A lot of small business owners get nervous or stressed out just thinking about applying for a business loan. While it’s true that a small business loan application does involve some work, it’s really not as hard as some people think it is.
Small Business Loan Application
In this article, we will discuss the steps that you need to take if you want to apply for a loan. We will also tell you what you can do to ensure that your application is approved, as well as give you tips on choosing the right loan and the right lender.
Tips on How to Ensure a Successful Small Business Loan Application
There is no question that small business loans can be vital tools in elevating a business towards long-term success. But before you can enjoy its advantages, you first need to get approved. Here are some of the most effective ways to get that approval that you are aiming for.
Learn the different kinds of small business loans that you can apply for
You might not realize it yet but there are dozens of loans that you can choose from as a small business owner. These loans vary greatly in terms of loan purpose, repayment schedules, interest rates, and so on. A little further down this article, we will talk about some of the most popular small business loans that are available today. You will have to examine each of these options carefully so that you can make the right choice.
Compare the different types of lenders
As the need for extra funding increased among small businesses, so did the number of lending companies that cater to this need. There used to be a time when traditional lenders like banks were the only provider of extra funds. Today, however, you can submit a small business loan application to many kinds of lenders. Each of these lenders offers their own terms so you have to make a thorough comparison before making a choice.
Improve your borrower profile
In deciding whether to approve or reject your small business loan application, a lender will carefully consider a number of factors. This will usually include financial details about your business like the credit score, cash flow, outstanding loans, accounts receivables, and length in business. It might not always be possible but before you apply for a loan, you might want to take steps to improve these aspects of your business, if you still have time, that is.
Have your business documents ready
It might not directly affect your status as a borrower but it will certainly make a positive impression on the lender if you have your business records in order. So before you submit your small business loan application, be sure to have all your documents prepared as well. This includes your business plan, financial statements and bank records for the last 2 or 3 years, and a recent business credit report. In addition, you should also prepare a copy of the legal structure of your company, a list of your executive officers, all state filings, insurance policies, and so on.
Be specific as to the purpose of the loan
When you submit a small business loan application, the lender will want to know exactly how you plan to use the loan. This will help them decide whether it is in their best interest to lend the money to you. Take note that many of these loans must only be used for the purpose that you state in your application. Should the lender find out that you used it for something else, you might have to pay hefty fees.
Apply only when you are ready
Before you apply, you will need to evaluate yourself as a potential borrower. Put yourself in the position of the lender. If someone like you applied for a loan, would you approve them? Gauge your qualifications and make sure to only submit your small business loan application if you really think that you will get approval.
Keep in mind that when you do apply, the lender will run a credit check on you. This will affect your credit score. If you end up getting rejected, it will be all for nothing. Also, the application process also involves some costs. You don’t want to keep paying these fees over and over until you finally get approved, so it’s better to be approved the first time.
Best Small Business Loans and their Intended Uses
As mentioned earlier, there are plenty of loans that are designed for small businesses like yours. Before you start sending out a small business loan application, take a look at the options and compare their pros and cons. This way, you will be able to make the right decision for your business.
The Paycheck Protection Program (PPP) has just recently reopened at the beginning of 2021. These loans are designed to provide financial assistance to businesses that have diminished revenue in 2020 compared to the same period in 2019. Some allowed uses of the PPP are payroll, rent, utilities, daily operations, and protective equipment. PPP loans are forgivable if they are used for the intended purpose.
SBA Disaster Loans
The COVID-19 pandemic has greatly affected small businesses in terms of finances. To help these businesses recover, the EIDL program was created as a type of SBA disaster loan. These loans have quite a long repayment period of 30 years or more, and a relatively low interest rate of 3.75%.
Small Business Line of Credit
These business loans are like personal credit cards. There is a maximum credit as determined by the lender, and there will be an upfront fee for the service. However, you only need to pay interest on the amount of credit that you actually use. A line of credit can be used for a wide variety of business purposes. You do have to keep in mind that there is an annual fee that needs to be paid. Also, you need to be sure that you can generate a steady income so that you can easily repay whatever you spend using your line of credit.
