Knowing how to get a business loan will allow you to expand your company.
The application process can be complex if you are not familiar with the ins and outs of borrowing money from financial institutions.
That’s why we’ve put together this guide.
We’ll cover what lenders are looking for, the different business loans available, and how to complete an application.
|Table of contents|
|1. How to get a small business loan|
|2. Tips for getting a commercial loan|
|3. Why you should apply for a business loan|
|4. Frequently asked questions|
How To Get A Small Business Loan
1. Decide Why You Need Business Financing
Before taking any steps, you must understand your reasons for getting a loan. Also, you should know what advantages you expect to see out of getting out of the planned investment.
Some helpful questions to ask yourself could include the following:
- How much money is the business going to need?
- How much return on investment will the company benefit from?
- What will you use the money for? Instead of a generic answer, get specific – for example, increase the ROAS by doubling our monthly ad budget.
- Are there any benefits to getting additional money through a loan instead of waiting for the business to save up some cash?
Once you know what benefits you expect from a loan, it will be easier to keep your goal in mind and communicate it clearly to the lender.
2. Decide on the Type of Loan
There are many lending products, all with their pros and cons.
Here are just a few options to choose from:
A term loan will provide your business with a lump sum of money upfront that you must repay over time.
Term loans are repaid with interest and have a pre-determined repayment timeline.
They are some of the most popular types of loans.Apply For A Business Loan!
If your business needs machinery or equipment, you may look for an equipment loan.
These loans will help you acquire these products, and the loan terms last the lifetime of the equipment.
However, you risk using outdated equipment in the future without the ability to replace them.
Banks and lenders offer these loans through the Small Business Administration (SBA).
Because they are government-backed, SBA loans can provide you with low, reasonable rates. That said they can be challenging to qualify for and even harder to apply for.
They offer different loans that allow business owners to buy equipment and real estate or to expand employment.
Microloans are loans typically under $50,000.
Commercial banks rarely make these loans, but you may be able to get them through:
- nonprofit organizations
- small business lenders
- online lenders
Because microloans are smaller, there is less interest to pay and a shorter repayment period.
3. Calculate How Much Money You Need
Depending on where you are in your business journey, you might already have a good idea of your expenses, such as office space or licenses and permits.
However, if you’re in the earliest stages, you may not be sure about that. Using the Small Business Administration’s Startup Costs Worksheet is a good place to start.
If you’re unsure of what these expenses look like in your area, it may be helpful to build connections with other entrepreneurs. They can help you make an accurate projection of your costs.
If you are getting a loan to fund progress toward a specific goal, there are some other factors to keep in mind, such as:
- How long you will need the money. This could impact what interest rate you are willing to accept because that interest will compound over time.
- What your future financing needs might be. Projecting your cash flow over the next three years and how much money you’ll need to keep up is important before deciding how much to borrow now.
4. Determine the Payments You Can Afford
Based on your cash flow, credit score, and personal debt-to-income ratio, you may not be able to afford the loan you’re looking for.
It’s crucial to figure out a realistic estimate of how much you can afford.
Even if you can comfortably afford monthly payments on the amount borrowed, the interest can stack up fast.
Account for the average business loan interest rates and determine what payments you can afford. If you don’t include these interest rates in your calculations, you could end up with payments you cannot pay.
We recommend that you use a business loan calculator to simulate a loan.
5. Decide if You Want to Offer Collateral
If you have collateral to offer, it may increase the amount you can borrow. It can also add increased risks if you cannot pay back the loan for whatever reason.
Whether this risk is worthwhile is a decision that only you can make.
Collateral is an asset that has value, but some assets are better to use as collateral than others.
In general, when applying for a business loan, the best collateral to use would be an asset that lenders can liquidate quickly if needed. Securities can also work, but they aren’t as favored by lenders.
6. Compare Business Lending Options
You will want to compare as many as possible to get the best rates and terms for your business loan.
The three main types are:
- Banks. They are the most traditional type of lenders. Generally, they usually have the lowest interest rates but also require the most documentation.
