How to Get Approved for a Small Business Loan
Money is the lifeline of any business, especially if you are a small venture. From purchasing equipment, paying your staff, making a new investment in fulfilling other needs, you need secure financing to maintain your business operations.
Or you can say that money is the fuel for your business.
No wonder why the lack of capital is one of the common reasons why a small business fails.
That’s why business loans are time-tested tools to cover various business costs. Whether it’s big or small business, nearly all businesses borrow money at some point.
However, applying for a small business loan is not an easy process. It requires you to work over several things, from arranging your documentation, identifying your lenders, and opting for the right loan type. After that, it is quite stressful to wait for loan approval.
Lenders primarily look for one key thing: your ability to pay back the loan with interest on time. Therefore, the point is here to assure them of your ability to get qualified for a small business loan.
Keeping all these things in mind, here are some tips to get your business loan application approved.
Identify Your Purpose:
First of all, make sure to determine how much money is required and why. Lenders will ask why you require outside funding. Here are some common purposes behind opting for a business loan.
To start business
To purchase machines or equipment
To grow business
To acquire real estate
To acquire another company
Your requirement will determine which type of loan is suitable for you. For instance, a start-up might not easily get a loan from a bank or online lender in the first year of their business. After all, they look for cash flow before accepting your loan request, so start-ups are generally disqualified from funding.
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Instead, they can borrow from their near and dear ones or opt for crowdfunding. However, a business with one year experience can have more financing options such as government-backed loans and lines of credit and invoice factoring.
Choose the Right Lenders:
Generally, there are three types of lenders you can choose from for business loans: banks, online lenders, and micro-lenders. However, make sure to choose the lenders according to your requirements.
Online lenders can be used when you need quick funding or lack collateral. They can provide loans and lines of credit from about $2,000 to $5 million with an annual rate ranging from 6% to 99%. Banks are ideal when you have good credit and you are not in the rush.
Micro-lenders are suitable when you need a short term loan of less than $50,000. Although they are named as micro, they can be chosen for the funding of smaller companies or startups.
Assess Yourself:
Opting for a loan is not a straightforward process. Most importantly, a lender would like to know about your ability to pay back the loan. That’s why it would be better if you consider some things that can make you an attractive borrower for them.
Here’s how…
Check your credit score. This is because a credit score determines your ability to pay back the loan. Make sure to have a 680 credit score at least while opting for a bank loan. If your credit score is lower than that, you can opt for microlender financing. First of all, order your credit report for free from Experian, Equifax, and TransUnion.
The history of your business also does matter. Most lenders check the age of your business. It takes at least one year to get qualified for online small business loans. Bank loans require the business to be at least two years old to get qualified.
Many lenders require the revenue that generally ranges anywhere from $50K to $250k. Therefore, figure out your revenue to know the minimum level to get qualified.
Can you afford the payment? You need to find out how much you can afford loan installments each month. Make sure your total income is at least 1.25 times your total expenses (it also includes your new loan amount). Let’s assume your business income is $15,000 a month while your expenses like rent, payroll, and inventory cost you nearly $8,000. In this scenario, you can afford the monthly loan repayment of $1,000.
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Gather Your Paperwork’s:
Make sure to have all your important documents in place. Here are some common documents you need to submit for a business loan:
Tax returns (business and personal)
Bank statements (business and personal)
Business financial statements
Business legal documents
Business plan
Choose Your Loan Type:
Loan type can be either unsecured or secured. Secured loans are those which require certain security from the borrower. Unsecured loans don’t require collateral but might carry higher fees and interest rates.
Here are some other types of business loans:
Terms loans
Small Business Administration Loans
Business Lines of Credit
Real Estate Loan
Factoring
Merchant Cash Advance
Micro-financing
How Long You Will Have to Wait to Get Your Loan Approved
Once you are done with your loan application and submission of all documents, the lender will ponder over the things to see if they can approve your loan requests. They will assess your financial statements as well as your tax returns, annual revenue, and existing loan to figure out whether your business can afford a loan. The credit history is also taken into account. Analyzing all these factors takes some time. If you have applied for a bank loan, you have to wait for two to four weeks to find out if your application is approved. Applying through the Small Business Administration can take 90 days or longer.
OVER TO YOU
A business loan helps your venture survive, expand, and gain better financial strength for the future. Preparing beforehand by knowing how the money will be used, which type of loan to opt for, which lenders can approve your fund request, and what paperwork is required can make your loan request more successful. All the best for your loan approval!
