So, you’ve decided it’s time to expand your business with a business loan. Applying for a business loan is a major decision, and you’ll have a better chance of being approved by the lender if you have all the right information when you apply. To get the financing you need, follow this step-by-step guide to applying for a business loan.
1. Determine the Purpose of the Loan
One of the first things a lender will ask you is what you plan to do with the loan. Maybe you want to expand your business into a new market. Maybe you just need more capital on hand for your business’s weekly expenses. Whatever your reason is, prepare a thorough answer so you can easily explain it to the lender.
2. Consider Your Lender Options
While banks are among the most common lender options for business loans, there are also microlenders that issue smaller loans and online business lenders that have higher approval rates than other options.
Banks tend to have the lowest interest rates and offer the largest loans. However, it’s much more difficult to get approved. You’ll likely have a hard time getting a loan through a bank if your business hasn’t been making a profit for at least two years.
Microlenders issue smaller loans (usually $35,000 or less) with shorter terms. Interest rates are higher than with bank loans, but you’re more likely to get approved.
Online lenders are one of the fastest options, and loans usually range anywhere from $500 to $500,000. Interest rates vary quite a bit depending on the lender, the borrower, and the loan details, but they’re almost always higher than with bank loans.
3. Make Sure That You Qualify
Every lender has its own requirements when issuing business loans. Lenders will look at your credit score, length of time in business, and revenue in deciding whether to approve your business loan application. Online lenders tend to be the most flexible, while banks are the strictest. If you need a loan but aren’t confident you’ll meet a bank’s requirements, then you may want to consider microloans or online lenders.
For your credit score, you should be above 680 if you want a bank loan, and higher is better. You’ll likely need at least one year of operation for an online loan, and two years for a bank loan. Minimum annual revenue requirements vary quite a bit depending on the lender, but typically range between $50,000 and $150,000.
4. Prepare Your Documentation
Once you know where you’ll be applying for your loan, it’s time to get all your financial documents in order so you can present them to the lender. While lenders all have their own application requirements, prepare thoroughly by gathering tax returns for yourself and your business, bank statements for yourself and your business going back at least two years, all your business’s financial statements, and any other important legal documents that are related to your business.
Having all your documents in order will make the loan application process much smoother. Keep in mind that if you’re not confident a lender will approve you, it’s smart to apply for multiple business loans within a two-week time period. Every time you apply for a business loan, the lender will make a hard inquiry on your credit when they run a credit check. Hard inquiries lower your credit score, but when multiple hard inquiries occur in the same two-week time period, then they only count as one.
5. Apply for the Loan
With everything ready, it’s time to apply for your loan. If you’re going in to a bank or microlender location, prepare to talk about your business. It may be wise to rehearse some statements regarding your business before you go. Being able to explain your business and your intention for the loan both clearly and professionally can make all the difference with a lender.
Getting approved for a business loan can be a huge step forward for your business. When you’ve prepared thoroughly and followed the right process, you significantly improve your chances of landing your loan.