- Online lenders. These lenders have become popular in recent years. They use technology to speed up the lending process and often have more flexible requirements than banks.
- Alternative lenders. They are a type of lender willing to take on more risk than traditional lenders. They often have higher interest rates but can be a good option for businesses that don’t qualify for a loan from a bank.
7. Check Your Eligibility
Once you have narrowed down to a handful of lenders, you need to check your eligibility.
Most lenders require the following:
You must provide your social security number to apply for a business loan.
The lender will use this number to check your credit score and determine your eligibility.
Personal and business credit scores
Some lenders may be more lenient on credit scores. If you are looking for a small business loan, however, they may look more closely at your personal credit score.
Most lenders require a personal score over 600.
Many lenders have minimum monthly or annual revenue requirements you must reach so they can even consider you as a candidate.
Most financial institutions will ask you to make a minimum of $100,000 annually.
Lenders will ask to see bank statements to learn what your revenue is.
How you plan to run your business will play a prominent role in your eligibility. Lenders will want to know how you plan to manage your business with this potential financing.
Years in business and industry
The minimum amount of years in business will depend on the lender. Most banks require at least two years in business.
Business industry and size
If you want an SBA loan, ensure your business qualifies as a small and for-profit business.
The SBA will also ensure you are current on all ongoing and previous government-provided loans.
Plus, there are some industries whose applications lenders don’t approve.
At Camino Financial, we have lenient requirements for our loan process. Here are some examples of how we stack with the competition:
- We don’t require a business plan
- You only need to have an active and registered business for nine months
- You need an annual revenue of just $30,000
- If you don’t have an SSN, you can apply with your ITIN.
8. Gather the Required Documents
Depending on the type of loan you are applying for, there may be some differences in the documents required.
However, some standard documents are good to have in one place that is easy to access. This list includes
- The goals and ROI you expect to achieve with this loan
- How do you plan to pay it back (collateral)
- Both personal and business income tax returns from the past three years
- Financial statements include your balance sheet, income, cash flow, and bank statements.
- Accounts receivable and accounts payable
- Articles of incorporation
- Business licenses and registrations
- Copies of any contracts. This includes contracts with third parties, commercial leases, and franchise agreements
Also, consider if there are any industry-specific documents that a potential lender would like to see and add those to your list.
Some lenders, like Camino Financial, offer a completely digital process. This allows you to submit all documents online anywhere, anytime.
9. Submit Your Commercial Loan Application
It’s time to apply!
Depending on the lender, you can do it online or in person.
Visit the lender’s website and fill out an online form, or go into a branch and speak to someone in person.
Ensure you provide accurate information about yourself, your business, and your plans for the loan. Providing false information will hurt your chances of getting the loan.
Be prepared to send additional documents or information and verify your identity.
10. Wait for a Decision
The amount of time it takes to receive an answer will depend on the lender.
More traditional lenders often take several weeks to decide your eligibility and provide you with an answer. This timeline may also fluctuate if there is a collateral requirement.
If this is the case, you may need to wait for an appraisal of your collateral.
This adds to the time it takes to decide but will provide you with the amount and interest rates your business qualifies for.
#DidYouKnow At Camino Financial, you can receive an answer in a few days.
The next step is signing the loan agreement and making repayments if you receive loan approval.
If you are not approved, the lender will usually:
- give you feedback on why your application was unsuccessful
- tell you what you can do to improve your chances of receiving approval
Tips for getting a commercial loan
These tips will help you submit a successful loan application:
- Make sure your credit report is free of errors. Review your credit report to be sure everything is correct; if not, fix the errors.
- Be realistic. If you set an unrealistic goal (like turning a mom-and-pop store into a multinational in 6 months), the lender will think you don’t know how to run a business.
- Have a plan. Even if the lender doesn’t require it, writing a business plan is a good idea. It will be the road map to help you make sound investments and stay on track.
- Be sure to ask questions. Ask any questions you have before submitting your application. Having all the information upfront can help ensure that everything goes smoothly.
- Stay organized during the process. Keep track of the documents you submit and follow up with your lender periodically to ensure everything is going smoothly.
