How to Get a Business Loan in 8 Easy Steps

how to get a business loan

Are you looking to secure a loan for your business?

Smart move! Credit financing is an ideal way to inject cash into your business without giving up your ownership stake.

However, getting approved for a business loan isn’t the easiest of tasks. A recent survey reveals the approval rates for small business loans at big banks is about 20 percent.

Yes, these numbers aren’t pretty, but they shouldn’t discourage you. As long as you know what it takes to get approved for a business loan, you stand a good chance of getting the cash.

Come with us as we flesh out how to secure a business loan in seven easy steps.

1. Cultivate a Relationship with Potential Lenders

Even though the number of nonbank financial institutions entering the lending market is increasing, banks are still the major players.

One thing about banks is they prefer lending to people or businesses they know. As such, the first step to getting a business loan is to cultivate a business relationship with the banks in your local area.

Do your research and identify one or two banks that have a reputation for supporting small businesses. There’s no point trying to establish a business relationship with a big bank that doesn’t make loans to small enterprises.

After identifying a suitable bank, open a business account and keep it active. Not only that, but visit the local branch and hold face to face meetings with account managers, loan officers, and bank managers.

At the end of the day, it’s these people who will process your applications for credit. The better they know you and your business, the more likely they’ll view your application in a positive light.

2. Understand the Different Types of Business Loans

Lenders offer different types of business loans. They include:

  • Small business line of credit
  • Working capital loans
  • SBA small business loans
  • Equipment loans
  • Accounts receivable financing
  • Small business term loans
  • Small business credit cards

When you have a firm grasp of the various business loans on offer, it’s easier to identify one that best suits the needs of your business. Plus, lenders often want to know why you need the loan. When your reason matches they type of loan you’re applying for, your approval chances increase.

Let’s say you’re short on cash, but your clients are due to pay you a total of $44,500 for services rendered. The most suitable credit facility to go for is accounts receivable financing.

Or, if you’re looking to set up a manufacturing plant, you’re best advised to apply for an equipment loan.

3. Know How Much Money You Need

Seeking more money than you need is a common reason for business loan rejections.

Before submitting your application, determine the amount your business need. Be precise with your calculations and ensure it falls within your revenues.

For example, if your business pulls in $500,000 after taxes and other annual expenses, it would make sense to borrow about $300,000, assuming it’s a short-term loan with a repayment period of 1 year. The lender will see that your borrowing is well within your means.

Applying for a $1,000,000 loan with similar repayment terms is a sure way to get rejected because there is no proof your business will be able to repay it.

4. Know Your Credit Score

Business Credit Score

Thought credit scores only apply to individuals? Sorry, but your business has a credit score as well!

Business credit scoring typically ranges from 0-100, with numbers closer to 100 indicating a strong score.

Most traditional lenders will look at your business credit score when reviewing your application. If you’re planning to get your loan from a traditional bank, it’s important to keep tabs on the score.

Obtain a copy of your business credit report from any of the 3 major credit bureaus (Experian, Equifax or Dun and Bradstreet) and know your score. If it’s anything above 76 (low risk), you have fewer hurdles to overcome.

But if it’s below 50 (high risk), its likely lenders will turn you down. Don’t rely on luck, since your credit score falls lower every time a lender accesses your business credit report. Focus on building it before applying.

Your personal credit score can also affect your business loan application, especially if it’s an SBA loan. A weak personal credit score tells lenders you might not be responsible with your personal finances. They might assume that you’ll also mismanage business finances.

The good news is not all lenders do credit checks. For micro and online lenders especially, your business revenues matter more than anything.

Personal Credit Score

Often times business loan lenders require the business owners to be personally responsible for paying back the debt. Essentially you will be a co-signer on the business loan, and thus responsible for repaying the debt if your company fails to do so.

The interest rate you receive on a loan will largely be determined by your credit score, both business and personal. The higher your credit score, the lower the rate will be, and vise versa.

Take steps to improve your credit before applying for a business loan.

5. Check with the Small Business Association SBA

The Small Business Association, or SBA for short. Is a Government run program that helps small business owners secure financing from private lenders. The SBA does not offer loans directly, they insure the loan protecting the lender against default. By reducing the lenders risk, it allows them to be more flexible with their requirements.

SBA Loan Requirements

  • Be a for profit business
  • Do business in the U.S.
  • Have invested equity
  • Exhausted all financing options

For more information on SBA loans please visit their website.

6. Determine Your Collateral

If your credit is not up to par, or your business is seen as risky you may have to get a secured business loan.

Get your collateral ready. This could be a property title, car title or any other asset with a cash value of at least (more is better) the amount you want.

It’s also possible for a lender to require collateral even when the loan you want isn’t a secured loan. This is usually the case when the lender, for whatever reason, considers you a medium to high-risk client.

7. Get Your Paperwork in Order

As part of the application procedure, lenders will require you to submit a range of documents, including:

  • Your personal identification and proof of residential address
  • Personal and business credit reports
  • Business plan, and financial statements
  • Business registration certificate, licenses, and permits
  • Personal and business income tax returns
  • Leases or rental agreements for real estate
  • Franchise agreements (if your business is a franchise)
  • Ownership documentation for collateral (when required).

Be sure to gather the right information from your lender, so that you know all the required documents and whether they need to be certified.

8. Fill Out the Application and Submit

Finally, it’s time to fill in the details and submit your application.

Take care not to make any errors, as a simple entry mistake can get your application returned for correction. This will only increase the amount of time it takes you to lay your hands on the cash.

Getting a Business Loan Simplified

Many businesses fail because of cash flow issues. Getting a business loan is a smart way to get cash to start and scale a business.

Now that you’re familiar with the seven steps you must complete to get the loan, your task is to find a suitable lender and submit your application.