As a business owner, times can get tough. If you find yourself asking how to get a small business loan, you’re not alone. Even when you manage to find some reliable advice (as you will here), the actual process of applying for a business loan can prove to be a challenge.
Why do business owners find it hard to get business loans?
One of the common reasons that a business owner may have a tough time getting a business loan is if they didn’t do any research on how to qualify for a business loan. There are some general rules that you should keep in mind when applying for a business loan – that is, if you want to be part of business loan approval statistics!
Fortunately, you’ve come to the right place. Discover everything you need with this guide on how to apply for a small business loan successfully.
How to apply for a small business loan in 8 steps
- Decide why you need a small business loan
- Decide how much you will need
- Prepare your paperwork
- Calculate how much you can afford
- Determine if you qualify for a small business loan
- Pick the right loan type
- Choose a lender that’s right for you
- Apply for a business loan
1. Decide why you need a small business loan
Business owners find themselves applying for a business loan for two reasons: either they need to, or they want to (and sometimes both). Thinking of reasons why getting a business loan may be a good idea? Here are a few examples:
- You need to get through the slow season
- You want to scale up your business
- Funds are tied up in unpaid invoices
- You want to purchase equipment
- Repairs have been waiting to be made
- You need to recover after a business disaster
You don’t have to wait until you’re seeing clear signs of your need for financial assistance to apply for a business loan – you might just want to make aesthetic improvements to freshen up your business’s look. Either way, business owners will want to be sure that they have a good reason to borrow money since they will inevitably need to pay it back. A responsible business owner will be practical and realistic when deciding why to apply for financing.
2. Decide how much you will need
After deciding why you need (or want) a small business loan, you’ll have to specify the amount of money you’d like to be loaned. The amount of financing you apply for should have a more-or-less direct connection to the reason you’re taking the loan. In other words, the size of the loan should reflect the cost of your intended use for the loan.
You might be wondering “what’s the problem with getting a business loan that leaves me with some extra cash?” The answer to that really depends on which type of business financing you apply for. Loans that come in the form of a lump-sum put business owners in a position where they are obligated to pay back the entire amount (with interest), even if they haven’t used the money.
On the other hand, business lines of credit allow owners to withdraw funds on an as-needed basis. Even if you only need extra funds to cover a small expense here and there, you can use a line of credit with less stress since you’ll only be charged interest on money that you actually use.
The bottom line: You won’t want to borrow more money than your business really needs, but you’ll need enough to fulfill the reason for taking the loan in the first place. Explore the price range for the product or service that you’re intending to pay for prior to applying for a business loan.
3. Prepare your paperwork
The last thing you’ll want to do when applying for a small business loan is to be scrambling last minute to gather the necessary documents. That’s particularly true when you want to get a fast business loan!
Avoid adding any extra pressure to the loan application process by getting all of your paperwork organized in advance.
Important note: Be sure to also stay aware of the required documents for the specific loan type that you’re aiming for – some types of funding require more paperwork, some require less.
Documents that lenders may request during the application process include:
- Bank statements from the last 3-6 months
- Remaining balance for any existing loans
- Proof of address
- Personal identification
- Registration certificate (if applicable)
- Partnership deed (if applicable)
- Balance sheet
- Profit and loss accounts
4. Calculate how much you can afford
You have a reason to take a loan, you’ve researched how much money you’ll need to borrow to cover the expected costs, and you’ve prepared your paperwork. The next step is to determine how much money you can afford to allocate from your budget to repay the business loan. To calculate that figure, you’ll need to consider two main factors:
- Monthly revenue (price for service/product X number of sales)
- Monthly expenses (utilities, rent, existing loans, insurance, employee wages, marketing, etc.)
With those two values, you can now calculate your DSCR (debt service coverage ratio). Your DSCR is a ratio of how much money your business can use to pay off its debt. Here’s the equation:
Ideally, you want your DSCR to be greater than 1. If it were less than 1, then you’d already be in debt and probably would want to avoid taking another loan since it would bring your DSCR even lower. The higher your DSCR is, the easier it will be for you to afford getting a business loan.
