There’s a lot that goes into starting a small business.

First, you need a good idea that solves a problem, then you need to test your idea, and ultimately, you need a way to fund your business.

In our last post we looked at different funding options for your small business, and today, we’re going to dig into small business loans. Read on to learn what you need to apply for a small business loan, how to get a small business loan, and what can prevent you from receiving a small business loan.

Small Business Loans

Many business owners struggle with financing at some point during the life of their business. For one business owner, it could be needing funds to get started and for another, it’s about having enough money available to cover day-to-day expenses.

It isn’t necessarily easy to get a small business loan and that’s largely due to the restrictive lending rules most banks abide by. Let’s look at what you can do to help increase your odds of getting a small business loan.

Prepare for your small business loan application

Before applying for loans, you’ll want to work on a business plan. Lenders won’t entertain your request if you don’t have a business plan they can review. No one wants to lend their money to a risky venture, so take the time to flesh out your business plan before going any further. 

Clearly state why you’re looking for a small business loan

Banks want to know that their borrowers will use the money wisely. If you can’t tell them how you plan on using the funds they loan you, chances are, you won’t be getting that loan. 

As part of your business plan, consider why and where you need extra funding. Will you:

  • Be using the money to get off the ground?
  • Request funds to maintain payroll and other regular expenses?
  • Need money to introduce a new product or service to your business?

Your ask and reasoning should be clear to the lender, don’t leave them guessing as to how their money will be used.  

Do your small business loan homework

Small business loans come in a great variety of types, not all of them being perfect solutions for everyone. For example, many banks won’t loan money to a new small business. This is because they want to know that you already have cash coming in the door (a positive cash flow) so they can rest assured that you’re able to pay back your small business loan. It’s a big risk to loan money to someone that doesn’t have proof of income to pay it back.

If that’s the case, new business owners may have better luck seeking funding through alternative lenders, like friends and family or crowdfunding.

If you’ve been in business for at least a year and can prove you’re making revenue, you’ll have an easier time receiving a traditional small business loan from a bank or a Small Business Administration approved lender. 

Review the Terms and Conditions 

Here’s a piece of advice that extends well beyond getting a small business loan: Don’t sign your name to something without reading any applicable terms and conditions first.

There are many places you can seek small business loans, but they all offer different terms. Some might offer deferred interest, and others might charge so much interest it makes the loan very unappealing. Do not sign and accept a loan without first understanding the terms of it, and if necessary, bring someone with you who can help explain the terms. 

Nerdwallet suggests that you, “Approach small-business-loan shopping just as you would shopping for a car. … Once you determine which type of lender and financing vehicle are right for you, compare two or three similar options based on annual percentage rate (total borrowing cost) and terms. Of the loans you qualify for, choose the one with the lowest APR, as long as you are able to handle the loan’s regular payments.”

Identifying the right lender

Small business lenders tend to fall into three categories: traditional banks, microlenders, and alternative lenders.

Traditional banks

Small businesses can have a tough time getting approved for a traditional loan through a bank. Banks often require that you have a good credit history, aren’t in desperate need of funds, and that you have enough collateral to make the loan less risky to them.

Bank loans tend to operate on a debt financing model, where you’ll need to pay back the loan, instead of an equity model where you can sell stock or ownership in your company for funds.

The Small Business Administration (SBA) partners with banks and lenders across the nation to provide small business loans. These loans range from $500 USD to $5.5 million USD, and “can be used for most business purposes.” Check out their site to find a lender that works for you. 

Microlenders

Bad credit? Fledgling business with no consistent revenue stream? These things can make a traditional bank turn their nose down at you and refuse to lend. However, that doesn’t mean you’re entirely out of luck when it comes to getting a loan.

If you’re not a good candidate for a traditional loan, look into microlenders. Microlenders are often nonprofits that issue smaller, short-term loans. While you may not receive as much funding from a microlender, it can be just enough to get you on your feet or launch that product you’ve been testing and are ready to release. 

Since microlenders work with people who are newly in business and those with poor credit, they often have a longer application process. Keep your business plan handy, because without one your chances of getting a microloan decrease. 

Alternative Lenders

If the term “alternative lender” intimidates you, relax. Alternative lending encompasses everything that isn’t a traditional bank loan, but that doesn’t mean it’s held in less regard than a traditional loan. If you don’t have the business tenure or credit score to land a bank loan, and you’re looking for more than what a microlender can offer, alternative lenders can be the perfect solution. 

Alternative lenders can take many forms: Friends and family, crowdfunding, and angel investors are just a few.

Instead of a debt financing model, many alternative lenders offer equity financing. This means that instead of having to pay back a debt according to specific terms, you offer the lender a stake or ownership in your company in exchange for the funding.

You can read more about various alternative lenders in this post.

What prevents you from getting a small business loan?

Competition in business is fierce, and not everyone will receive a small business loan to help them succeed.

Wondering if you’ve got what it takes to be approved for a small business loan? The following things can make or break your chances of securing a loan.

1. No Business Plan

Not having a business plan isn’t an option when applying for small business loans. Your business plan is your blueprint for success. Think of it as a road map that you and your lenders can follow to make sure you’re achieving your business goals.  

Why is a lender going to waste their time and money on your business if you haven’t bothered taking the time to create a plan? Not having a plan is risky business, and sets you up for failure.

Here’s where you can learn how to write a business plan.

2. Bad Credit History

Banks won’t offer a small business loan to someone with bad credit. In fact, most banks insist your credit be at least in the 680-700 range (if not higher) before they’ll consider you a viable candidate for a small business loan.

If you don’t know your credit score, the time to find out is now. TransUnion, Equifax, and Experian are three credit-reporting agencies that all offer a free yearly personal credit history report. You can apply to receive yours at annualcreditreport.com.

3. No collateral or cash flow

Banks want to be assured that you’re able to pay back your loan before they’ll approve you for it. They’ll be interested to know what collateral you have and what your cash flow is so that they can better assess their risk in lending to you.

It’s a good idea to regularly calculate your cash flow so you’re always prepared in case of emergencies, and so that you can approach lenders with confidence.

4. General apathy and disorganization

Banks aren’t lending to a nameless, faceless entity — they’re lending to you, a living, breathing human being.

When making your appeal for a loan, don’t forget to include some emotion and make a human connection. Lenders are constantly approached by people looking to get a small business loan, so come prepared with an organized plan and appeal, and let your personality shine through to set yourself apart from the rest.

Putting it into practice

Now that you know what lenders are looking for when you apply for a small business loan, and what to have prepared before you apply, it’s time to shop around for the right lender and get your small business loan.

We’d love to hear about what has and hasn’t worked for you when applying for small business loans, so let us know in the comments below!

And if you’re ready to take the next step and get your business online, we’re here to help. 

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