A business loan can provide the funds you need to expand operations, cover day-to-day expenses, and purchase equipment or inventory. If you’ve never applied for a business loan, you might be unsure where to begin or which documents are required.

Here’s a simple guide that walks you through evaluating your options and preparing your business loan application in five easy steps.

1. Decide Why You Need Financing

There’s more than one kind of small business loan. Deciding why you need financing will help you choose the right kind of loan. Here are a few common scenarios:

  • Buy new equipment. Some lenders offer equipment loans. This type of loan is designed to help you purchase business equipment, like machinery or office furniture. The loan is secured by the equipment, so the lender can seize it if you fail to repay the loan.
  • Borrow a small amount of money. If you need to borrow a small amount of money, consider applying for a microloan. The U.S. Small Business Administration (SBA) has a Microloan program that allows qualified applicants to borrow up to $50,000. In addition, there are not-for-profit organizations that offer microloans, such as Kiva and the Women’s Microfinance Initiative.
  • Establish a business. Since most lenders have minimum time in business requirements, it can be tough to find one that will issue you a startup loan for a new business. If you’re just starting out, you may have to apply for a microloan or a business credit card. You may find it easier to qualify for a business credit card than other types of business loans since approval is based on your personal credit score.
  • Pay for day-to-day operations. A working capital loan—a short-term loan used to cover daily expenses, like rent and payroll—can help you cover temporary cash flow problems.
  • Borrow money on an as-needed basis. If you don’t know the exact amount you need to borrow, a business line of credit could be a good option. Once a lender issues you a line of credit, you can withdraw funds up to a certain amount to cover business expenses and only pay interest on the amount you borrow

2. Check Your Eligibility

Although business loan requirements vary, here are four things lenders are likely to consider when reviewing your small business loan application:

  • Credit score. When you apply for a business loan, a lender will review your personal and business credit scores. They help the lender assess the likelihood you’ll repay your loan. In general, the higher your credit score, the greater your chances of loan approval and receiving a low interest rate.
  • Collateral and/or personal guarantee. Some lenders require you to pledge collateral—something of value, such as equipment or inventory—it can seize if you default on the loan. Some lenders may also require a personal guarantee, meaning you have to secure the loan with personal assets, such as your savings, home or other valuable possessions.
  • Time in business. A traditional bank typically requires a business to have been in operation for at least two years, while an online lender usually requires only one year. If you’ve been operating your business for less than one year, don’t get discouraged. Some online lenders will approve qualified applicants who have only been in business for six months.
  • Annual revenue. Your total annual sales are also a relevant factor. Before applying, ask a lender what the requirements are and review your business finances to see if you meet them.

3. Compare Business Lending Options

There are several places you can find small business loans. Here are three of the most common types of lenders.

Online Lenders

Online lenders offer a variety of loan products to small business owners, including term loans, merchant cash advances, lines of credit and microloans. Loan approval rates were higher for online lenders than traditional banks as of 2019—80% versus 74%, respectively—according to a 2019 Small Business Credit Survey by the Federal Reserve.

One reason for this is that online lenders often have less stringent requirements than traditional banks. As a result, you may find it easier to get approved for a business loan with an online lender if you have less-than-stellar credit. In addition, online lenders often have much faster turnover—some may issue funds as soon as the same business day.

A major downside of taking out a business loan with an online lender, however, is that it often charges higher interest rates than a traditional bank.

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