5. Determine if you qualify for a small business loan
If you’re applying for a business loan anywhere other than Become, you’ll likely be running the real risk of doing damage to your credit score if you don’t qualify. It should go without saying that a lower credit score will make it that much more difficult to qualify the next time you apply – something to be avoided at all costs.
Your best bet is to get a better understanding of what it’ll take to qualify before you apply, and to see if you meet that criteria. Of course, different lenders will have different business loans requirements for qualifying. Fortunately, through Become’s online lending marketplace, you get the benefit of an application process that’s much more transparent than you’ll find elsewhere.
Not only will you know what the standards for qualifying are from the get-go, but in the event that you don’t qualify, you’ll be given free access to your very own LendingScore™ Dashboard which is tailored to your business’s profile. There, you’ll be provided with unique insights into the specific reasons why you didn’t get approved, and what you need to improve in order to get approved next time around!
Business loan eligibility criteria that lenders consider include:
- Credit Score
- Non-Sufficient Funds
- Monthly Deposits
- Business Age
- Monthly Revenue
- Existing Business Loans
- Negative Balance Days
- Bank Balance
6. Pick the right loan type
One of the biggest mistakes that small business owners make when applying for a business loan is choosing the wrong kind of business financing. If you want to know how to qualify for a business loan, you’ll want to remember this step!
Business owners that need to purchase equipment should apply for equipment financing; if you want to get a vehicle to use for business purposes then apply for commercial vehicle financing; for unpaid invoices, you’d want to apply for invoice factoring; and so on.
There is a variety of business financing types because there are so many different reasons that business owners need additional funding (as discussed above). While some business loans have specific purposes, other forms of business loans such as unsecured business loans allow for a flexible range of uses.
It’s best to investigate each kind of funding option (and how to become eligible for business loans) before applying for a business loan, that way you don’t waste time attempting to obtain a solution that might not actually address your financial problem.
One important note: Of course, the type of business will affect the kind of industry loans a business needs, as well as the specific circumstances that business finds itself in. Be sure to weigh your options carefully in order to choose the right funding solution for your business.
7. Choose a lender that’s right for you
The process of getting a business loan may actually be easier than the process of choosing the lender that will be the optimal fit for your needs. It takes a lot of time to scan through the loads of loan providers that are out there and compare there strengths and weaknesses. The hours you’d invest in comparing lenders are hours that you’d be better of spending on the improvement of your business.
Become has designed and developed a technology called MatchScore™ (not to be confused with LendingScore™), which uses advanced algorithms to match business owners with the lenders that best fit their business’s financial profile. By combining that financial technology with access to dozens of the top loan providers across the country, Become virtually eliminates the need for business owners to waste their time searching for the right lender.
When applying for a business loan through Become, small and medium-sized business owners are automatically matched with lenders, and can then choose their preferred loan provider from those curated offers. Getting a business loan has just become been easier, quicker, and more likely to result in approval.
Now, all you need to know is how to apply for a small business loan.
8. Apply for a business loan
Still wondering how to get a small business loan? Look no further. Just follow the 8 steps below.
Step-by-step guide on how to apply for a small business loan:
- Choose your desired loan amount and select ‘Get Loan Offer’
- Fill in the requested information (including time in the industry, revenue, business, etc.)
- Submit your business’s checking account information for analysis
- Wait for offers. You can also review your status by clicking ‘Access Your Loan Application’
- Review offers and select your preferred lender
- Receive the funds to your business checking account
- Review your tailored LendingScore™ Dashboard to improve your funding options
- Improve your rates – if your LendingScore™ is insufficient, follow the personalized plan (8-12 weeks to unlock funding)
Getting a business loan may help to keep the boat afloat for the short term. But you’ll also want to understand why some small businesses fail so that you can be prepared to thrive in the long run.
Even if you’re unable to qualify for business financing after applying once, Become will provide you with continued support until you obtain the funding you deserve. You’ll even be given tailored guidance on how to improve your fundability, completely free of charge.
We hope you find this information useful! Be sure to share this article on social media so that other small business owners like yourself can learn how to qualify for a business loan.