Small business loans are a useful tool for business owners looking to achieve a variety of goals. Are you hoping to expand your business? Do you need to update your equipment? Maybe you simply want to access a little extra capital to support your business on a day-to-day basis. Whatever your needs are, the right small business loan can help you get there. So, where do you start?
This article will walk you through how to get a small business loan and how to increase your chances of securing the funds you need to support your small business.
Meet the Qualifications for a Small Business Loan
Planning how to get a small business loan and get approved starts with the crucial step of reviewing your finances and ensuring you are a strong applicant.
Review Your Credit Report
The loan approval process begins with reviewing the applicant’s credit report and score. In this case, the applicant is the business owner. Your credit report will show lenders if you have a history of paying your debts on time and managing your revolving balances and credit limit. Lenders typically offer lower interest rates to applicants with good to excellent credit scores, ranging in the upper 600s and above. Check your credit report for free before you apply so you know what to expect.
Show Your Business’s Annual Revenue
Lenders require applicants for a business loan to show that their net income will be sufficient to service the debt. You may provide your lender with your business’s financial statements which include current income statement, balance sheet, income tax returns and any other supporting documents that show your business earnings.
Create Your Business Plan
Writing a strong business plan for your loan application can help give your lender confidence that you have a well-thought-out plan for growing your business with the funds provided to you. Including a strong loan proposal that demonstrates how you plan to pay down the loan can also help give an added boost to your application, increasing your chances for loan approval.
In your business plan and proposal, show how you will be able to continue paying your daily business expenses while having enough capital available to also absorb your monthly loan payment
Pledging collateral as security for your loan
Backing your loan with assets in case you are unable to repay it as intended can help increase your chances of loan approval. Collateral can include owned real estate, inventory, equipment, or other valuable assets that can be used to cover your debt in the case of non-payment. Adding your personal guarantee to the loan will show the bank you are willing to personally back your business.
Choose Which Type of Loan Will Be Best for Your Business
There are many reasons a small business owner may apply for a business loan. Maybe they’ve decided to expand their online business to a brick-and-mortar location—or do the reverse and take their brick-and-mortar business online. They might be looking to obtain tools or machinery to support their products or services or to secure a line of credit to cover daily operating costs.
Putting in the time at the beginning of the loan application process to research and find the best loan for your business needs will pay off in the long run. Save yourself time and money by ensuring you apply for the correct loan. For instance, buying a big ticket item to support your business will require a different type of funding than if you are looking to finance a real estate purchase, such as purchasing a storefront location. What are your plans?
Financing a Large Purchase
To be able to pay for an expensive item for your business, you’ll likely want to apply for a traditional business term loan. This type of loan is distributed as a large lump sum that you then pay off over time with principal and interest payments over a set number of months.
Paying for Daily Operational Costs
If you are looking to cover short-term expenses that come up while waiting to be paid for your services, such as payroll, operating expenses, purchases for additional inventory, or unexpected costs that may not be budgeted for, opening a business line of credit may be the best option for your business. With a line of credit, you can use as much or as little of the approved amount as you need, when you need it. Then pay it back as you received payment from your business’s goods and services.
Real Estate Financing
If you are looking to secure a physical building for your small business, you should apply for a commercial real estate loan as opposed to a business term loan.
SBA Loans
SBA loans are backed by the government through the Small Business Administration (SBA). This means if the borrower fails to pay back the loan, the SBA will cover the costs and repay the lender. This lowers the risk for the lender, making it more likely the applicant will be approved for the desired loan.
There are a few different types of SBA loans available. The SBA 7(a) loan is for business owners looking to cover general business costs or for refinancing any outstanding business debt. The SBA 504 loan is meant to cover large expenses, including real estate, construction, and equipment costs to support a business. An SBA microloan provides business owners with a small line of capital under $50,000.
How to Choose the Right Lender for Your Business
Finding a small business lender is an important step in the loan application process. You want to partner with a lender that can support your business’s financial needs and goals. Be sure to consider local financial institutions, such as a community bank, as they are often great options for small business loans since they are better tuned in to the community where your business operates. Compare interest rates and fees before borrowing with any lender to find the most cost-effective loan for your business.
If your business is located in the Pacific Northwest and you would like to apply for a small business loan, contact Riverview Bank. We can’t wait to help your business succeed.