How Do I Apply for a Small Business Loan?

You have the idea, you have the passion, you have the work ethic, but you’re missing the capital. What are your options? Small business loans can be intimidating, make no mistake about it. But with the right information and planning, the seemingly impossible and risky can become manageable and worthwhile.

First things first. What types of small business loans are available?

Not all small business loans are created equal. And that’s great news! Whether you are starting a new business or looking for more capital for your existing one, you have options.

• Small Business Line of Credit: Similar to a credit card, but you get access to cash. Interest is only charged when the funds are withdrawn.

• Accounts Receivable Financing: Your receivables work as collateral in securing you capital. The capital loaned to the business is less than or equal to the amount owed to your company.

• Term Loans: Typically for a fixed amount with a specific repayment period. This is often used for business operations, business expansion, or equipment.

• Working Capital Loans: A loan to finance the everyday operations of the company. These should not be used for long-term investments.

• SBA Small Business Loans: Here the U.S. Small Business Administration (SBA) guarantees a loan through your bank, thereby giving you lower interest rates and better repayment terms. The process is on the lengthier side, but if approved, it’s well worth the trouble.

• Small Business Credit Cards: A flexible option for companies with temporary cash crunches. Rewards and cashback programs can offset the downsides of it being a credit card.

• Equipment Loans: This loan option is secured by the equipment. Interest may accrue at a fixed or variable rate.

Choosing the Right Lender

Good news! There are more lenders than ever.

• Large Commercial Banks & Small Community Banks

Choosing the right banking partner can offer you higher credit amount and possibly better terms. Many banks (and bankers) will have specialized credit and risk appetite for business lending. If fact, engaging within different divisions of the same bank (i.e. small business, commercial, real estate, and SBA) can result in different levels of approvals. Ask around your professional financial advisors, industry professionals, and other entrepreneurs for possible referrals.
– Jason Lee, Founder and Chief Credit Advisor of Capital Link, LLC

Sure, you have your local bank or the Wells Fargo downtown as options, but divisions within those banks can offer different conditions. Also, remember that if the bank issues loans backed by the SBA, it can result in more favorable interest rates and terms.

• Direct Online Lenders

They’ve been called a “faster lifeline for small businesses” than banks by the New York Times. An option worth investigating for your needs.

• Peer-to-peer Lending Sites

Like direct online lenders, peer-to-peer sites are also increasing in popularity. Recipients have praised the ease and speed of the process.

Getting Organized

Now you have some things to do and prepare. Let’s walk through them:

1. Check your credit score

Remember that even if you pay your bills on time, there may be errors that can bring your score down. Check it at least once a year. (Annual Credit Report)

*Your personal FICO Score can range from 300 to 850; scores at 700 or above are considered good.

Lenders may also look at your business credit score through Experian, Equifax, Dun & Bradstreet.

*Your business credit score generally range from 0 to 100; scores of 80 or above are considered good.

2. Create or update your business plan

If just the idea of sitting down to write a business plan makes you quiver, you’re not alone! The good news is there are plenty of resources out there to help you nail this important document. If that’s not enough and the resources only intimidate you more, the Small Business Association has free business counselors for your area. Take advantage!

3. All those financial and tax documents you have? Organize them!

One of the simplest ways to save time and frustration is to get all financial and tax documents organized. The constant paper chase during the underwriting period can be frustrating for both borrower and the bank.
– Jason Lee, Founder and Chief Credit Advisor of Capital Link, LLC

These documents should include:

• Personal background
• Resumes
• Business plan
• Use of loan
• Time in business & business size
• Personal credit report
• Business credit report
• Personal & business income tax returns
• Financial statements
• Collateral
• Legal documents

4. Provide collateral

Think real estate, equipment, accounts receivable, and possibly inventory.

5. Good character and presence

Reputation and responsibility. Lenders will check everything from social media to Yelp reviews to professional references. The money may be for your business, but remember that you are the face of your business.

It comes down to you. You have the idea, you have the passion, you have the work ethic. Now go get that capital!