Many or all of the companies featured provide compensation to LendEDU. These commissions are how we maintain our free service for consumers. Compensation, along with hours of in-depth editorial research, determines where & how companies appear on our site.
Starting a business can be a challenging endeavor, both professionally and financially. According to the U.S. Small Business Administration, as many as 1/3 of businesses fail during the first two years after they open their doors. Success rates don’t improve much as time goes on, with around 50% of companies failing within the first five years.
There are many reasons why companies aren’t always successful. One of those reasons is cash shortages and difficulty gaining access to funding. Without enough money, your company may not be able to grow as needed to compete, or it may not be able to weather a temporary downturn and could be forced to shut its doors.
You don’t want your company to go under due to insufficient cash, so it’s important you know how to get a business loan if you need one. This guide will provide insight into some of the financing options available to small business owners.
4 Steps to Getting a Business Loan
If you’re thinking of getting a small business loan, here are four steps you should take.
1. Write Down How You’ll Use the Loan
Going into debt isn’t something you should take lightly, especially if you’re launching a small business. Having a written plan for what you’ll do with the borrowed funds will help you really think through why you’re taking on debt and how best to use it.
Creating a written strategy can also help you communicate your plans to potential lenders. Most financial institutions will want to see a business plan and know what you’ll do with their money before they make a lending decision.
Finally, a detailed spending plan will allow you to determine how much you should borrow based on your business needs and what types of business loans for which you might be able to qualify.
2. Determine Which Type of Loan you Need
There isn’t just one type of business loan you could apply for. Business loans come in all shapes and sizes, and factors such as your creditworthiness and your plans for the money will determine the type of financing you can get. The length of time you’ve been in business and your history of profitability can also affect your loan options.
Established businesses with good credit, for example, may easily qualify for small business loans with low interest rates and favorable terms, including those backed by the Small Business Administration (SBA). Newer small businesses that are brand-new to credit, on the other hand, may want to look into online lenders offering microloans that may be more willing to lend.
Here are the major types of business financing for which you might apply:
- Secured loans: If you’re buying equipment or real estate, secured loans are a good option. Secured loans require collateral, such as the property or the equipment you’re purchasing with the borrowed funds. The collateral guarantees the loan, reducing the risk to the lender and making loan approval more likely. Traditional banks, such as Chase, are good sources of equipment loans and other types of secured lending.
- Unsecured loans: Unsecured loans don’t require collateral, so lenders take a bigger risk. You’ll need good credit to qualify for an unsecured loan, but there’s a bit more flexibility in how you use the money, from paying employees during downturns to paying to market your new business.
- Small business lines of credit: Abusiness line of credit works differently than a regular loan. Instead of borrowing a set amount of money for a specific purpose and making fixed monthly payments to repay it, you’re given the ability to access credit on a revolving basis. As you repay what you borrow, you can borrow more, up to your total approved credit line. A line of credit can be great to help with operating capital, as you can draw from it only as needed.
- Microloans: Microloans are small loans that have shorter repayment terms. If your company can’t qualify for a larger traditional loan or needs to borrow just a few hundred or a few thousand dollars, microloans are a good choice. You can find many alternative lenders offering these short-term loans online.
- Invoice factoring: Invoice factoring isn’t really a loan. Instead, you sell your accounts receivable to a third party at a discount. The factor collects on the invoices and you get cash upfront for as much as 90% of the original amount. Once the factoring company collects on the unpaid invoices, they return the remainder of the collected funds to you, minus any fees they charge.
- SBA loans: SBA loans are offered through participating lenders and are partially guaranteed by the Small Business Administration. These loan programs often offer better rates than other small business loans, but your company will need some proven methods of generating revenue and ideally should be up and running for at least a year before you try to qualify.
3. Collect Your Paperwork
After deciding which type of small business loan to apply for, you’ll want to get your documentation together before you begin the application process. Although different lenders have their own specific requirements, there are certain documents most lenders will require with your business loan application, including:
- Tax returns: This includes business tax returns and, in many cases, your personal tax returns if you own the business.
- Bank statements: Again, you’ll likely be asked to provide both business bank statements as well as statements from your personal bank account if you’ll be guaranteeing the loan.
- Business licenses: If your company is required to have a license to legally operate, the lender may want to see it included with your loan application.
- Other documentation related to the loan: This could include leases, a business plan, details on outstanding invoices, or other financial statements that show your business assets and give insight into your cash flow, annual revenue, working capital, and profitability.
4. Compare Quotes
When you’re getting a small business loan, you don’t just want to take a loan from the first lender you can find. Instead, business owners should obtain quotes from several different lenders so you can compare terms and get the best deal.
Many online lenders allow you to generate loan quotes without incurring a hard credit inquiry, too many of which can temporarily damage your credit score. Getting pre-approval quotes from multiple lenders that use soft credit pulls can help you find the best deal for your business without getting stuck with a hard inquiry that stays on your personal credit report for two years.
Here are some of our favorite small business lenders to get you started. You can apply online and get a quote in minutes.
Now that you know how to get a small business loan, you can take the necessary steps to secure the funding required to help your company grow and thrive. Just remember, have a plan before you borrow and shop around to make sure you get the best rates — you don’t want to pay more than you have to or put the financial health of your business at risk.
Author: Christy Rakoczy