You have big ideas for your business, but you’re coming up short in the finance department.

Sound familiar?

You need capital to scale your business, but lenders want to see a track record of success before they hand over the money.

For newer small businesses, that isn’t always easy. In fact, 27% of small businesses can’t get adequate funding.

Add to that the complexity of figuring out how to get a business loan, and the process can feel defeating.

But what if you could get the stamp of approval from a lender? How you would use the capital? Expand to new markets or increase inventory? Add employees? Upgrade your equipment?

How big could you dream with adequate funding?

Get your financial ducks in a row before you apply for a small business loan to simplify the process.

Not sure what you need to do? Keep reading to learn more about the small business loan process.

1) Know Why You Want the Money

Do you really need capital? And if so, why?

Expect any lender to ask those questions when you apply to get a business loan. You need a clear plan for the money if you want the lender to feel confident.

If you’re just getting your business of the ground, your reason is to cover start-up costs. Established businesses borrow money to grow the company.

Common reasons to look for business funding include:

  • Hiring new employees
  • Increasing your inventory
  • Expanding to offer new inventory
  • Buying new equipment
  • Expanding to a new location
  • Covering regular operating expenses
  • Refinancing previous business debt

Part of deciding why you want a loan is having a clear plan for your business. What are your goals for growth? What steps can you take to make your business plan happen?

With your reason in mind, think about how money helps with that goal. If you’re hiring a new employee, the money covers the recruitment process. This lets you get a new person on staff to grow your business and increase productivity.

2) Calculate How Much Money You Need

Taking out the largest loan possible may seem like the best option. But fees and interest increase what you owe, which can strain your business finances.

Borrowing too much money can get you in over your head and make it tough to keep up with payments. If you take out too small of a loan, you may run out of money before you reach your goal.

Instead of guessing, calculate what you actually need. Look at your current finances to figure out how much you can afford each month.

Since you already decided why you need the money, you can estimate how much you need for that purpose.

Say you’re hiring a new employee. It costs an average of $4,129 to hire a new employee. You also have the employee’s salary and benefits to cover.

If you’re expanding to a new location, you’ll need to do market research to figure out lease costs. Calculate the cost of any renovations and furnishings you need for space.

Does it seem overwhelming to calculate all the numbers? Work with your accountant to figure out how big of a loan you can afford. A small business loan calculator helps to figure out your monthly payments and total loan costs.

3) Check Your Creditworthiness

Lenders look at your current financial situation to decide whether to loan you the money. Do your own checks before lenders have a chance, so you know what they’ll find.

By looking at your creditworthiness, you can get an idea if you’re qualified for a business loan. You may decide you need a little more time to improve your financial situation before applying.

Credit Score

Three digits. That’s all it takes to make or break your creditworthiness when getting a business loan.

Your personal credit score puts your past finances into a concrete number. Lenders use that number to decide if you’re a good risk.

You can also build a business credit score. You establish that score, which ranges from zero to 100 when you take out a business credit card or similar business credit.

A strong business credit score can increase your chances for larger loans and better terms. It can also protect your personal credit score.

Whether you’re relying on your personal or business credit score, knowing what it is will help anticipate lending options. Weak credit scores can keep you from getting your funding.

You can still get funding if your credit score isn’t perfect. But you may be limited in your options and pay more in total loan costs.

Spend some time improving your scores if necessary. Paying personal and business debts on time is an effective way to raise your scores.

Current Loans and Debts

Do you already have business loans or business credit cards? Those balances and payments can impact how much new funding you can get.

Lenders need to know that you have enough business cash flow to cover everything. If you haven’t checked in with your finances, now’s a good time to make sure your cash flow is adequate.

Business Assets

Both you and your lender hope you never default on your business loan. But your lender wants to know you have some assets to go after should you stop paying.

What kind of assets does your business have to make you a more appealing customer? Your lender may want some type of collateral to secure your loan.

Examples of collateral include:

  • Buildings
  • Vehicles
  • Equipment
  • Inventory
  • Accounts receivable
  • Land

4) Explore Business Loan Options

When deciding how to get a loan, you need to know what your funding options are. Lenders often want you to have a minimum revenue and a certain number of years in business. If you don’t meet the requirements for a traditional loan, you may have other lending options.

Traditional Business Loans

This is probably the type of loan you think of when considering financing. You receive the fixed loan amount once you complete the loan process. Then, you make fixed payments on the loan based on the term and interest rate.

Approval usually requires an established business and good credit scores. Banks also prefer to deal with larger business loans for the profitability aspect. That means if you’re looking for a smaller loan, you may have trouble finding a bank to lend to you.

