How to Get a Small Business Loan: The Complete Guide

small business loan

According to a recent study, about 82% of businesses close due to cash flow issues. Cash flow includes the number of dollars coming in and going out of your business. 

You can experience cash flow issues if your business uses an invoicing system where the invoice isn’t paid until after loan payments are due. This can negatively affect your cash flow. 

But, with that said, did you know that more than one-quarter of small businesses claim they struggle to obtain the necessary finances to keep running?

Without enough financing, businesses can’t expand. They miss out on sales, and often have to layoff their staff. All these consequences help to kill their aspirations of running a successful company. 

So, the biggest question remains. How should small business owners proceed? The truth is, having knowledge is half the battle. First, you need to learn about all the available funding alternatives in the market. 

Then learn more about how you can make yourself more appealing to these lenders. With this information, you can start applying for suitable loans that benefit your business. 

The truth is, business loan applications are scary. You might be stumped on how to proceed, even if you have a desired lender in mind. This can be especially true if you’re seeking financing for the first time. 

The good news is that we’re here to make the process seamless for you. This ultimate guide should help you learn exactly what you need to know to obtain the right business loan for you. 

1. Decide Why Your Small Business Needs Financing

The WHY is an important question to ask yourself before applying for a business loan. In fact, every lender wants to know the reasons why you’re applying for a loan. 

Every small business owner has different reasons why they need financing. They may need merchant cash advance loans because they need immediate access to funds. This is great for businesses that accept card payments. Merchant cash advance loans are very flexible as the lender adjusts the deductions based on the season of your business for all future sales. 

While other businesses may require a loan to purchase a piece of equipment for their business, taking time off is necessary to assess your reasons for needing funds. This is essential as it influences the lender and the loan type you select. 

However, why you are applying for these loans may become a little hazy sometimes. You could have numerous reasons why you need the funds. For example, it could be that you need immediate access to funds to buy equipment for your start-up business, or that you need to consolidate your current debt. 

Lenders often engage clients who need business loans for various reasons. Below are some of the most common reasons small businesses apply for loans:

  • For starting a business.
  • The need to consolidate their business debt.
  • To cushion their business in case of cash-flow gaps.
  • For business expansion.
  • Buying office equipment.

2. Check Your Eligibility

Loan Application

The truth is, business loan requirements differ. Therefore, it’s essential to understand the type of financing that’s practical for your business. 

In short, you need to consider your eligibility, and determine what funding options your business may qualify for. This is essential as you begin comprehensive research on the lenders that you can approach. 

First, ask yourself what lenders will need before they approve your loan. This is crucial as it can guide you when applying for a loan. 

  • Your Credit rating: Your personal and business credit scores are the first things lenders check when you apply for a business loan. This can give the lender a clear overview of the possibility of you repaying the loan or not.  So, with a good credit score, chances are high that your loan will be approved with a favorable interest rate. 
  • A personal guarantee or collateral: While some lenders require a personal guarantee over your debt before approving your loan, other lenders demand valuable items, or collateral, they can seize in case you default. For instance, they can ask you to use your savings, valuable assets, or even your home as collateral. 
  • Business time of operation: Online lenders usually only require a minimum of one year in operation for certain loans. However, traditional bank requirements may be different. Sometimes, they can only finance businesses with a minimum of two years in operation. 

Don’t give up if you have only been running your business for a few months. Some online lenders can give you a loan with six-month business history.  But, if you’re applying for merchant cash advance funding, some online lenders may only require two months of time in business.

  • Annual income: The sum of your yearly sales is also another significant aspect that you should consider. So, make sure to ask the lender about the financial requirements before applying. 

3. Examine Different Types of Business Loans and Lenders

A decade ago, the only option you had when looking for financing was your traditional bank. However, today, there are far more possibilities you can choose from. Understanding the differences between the various loan types and lenders can be challenging.  

It’s vital to examine all the available options for business loans that best suits you before shopping for the best lender. This guide gives you an overview of the best small business loans suitable for your business. Here’s the breakdown:

1. Merchant Cash Advance Funding

This type of loan is also referred to as a business cash advance, and the merchant cash advance providers usually fund a business depending on its future credit card sales. 

As a business owner, you will need to pay the advance with interest as a percentage of your credit card sales until you pay it in full. 

A merchant cash advance for small businesses can be worthwhile, or a liability, depending on how you view it. This is because there is no predetermined payback period, as it’s funded by a portion of your credit card receivables. 

So this type of loan repayment depends on the number of credit card sales you can generate. Therefore, if the number is high, you can quickly pay back the advance; if it’s low, it might take a while before you clear the loan. 

A merchant cash advance could be ideal for you if you’re running a restaurant, a retail shop, or any other business that significantly relies on credit cards. 

Another added advantage is that you don’t need to make manual payments or have an excellent credit score to qualify for this loan. 

2. Small Business Administration (SBA) Loans

Almost every project can benefit from SBA financing. Most lenders prefer this type of loan as the SBA loan lessens their risk. 

This is because it’s more challenging for small businesses to qualify for this type of loan. Moreover, even after qualifying for the loan, the approval and funding process may take several weeks. 

So, what are the requirements for small organizations to qualify for an SBA loan? Small firms that have exhausted other funding sources, and have a strong credit score with at least two years in business get considered first. 

3. An Asset-Based Loan

This type of loan provides funding to small businesses with the help of collateral. For instance, you can guarantee your loan with your inventory or accounts receivable. 

The beauty of these loans is that they are easily accessible because it doesn’t have many qualification requirements. So, if you have short-term financial needs, this can be the ideal loan.

So, if you have viable assets that you can use as security, and need funding to keep your business afloat, this type of loan can be suitable for you. 

4. Gather the Documents You Need for Your Loan Application

Assembling the paperwork you need for your application is the next step in learning how to acquire a business loan. This step comes after examining all of your potential lenders, and your ideal funding method for your business.  

Almost every loan type, and small business lender needs a few similar pieces of information. But, the specific required documents are usually customized to the lender you’re working with. 

Here are some of the documents your lender may request from you: 

  • Tax returns for individuals and businesses.
  • Income and expense reports.
  • Business strategy.
  • Financial records.
  • Business permits.
  • Statements of personal and business finances.
  • Business constitutional documents.

5. Complete Your Loan Application

Loan Application

Finally, you need to submit an application for a small business loan. Depending on your preferred lender, you can do this in person or online. 

Here are some of the details a lender might request:

  • Your official names.
  • The name of your company.
  • Your Social Security Number (SSN).
  • The ideal loan amount.
  • The objective of your loan.
  • Your business tax ID.
  • Your annual revenue.

After completing the submission process, the last step is to wait for an approval decision. After the loan approval, you need to sign a loan agreement from your lender before receiving your funds, or a line of credit. 

Final Thoughts

It’s not always simple to figure out how to secure a small business loan, but your chances of obtaining a business loan—and an affordable one—increase significantly if you invest the time and energy required to manage your personal and business finances.

Now that you know, make sure to compare loans and lenders once you’ve done your best to prepare, and are ready to begin your search to guarantee you’re getting the best and most reasonable loan for your business.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.