Doing your homework on the steps to get a small business loan will ease your frustration and greatly increase your chances of getting approved. By researching all the possibilities beforehand and focusing on what the best choices are for your particular situation, you’ll save time and aggravation.
What Is a Small Business Loan?
A small business loan is similar to standard financing, except that it is backed by the government. So, if the small business defaults on the loan, the government is on the hook as far as paying back the lender is concerned. Understand that there are multiple flavors of small business loans and researching all of the options will help you focus on the one that is right for you and will give you a far better chance to successfully close on a loan.
The government agency that it all starts with is the U.S. Small Business Association (SBA). However, the SBA (or the U.S. Government for that matter) doesn’t actually loan money to small businesses; it is simply the conduit that connects you to a pool of lenders. These lenders are traditional financial institutions, banks, credit unions and other lenders, all of whom have a relationship with the SBA.
There are many factors to consider when applying for a loan. One of the big ones is the SBA’s size standards, which has to do with the size of your business, your annual revenue and the number of employees. When reading this chart, you’ll notice that the numbers for these factors vary greatly from industry to industry. Other considerations include what you are planning to use the proceeds for, such as purchasing fixed assets, recovering from a declared disaster or working capital, to name just three.
Another aspect to consider are the personal circumstances of the business owner. There are certain loans based on these factors, as there are special programs for women-owned, minority-owned and veteran-owned businesses, among others. In addition, there are a few other eligibility requirements for obtaining a small business loan. These include operating as a for-profit business, maintaining a physical presence in the U.S. (or its territories), having equity (owner’s own time and/or money) put into the business and having exhausted all other avenues of procuring a loan.
The Steps to Take
The Steps to Take
Check your personal and business credit profiles, as these scores are vital factors in determining whether you’re considered financially responsible for qualifying for a loan.
Draft a business plan if you don’t have one or update your current one.
Familiarize yourself with SCORE. SCORE is a non-profit organization, dedicated to helping small businesses get off the ground, grow and achieve their goals through education and mentorship. Aligning your business with SCORE will allow you to tap resources from professionals who have vast experience in this area.
Qualifications for the loan
Understand what qualifications are necessary for a small business loan. As previously mentioned, there are a number of factors that are considered that are unique to your small business. In addition, you’ll need the standard type of documentation that you would for any other sort of loan. This includes having a business bank account, previous bank statements, official documents (business license, articles of incorporation, tax certificates, etc.) and any previous business tax returns, among others.
The right fit?
Determine the right fit for your loan. There are multiple types of loans, different rates and terms. Finding the right one for your unique situation is one of the ingredients for success.
Research which lender is the best fit for your business. There is a near limitless number of banks, credit unions, online lenders and even microlenders. This involves some shopping around but partnering with the appropriate financial institution will help the process flow more smoothly.
Submit your application
All banks and lenders have different policies on how to submit paperwork, whether online, mailed hardcopies or in person, so do whatever the lender requires.
The red tape and hoops you have to jump through to navigate the entire small business loan system can look daunting. However, performing due diligence and understanding the process will certainly help simplify the journey. The more you do up front will certainly help you move through things faster and give you a greater chance for success.
Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.
SBA – Loans
NerdWallet – How to Get a Business Loan in 5 Steps
Experian – How Do Small Business Loans Work?