Microloans

Do you need a small amount of capital to reach your next business goal? A microloan covers smaller expenses and often comes with a low interest rate.

If you’re trying to learn how to get an SBA loan, a microloan may be what you want. Large banks often don’t give out smaller business loans since they’re not as profitable. An SBA microloan is an alternative option.

Line of Credit

Lines of credit give you a little more flexibility than traditional loans. You can use money from the line of credit as needed. As you pay it off, you can access that cash again up to the limit.

Lines of credit work well if your cash needs change. Seasonal businesses or those with unpredictable patterns fit that profile.

You may qualify for different types of credit lines. An accounts receivable line of credit lets you borrow money against your outstanding invoices.

Working Capital Loans

This type of small business loan goes toward your operation costs. Working capital loans can be either secured with collateral or unsecured. You’ll need a strong credit history to get an unsecured one.

Expect to pay back a working capital loan quickly. They’re usually short term with lengths between one month and one year.

5) Gather Financial Documents and Info

If you’ve ever taken out a loan, you know how much paperwork goes with it. Save time by gathering as much paperwork as possible now.

Banks typically want the most documentation. If you’re going with an online lender, you may not need as much paperwork.

Financial Documents

Lenders want to know financial statistics about your business. That includes cash flow, accounts payable, accounts receivable, debt-to-equity ratio, and gross margin to name a few.

Lenders may ask for several different financial statements, including:

  • Cash flow statement
  • Balance sheet
  • Income and loss statement
  • Shareholder equity
  • Projected financial statements
  • Personal financial statements
  • Tax returns
  • Bank statements

If you have an accountant handling your books, it’s a good idea to sit down together. Your accountant can let you know if your financial statements raise any red flags for lenders.

You may need to hire a CPA to audit or review your financial documents. Reviewed documents are cheaper than audited documents.

Not all lenders require audited or reviewed documents. Check the requirements before you spend the money.

Business Information

Lenders also want all relevant information about your business. Knowing this information before you apply lets you fill out the application faster.

You may need the following information:

  • Federal tax ID
  • Legal structure
  • Executive officer names
  • Insurance policies
  • Loan amount
  • Collateral
  • State registrations
  • State licenses

The lender may also want to look at your business plan or executive summary.

6) Check Out Different Lenders

Hooray! Someone wants to lend you money.

Before you sign anything, have you done your research on the lender?

Not all lenders follow ethical business practices. Predatory lending can cost you big time. The loans come with high interest rates and excessive fees.

Spotting a predatory lender requires you to look past the helpful persona. Watch out for loans that seem too good to be true.

Shop around with various legitimate lenders to find terms that fit your needs. Different lenders may have varying rates and fees that can save you money.

Where should you look for lenders? Online lenders and traditional banks give you different options.

Traditional Banks

Established traditional banks tend to have a long loan approval process. They have strict criteria to make it through underwriting. Those requirements can make it difficult for small companies to get a business loan.

Established business at least two years old have the best chance of getting a traditional bank loan. Only about half of small businesses survive five or more years. It makes sense that banks are cautious about lending money to a company that may not survive long enough to pay off the debt.

Traditional bank loans are best for business owners with good credit. You’ll likely need collateral. You’ll also need patience since banks tend to take longer.

Check with smaller community banks if you strike out with national banks. They’re sometimes more willing to work with local businesses with smaller loans or more flexible criteria.

Online Lenders

Are you looking for an alternative to traditional banks? A growing number of online lenders make the process faster and easier.

Online lenders tend to offer different types of small business financing. That variety lets you get the amount and type of funding you need.

7) Submit Your Loan Application

Once you narrow down the lender options, you’re ready to apply. If you do your research and gather financial documents early in the process, the actual application should be a breeze.

Submit the loan application completely and honestly for the best chances of an approval.

If you’re approved, the underwriting phase starts. The lender looks at everything you submit and verifies that it’s accurate.

When you get the okay from underwriting, you sign your loan agreement. Review that document before signing. That’s where you’ll find the fees, interest rate, and other important details about your loan.

Be prepared for slight variations in the application process from one lender to another. Some may require different documents or extra information.

If the lender asks for more information, respond as quickly as possible. Business loans can take two or three months to complete. If you don’t respond quickly, you can delay that process.

Learn More About How to Get a Business Loan

Does figuring out how to get a business loan feel overwhelming? It doesn’t have to be.

We can help you find the right funding for your small business. Contact us to explore your options.

With the right funding, you can scale your business and make your biggest goals a reality.