Accounts Receivable Financing
If your business has a lot of incoming funds in the form of accounts receivables, you can submit a small business loan application for this particular type of funding. The lender can give you money now, and you can pay later when your customers pay your AR.
SBA loans are made specifically for small businesses. They come with relatively low interest rates and reasonable repayment terms. But the criteria for qualifying for these loans are rather tight. Also, one of the important requirements for SBA loans is that you should have tried to apply for another business loan and was rejected. There is also a lot of paperwork that you need to submit if you choose to apply for this type of loan.
Where to Submit Your Small Business Loan Application
Now that you understand the different kinds of small business loans that you can apply for, the next step is figuring out which lender to approach. There are plenty of options available but not all of them will be equally suitable for your needs.
These are considered to be among the most secure lenders for small businesses, and they also offer the lowest interest rates. However, the requirements are much more rigorous and it can take up to a few months to get approval.
These smaller local banks are also very secure and might have a bit more lenient requirements than the larger banks. But it can still be hard to get approval because of the stringent criteria.
Direct Online Lenders
If you are looking for a fast payout, direct online lenders are a good option. They are also convenient because you can find these lenders all over the internet these days. The approval process is also easy and they don’t have a lot of requirements. They might charge high interest though. Also, you need to be wary of bogus lenders and stick only to reputable ones.
Peer to Peer Lending
If you find it stressful or confusing to find a suitable lender, you might want to take a look at some peer to peer lending sites. These are like middlemen that connect small business owners to reputable lenders, and facilitate the borrowing process as well.
Because these lenders are backed by the Small Business Administration, they offer a higher level of security than other lenders. Some of these lenders are banks, while others are alternative lenders that also abide by the SBA criteria.
FAQs on Small Business Loan Applications
Do I need to have a high credit score to get a business loan?
A high credit score will qualify you for better rates but it is not a requirement. Many small business loans are available for borrowers that have bad credit. Banks would most likely reject your application but alternative lending companies will be very happy to provide the funding you need.
What documents do I need to submit with my small business loan application?
Different lenders might ask for specific documents but in general, you need to get your business financial documents ready. These include your tax returns for the last two or three years, your annual bank statements, income statements, accounts receivables, accounts payables and cash flow statements.
What is the most common reason for not getting approved for a small business loan?
The leading cause of rejection of small business loan applications is having an excessive amount of debt. It would be helpful if you can shave off some of your debt before applying. Alternatively, you can choose a different type of loan to apply for.
Is there a requirement when it comes to the length of business?
Typically, banks want to see at least 2 years of being in business before they consider a small business loan application. With online lenders, the requirement is a bit lower because they only need 1 year.
When is it advisable to get a business loan from online lenders?
Online loans are most suitable for businesses that are fairly new, do not have a lot of collateral, and require funds fast. Bank loan applications take a very long time to process and the requirements are much stricter as well.
When is it advisable to get a business loan from a bank?
A more established business with a good credit score and that does not have a very urgent need for extra funding might be better off with a loan from a traditional lender like a bank. Online lenders are faster but they also come with much higher interest rates.
In comparing loan options, what are the factors that I should consider?
The interest rate is definitely one of the most glaring criteria, but you should also consider the terms of the loan and the deadline for repayment. You should also think about the allowable uses of the money that you can get from the loan.
Small business loans are a godsend to many entrepreneurs looking to expand their ventures. With the wide array of choices available, it can indeed be difficult to choose the one that will serve your interests the best. It’s even more confusing because the right choice for one business might not be helpful for another.
Our loan experts here at Booster Financial can help you decide which path to take. Whether you are looking for funds to purchase new equipment, augment your daily cash flow, or build your business credit score, there’s no need to worry. We are here to provide all the assistance you need so that you can make the best decisions for your business.
Understand Your Options
Find out more about the different finance opportunities available in your area and get funded today!