How To Apply For A Small Business Loan - Slimmer Payments

How To Apply For A Small Business Loan

Starting a small business is no small feat. It requires know-how, resilience, and resourcefulness. Even under the most ideal circumstances, running a business is not for the faint of heart.

Taking out a small business loan can help you start or maintain your business, but it can also be a daunting process where many questions can arise. How much money should you get? How much money can you get? And what on earth is collateral?

Learning what to expect ahead of time will enable you to be more successful in this process. Here is everything you need to know.

Should you get a small business loan?

It’s always a good idea to speak with a financial advisor or an accountant to decide which loans you qualify for, and exactly how much debt you can afford to take on — if any.

Another important factor to consider early in the process is your specific business needs. Think about the status of your business. How old is your company? Does it still need time to blossom? Are you growing like crazy? Do you need extra cash on hand for expenses in order to stay afloat?

Look carefully at your business’s financials and evaluate how much you can afford to pay back each month. Financial specialist Suzanne Darden says your total income should be at least 1.25 times your total expenses — including your new repayment amount.

How can collateral impact your loan?

Lenders offer both secured and unsecured business loans. A secured loan requires business collateral, such as equipment or inventory, which can be seized and sold if you can’t repay the loan.

While putting up collateral is indeed risky, the reward is that you can get a lower interest rate, and it can also increase the amount you can borrow.

What types of small business loans are available to you?

As a small business owner, you have a wealth of different financing options. Lenders will ask you what you intend to do with your loan, so it’s a good idea to determine your “why” ahead of time. Your “why” will likely fall under one of the following:

  • Starting a business. If this is your “why,” instead of a small business loan, you’ll want to explore startup financing options instead. Lenders typically want to know that you’ll be able to repay the loan, so they typically don’t approve requests for companies still within their first year.
  • Managing day-to-day expenses. If this is your “why,” you’ll want to look into a line of credit. A line of credit is flexible and allows you to access it when needed in order to cover expenses. 
  • Growing your business. If this is your “why,” you’ll want to consider a government-backed Small Business Administration (SBA) loan, or a traditional installment/”term” loan. These options often have higher maximums, and options for long or short-term repayment.

Which lender is right for you?

Online lenders are a good option for you if your business is newer, you don’t have collateral, or if you need funds in a flash. Online lenders offer a wide range of borrowing amounts, from about $1K to $5 million. These lenders offer higher approval rates with much faster funding than banks. If you go this route, be sure to research your lenders and find one with a good reputation, and be wary of astronomical interest rates and fees.

If you’ve been in business for two or more years, have good credit, and don’t need quick cash, you’ll want to consider getting a loan from a bank. Choosing a bank as your lender typically means you’ll be waiting longer to get funded, but they are usually the lowest annual percentage rate (APR) option. 

Taking out a business loan from a bank as a small business owner can be difficult. For instance, Bank of America requires businesses to have a minimum of $250K in annual revenue in order to qualify. 

If your company is too small for a traditional loan, consider microlenders, which are nonprofits that typically lend short-term loans of $50,000 or less. 

What will you need to apply for a small business loan?

Lenders will typically want to see a few specific things. It’s advisable to have these items easily accessible in order to streamline the process for both you and your lender. Here’s what lenders may want to see:

  • Credit score.
  • Tax returns, both business and personal.
  • Bank statements, both business and personal.
  • Business legal documents, examples being commercial lease, or articles of incorporation
  • Your business license.

So you’ve done all of the above — now what?

You’ve made it! It’s time to apply. Start by looking at a few similar loan options. Then, grab those documents you gathered earlier, find the one with the lowest APR, and apply.

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