Steps to Follow When Getting a Small Business Loan

Applying for a small business loan can be tricky, especially if you do not know what you are doing. There are many documents that you have to prepare and a lot of research to pick the best SBA loan programs.

There are also a lot of other things to consider, one of which is what business you plan to put up. If you plan to borrow a large amount of money, your business should be able to cough it up in the future, otherwise, you wouldn’t be able to pay your loan. A sound business idea and a plan are needed first and foremost before you proceed with applying for a small business loan.

Hopefully, this guide can give you an idea of what you need to prepare and do to apply for a business loan from an SBA loan company.

Know Your Lenders

Being prepared for all the things that might happen during the application process can go a long way in helping you secure your needed money. The first step is getting to know the small business loan lenders that you will borrow money from. If you haven’t found a specific lender, then you should prepare a checklist of what you expect and want from a business lender that you will do business with. This article about seven common misconceptions and facts about small business administration loans can help give you an idea of what to expect from the lenders.

Another thing you should look into is the criteria that the lender is looking for when they approve business loans. Here are the basic things that SBA loan providers will expect from their clients.

1. The loan you will be asking for should only be for business purposes and not personal reasons. The firm you will be borrowing from will probably ask for your business plans, so prepare these things already.

2. Good character. The lender must know if you will be able to pay them the borrowed money. So they expect the borrowers to have a good character with no history of poor credit.

3. Depending on the amount of money you will borrow, the lenders will need a collateral, whether business or personal, to ensure that you will pay back the money you have borrowed.

What Do you Need the Money for

As mentioned above, you need a pretty strong reason for why you are borrowing money from an SBA loan program. Without this purpose, your chance of being approved is lower. Here are some pretty strong reasons why you should loan money for your business:

1. You have been wanting to build a startup business but do not have the capital to do so. As long as your business idea is a comprehensive one and you believe it will succeed, then you should apply for a business loan. According to the latest report from Small Business Administration, about 66% of small businesses succeed in the first two years.

2. Small business loans are not just for startups. You could also use this to expand an already existing business. An example would be to develop your kitchen if you own a restaurant. Or you want to rent the available stall next door to expand your boutique. The expansion also means that your business is doing well, so you will be able to pay back the money that you borrow.

3. Increase working capital. Like the expansion, you could also apply for a business loan if you want to have more money to manage your daily operations. Until you could meet your daily operational needs, supplementing your working capital is a good reason to get a business loan.

How Much Money Will you Need

Now that you know what you will use the money for. It’s time to know how much money you will need for whatever you want to do. You could develop a budget to have an idea on how much money you should apply for. This budget will help guide you on the amount of money you will need and it will also show your small business loan provider where you will use the money. The amount of money you will borrow will also determine the type of loan that you will get. Read this article about the things to consider before finding the right business loan.

Here are the types of loans that you could apply for:

1. General Small Business Loan. This is also called the 7(a) Loan Program. This is the most common type of loan that SBA loan programs This includes financial assistance for businesses with special eligibilities depending on what the businesses will use the money for.

2. Microloan Program. This kind offers small loans, the maximum is $10,000, for short-term business concerns. This is also available for nonprofit centers.

3. Real Estate and Equipment Loan. This is also called the CDC/504 Loan Program provided for business owners who need to borrow money to acquire fixed assets like real estate and equipment.

4. Disaster Loans. The best SBA loan programs offer disaster loans to any business and organization who have been affected by declared disasters.

Know Your Credit Score

A credit score is used to gauge how creditworthy a person is. Although most SBA loan companies look more than the credit score to determine the ability of a borrower to pay back the money borrowed, they still look closely into it. Here are the things that most lenders look for in their clients:

1. Credit score. A score of 600-700 is already acceptable but a range of 700-800 will gain you more points in the eyes of the lender.

2. Debt to Income ratio. This is your personal debts, and your debt should be 33% or less of your monthly income.

3. Age of Business. Most lenders will favor businesses who have been in operation for two years or more and have a consistent income.

4. Industry risk. The industry risk is a rate the government gives to industries based on SIC codes. You can check the industry risk of your business before applying for a loan.

5. Cash Flow. If you have a high, regular cash flow, your chance of getting approved when asking for a loan is also higher.

Find a Lender

The next step, and a very important one, is to find the perfect lender. This might be difficult but not impossible. You could aid your search by reading reviews of SBA loan programs found on review sites on the internet. The type of lender you will pick will depend on the type of loan that you have chosen. Here are some of the types of lenders that you can approach for your loan:

1. Commercial Banks. You could go to a commercial bank to ask for a business loan but if you are planning a startup, you might not get approved here. They have very strict requirements and favors large businesses and corporations.

2. Non-Bank Lenders. According to Forbes, there are about 28 million small businesses in the United States alone. With the increase in the number of small businesses, non-bank lenders are also increasing. Although they have the tendency to charge high interest rates.

3. Rural Banks. There are banks in local communities that offer loans for small businesses because it also helps with the local economy.

4. Alternative Lenders. This is where SBA loan providers come in. Crowdfunding also falls under this category.

Prepare the Loan Application

Once you have chosen your preferred lender, they will give you a loan package to fill out to start the application process. Read small business loans reviews to have an idea on what a specific company will ask for in their loan package. This package might differ from lender to lender but, generally, it includes:

1. Your business plan. The lender will ask for this to get an idea on what you will do with the money and if you might be able to pay it back in time.

2. Your resumes. Lenders will look at your capability to handle a business so they can know if you know what you are doing. If you have a partner for your business endeavor, you also have to provide their resume.

3. Financial reports. This includes the projected profit and loss, cash flow statements and the balance sheet.

4. Your personal financial information which includes your tax returns.

Before submitting the application package, read the article about how to convince an SBA loan provider to finance your business to have an idea on what you could do to increase your chances of approval.

Wait for Approval

Lastly and probably the hardest part of the process is the waiting. Depending on the lender, the waiting time could span from two to four weeks. During the waiting time, the lending company might also ask for supplementing documents, so you should prepare those when they ask for it. You could call the lending firm weekly to know the status of your loan application.

Thinking of applying for a small business loan? Read the reviews at CrowdReviews.com first to know which lending companies you should go for.