With the strict lending standards of banks today, getting a business loan is a major accomplishment for someone who is starting a new business. Also, it can be a high hurdle to jump for existing businesses needing funds for expansion. This is the best way to approach the process for any size of business.
Determine The Loan’s Purpose
Before you start sending in applications to different lenders, you must identify why you need funding. Are you seeking a small business loan to start a business or to expand a current business? Are you seeking a larger loan amount? All of these factors and several others will determine which type of lender and loan to seek. When you decide why you need a loan, the next step is comparing types of loans.
Understand Types Of Business Loans
You should invest plenty of time in researching the details of different loan types. The first major decision is whether to seek a government loan or private funding. Also, determine whether you want a traditional loan or have a solid enough business plan to seek help from angel investors. Here is a quick summary of loan types and their purposes:
- Startup loans are perfect for starting a small or large business.
- Working capital loans and invoice factoring are good options for existing businesses needing extra funds.
- A business line of credit is good for expansion or day-to-day costs during a dry spell.
- Business expansion loans are helpful for growing a thriving business.
Decide Which Type Of Lender Is Better
For some individuals, an online lending platform may be the right choice. For others, a bank may be the ideal provider. P2P loans generally come with more flexible terms, lower interest for those with less-than-perfect credit and quicker approval times. These loans are easy to apply for, and the entire process can be completed online.
If you have excellent credit and do not wait until the last minute to apply for funding, a bank may be the answer. Also, banks offer low interest rates when you provide collateral. Investors may be harder to find but are a feasible option if you have a solid business plan and are considered a low investment risk. Another option is a microlender. This is a non-profit organization that may lend you money when banks and other lenders are unwilling to do so.
Determine Your Qualification Status
Each person is entitled to a free yearly credit report from AnnualCreditReport.com, which is the only site recommended by the government. Learn your credit score, and pay attention to the negative items on your history report. If there are inaccuracies, dispute them. You should compare your debt with your income.
For an existing business, lenders usually require an annual revenue of $50,000 to $150,000 depending the size of your business. Also, most banks require a credit score of 680 or above. However, P2P lenders, angel investors and microlenders usually have lower score requirements. Some lenders require that you be in business for a certain amount of time to lend you money. Getting a snapshot of your credit in advance will help you determine which type of loan you should seek and which lenders are willing to work with you.
Prepare Your Documents
When you are ready to apply, there are several bits of required information. You will need to provide background information, a business plan and proof of any collateral when applicable. These are some additional documents to gather before you apply:
- Tax forms for the past several years or since the business was started.
- Quarterly and annual financial statements showing revenue and expenses.
- Personal or business bank statements for the past few years.
- Any legal documents related to the inception of the business.
These documents will prevent any holdups in the application process. When applying with multiple lenders, keep in mind that several credit inquiries in a short period of time may temporarily lower your score. This may affect a lender’s approval decision or your interest rate. For this reason, only apply when you are ready to accept a loan.