In this article, we’ll present you with a simple explanation of how to get a small business loan in just six steps. Small businesses are an integral part of the economy, but navigating the process of securing a loan to start one can be intimidating if you don’t know where to begin.
Most small businesses will need to get approved for financing, and sometimes banks aren’t always willing to give a loan to small businesses or start-ups. This is why breaking it down into six manageable steps will help you better understand the qualifications for receiving a loan and help you secure the funding you need.
1. Decide what type of loan you need to fund your business
The good news is there are multiple sources you can get a loan from to start your business.
Since small businesses are considered high-risk borrowers, you will need to make sure you have an air-tight business plan and look at lenders willing to work with you to supply a small business loan. The following are some of your options:
- Credit unions are one of the many options business owners can look towards when financing is needed. These institutions are privately owned by customers so you’ll need to become a member, have a good credit score and collateral, as well as a business plan to present to them.
- are flexible funding options that let you use the funding on an as-needed basis. This type of loan can be used as a safety net to cover unexpected expenses such as repairs or cover your staff’s payroll.
- Microloans are offered by financial institutions to business owners if they’re having a difficult time securing a normal loan for their company.
- Small business (SBA) loans are traditional term loans that have a high borrowing maximum. Lenders will offer specific products to help you grow your business under an SBA loan, like purchasing or improving business equipment or even a vehicle for yourself or staff members. Small business loans in Canada may also be referred to as Canada small business financing.
- Startup financing is made up of business credit cards and personal loans, however, lenders will require a steady cash flow to support the specific terms and conditions of the loan.
- Community loan funds are offered by non-profit organizations to help people start their businesses when they cannot acquire a loan from a bank.
- Online lenders are a great option if you need to get your loan approved quickly. This is a different and more streamlined way of financing your new business.
Before you go after a loan, you’ll want to conduct research, determine the interest rates on the loan, and look into which option is the best fit for your new business.
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2. Find out if you qualify for a business loan
There are several things lenders look at before approving you for a loan, including:
- Your personal credit score. Borrowers with credit scores above 680 are more likely to receive a loan from a bank. If your credit score falls below this, you will need to look at a microlender. Your personal financial history will affect this.
- How long you’ve been in business. Most online small business loans will require you to have been in business for at least a year or two before you can qualify for a loan.
- Your business’s annual revenue. Lenders will require a minimum annual revenue before qualifying. If you fall below their requirement you can look for a short-term loan or SBA microloan.
Related: What is the easiest business to start with no money?
3. Determine the payments you can afford
You will need to look carefully into your business’ financials, and consider how much you can comfortably afford to pay towards your loan repayment each month. Some loans will require a personal guarantee of a daily amount, and others will be a monthly set repayment, so you’ll need to choose what works best for your business.
4. Determine if you need to collaterize the loan
Some loans will require collateral, like personal property, that the lender can seize if the loan isn’t repaid. While this is risky, it lets you borrow a higher amount at a lower interest rate. This kind of personal guarantee means you will pay back the loan if your business is unable to.
5. Gather your documents
Before you apply for your loan you will need the following documents ready:
- Business and personal tax returns and bank statements.
- Business financial statements.
- Business legal documents, such as your commercial lease or articles of incorporation.
- Business plan.
6. Apply for a loan
Now that you’ve decided which loan is the best for your business, you can apply. We recommend that you compare several similar options from a couple of different lenders before making a decision. It’s also important to consider the annual percentage rate, this will let you know the final yearly repayment amount.
Starting a company is an exciting adventure, but it can be complicated. Before securing your business loan you’ll need to look into multiple factors and determine which option is best for your specific type of business.
The right business insurance plan can mitigate some of these problems as you head into your loan application. Get a quote and buy your business owner’s policy plan today with APOLLO.
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