- Strengthen your credit score before applying. Try to improve your score by making timely payments on your existing debt or paying off past debt before filing a new application.
Why You Should Apply For A Business Loan
Help you keep ownership of your company
Other financing forms, such as selling equity, can mean letting other people take on some level of ownership of your company.
With a business loan, you maintain full ownership.
Submitting payments online can raise the credit score of your business
By making payments on time, you can improve your business’s credit score. This empowers your business to access more opportunities later.
Not all lenders report payments to credit bureaus.
There are a variety of loans available
Some examples you may have heard about include lines of credit and commercial installment loans.
Helping your business grow
When used wisely, business loans can empower you to expand into a new market, offer new products, or hire more employees.
While the upfront costs of these decisions can be high, a loan can help you pursue them sooner, leading to profitable and relatively fast growth.
If you have realized that a business loan is exactly what you need, we recommend applying with Camino Financial.
Our requirements, easy application process, and customer service differentiate us from the competition.
How hard is it to get a business loan?
The difficulty varies depending on the lender and your credit score.
If you have a strong business plan and a good credit history, you may be able to get approved for a loan easily. However, getting approved for a loan may be more difficult if you have poor credit or a weak business plan.
How do lenders decide interest rates?
This varies widely depending on how well your lender thinks you’ll be able to repay the loan. They check your cash flow, time in business, credit score, collateral, business plan, and required loan amount.
How can I get a loan to start a business?
If you only started your business, you likely won’t receive approval from a regular business loan. Fortunately, there are startup loans available for businesses in their early stages.
Startup loans usually have different requirements and terms.
What are the chances of getting a small business loan?
If you go with a traditional bank, the chances aren’t usually in your favor. They only approve about 27% of small businesses for the loan they apply for.
This is usually because small businesses are at higher risk than larger businesses and may not have a very impressive ROI.
It’s easier to get a loan with alternative and online lenders.
What is the average size of a small business loan?
According to the Federal Reserve, in 2017, the average size of a small business loan was roughly $663,000.
This number is lower for small business loans from alternative lenders, which average from around $50,000 to $80,000.
What credit score do you need for a business loan?
On average, to qualify for a business loan, you will need a credit score of around 680.
But this number varies by lender.
How can I get a business loan with no money?
If a business doesn’t have any proof of annual revenue, lenders may ask for supplemental documentation, such as
This helps show that the small business will still be able to repay the loan, even though they lack proof of annual revenue.
Can I get a business loan with bad credit?
Getting a business loan with bad credit is possible, though you may need to find a lender with flexible requirements. These lenders will only be able to offer higher interest rates or will ask you to provide some form of collateral.
How can I get approved for a business loan without collateral?
Getting approved for a business loan without collateral may be possible if you have a strong business plan and a good credit score. Or, you might need to pay a steeper interest rate.
Lenders will also look at your revenue, cash flow, and ability to repay the loan. If you can prove that your business is stable and profitable, you may be able to get a loan without putting up collateral.
How much income do you need to get a business loan?
Depending on the lender, the required revenue may be as low as $10,000 or above $30,000 a month. Every situation is unique, so it’s a good idea to review each lender’s guidelines before applying for a loan.
At Camino Financial, we ask you to have a monthly income of $2,500.
What bank is easiest to get a business loan from?
Each bank will be easier for different types and sizes of businesses to get loans from, so there’s no one size fits all answer.
That said, TD Bank seems to be an institution where it’s easy to get a loan. Other popular banks for small business loans are Citibank, Wells Fargo, JPMorgan Chase, and Bank of America.
What are the alternatives to getting a business loan?
There are a few alternatives to getting a business loan, such as
What are the most common business loan requirements?
First, businesses must prove their creditworthiness as part of the loan application process.
Your lender may ask for other documents, such as:
Finally, potential borrowers should always have at least 20% equity in the property they use as collateral or security.
What is the easiest loan to get approved for?
The easiest loan to get approved for depends on several factors, including:
With good credit and a steady income, several types of loans will be easier to secure approval.