonably pay off in the allotted time. You can use a handy business loan calculator to help you decide on the right loan amount for you.

 


 

Qualifying for a Small Business Loan

Lenders have one ultimate goal, and that is to determine your ability to repay the loan as a trustworthy borrower, allowing them to give you the funds you need. By putting your best foot forward, you’re establishing trust with the institution and showcasing your value as an investment.

Your loan application is built to find qualified applicants. It may ask for evidence of your business’s existence and dependability – collect up-to-date financial statements on your small business credit cards (along with credit card transactions), business bank statements with a balance sheet to support them, an annual report of credit card sales, and other supporting documentation to help qualify for a loan.

Gather support for your business – including a completed business plan, proof of cash flow, and a vision of what your business will look like after funding will enhance this experience.

Funding Sources and Business Requirements

You’re ready to start applying for a business loan, but where do you go? There’s a range of choices for you to explore, whether in-person or online:

1) Commercial Banking Institution

A traditional bank loan is the most common form of business financing available. Corporate banks, while federally regulated and very trustworthy, specific and strict guidelines for bank loans, usually require a strong personal credit score and a favorable business credit profile to qualify. Still, banks are the centerpieces of finance – most national banks can be found online, provide customers with smartphone applications, offer competitive interest rates, and automate monthly payments.

2) Community Banks

Local credit unions and merchant banks are locally-owned financial institutions. Driven by its members, community banks are governed by the FDIC and other federal agencies. They offer similar loan products as a traditional bank would, but vary in annual interest rates for loans. While not technologically the most advanced organizations, community banks offer small business financing and unsecured loans to business owners with lenient loan payment programs.

3) Non-Depository Lender

Private lenders are non-banking financial agencies that offer the most accessibility for business loans. Although not as highly regulated as banks are, private lenders are supervised by state governments. Due to their limited regulation, private lenders can offer a wider range of loan products versus traditional lenders and are more forgiving of disadvantaged borrowers. They usually accept applications with less-than-good credit to bad personal credit and offer lengthy monthly loan payments. Most non-banking agencies can also be seen as online lenders since most private agencies provide online methods of communication.

Business Insurance Requirements

Most small business loans don’t require business insurance to be processed by a lender, but many states have small business insurance requirements (general liability, property, business income, auto, disaster, surety bond) that your company will need to meet. If you have employees, there are small business health insurance requirements to be aware of, too.

State & National Laws Regarding Loans

In recent months, policymakers at the federal and state level have made progress in improving the transparency of the small business lending market and increasing oversight of business loan products.

Knowing what you’re protected from is important as a business owner, and it’s fair to say that many have doubts as to who to trust. Since the introduction of the federal Truth in Lending Act (TILA), which requires lenders to disclose the annual percentage rate (APR) and loan terms for a mortgage and personal loans, no such disclosure requirements exist for small business lending at the federal level.

It’s important to know how you’re covered regarding lending products – check in with your state or regional laws and record any regulations that involve the future of your business.

 


 

Free Checklist for Business Owners: How to Get a Small Business Loan (with Other Free Resources)

Looking to take a digital guide with you on the go? Download the PDF version of this guide and get access to other great resources and tips.

 


Takeaway: What do I need to get a small business loan?

There’s a lot to take in regarding the loan process for your business. Every little piece of it is important, from understanding how your business credit score affects your loan, and why a business plan is important.

If you’re looking to apply for a business loan online, shop around for an online lender that offers prequalification loan options that do not require hard inquiries, or will never perform a hard credit inquiry without your authorization.

What’s important to note is you should do your homework and research which loan provider can offer you the best deal with your existing financial needs. The process of getting a loan can be confusing and stressful, but it doesn’t need to be.

If you are a small business owner who runs a for-profit business that has produced an income for at least 90 days, LoanMe offers short-term loans between $3,500 and $250,000 (depending on state regulations). If you feel that LoanMe is the lender you need for your business loan, then we’d be happy to help you find the right financing options and support you through the entire loan process.

Happy hunting and good luck!

 

 

*This article has been prepared for general information purposes only. The information presented is not legal, financial, tax or accounting advice, is not to be acted on as such, and is subject to change without notice. Credit approval is subject to LoanMe’s credit standards, and actual terms (including actual loan amount) may vary by applicant. LoanMe requires certain supporting documentation with each new application. If you have any questions regarding this, call us at 844-311–2274. California loans are made pursuant to LoanMe’s California Department of Business Oversight Finance Lenders Law License #603K061. LoanMe also offers loans in certain other states which may have higher minimum loan amounts. Wires are sent out by 5:30pm EST Monday-Friday. The funds should appear in your account shortly thereafter, however this is subject to your bank’s policy and procedures with receiving incoming wires. Copyright © 2022 LoanMe, Inc. All rights reserved. 

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