Finding a Business Loan
Running a small business presents financial challenges in the best of times, but these problems are amplified during a pandemic. According to the 2021 Small Business Credit Survey by the Federal Reserve, 80 percent of companies experienced financial challenges in the past 12 months. This is a significant increase from 2019 when only 66 percent of firms experienced financial struggles.
While 62 percent of these business owners tapped into their personal funds to cover their costs, others sought out funding through loans and grants. Whether you want to rebuild your finances after the COVID-19 pandemic or simply want to launch your new idea, a business loan can give you the working capital you need.
If you want or need to apply for a business loan, use these steps to understand the application process.
Gather Your Financial Information
Banks and other creditors will determine your loan terms based on your current finances. The better your credit and higher your income, the better your terms will be. When you shop around for different loan providers, they’ll all ask for the same information, so you can save time by gathering this information and keeping it on hand.
Here are some documents to keep close by during the loan application process.
- Cash flow. Lenders want to know that you can pay them back. Pull copies of your bank statements and any documents that offer proof of income. If you currently own a business, you will likely need to share your most recent balance sheets and profit and loss statements (P&Ls) to show that your business is profitable.
- Time in business. Most lenders will only lend to companies that have been open longer than one year. Gather documents for your licenses and state LLC registration to show how long you have been in business. You can also use your business tax returns for this.
- Collateral. If you plan to borrow against your assets, you’ll need documents proving their value. For example, you may need to submit the sales documents of a fleet vehicle if you want to use it as collateral. If you can’t make the payments, the lender may be able to seize these assets.
Different lenders may ask for specific documents related to your business during the loan process. Use this list as a jumping-off point for starting the loan discussion.
Shop Around for Lenders
When you have your documents ready, you can start meeting with lenders about potential business loans. Your job is to evaluate the different financial institutions to see which one provides the best loan option for your needs. Here are a few places to look:
- The Small Business Administration (SBA). This is the federal lending arm of the United States government. They offer emergency response loans, equipment loans, and microloans under $50,000.
- Your current bank. Some banks and credit unions offer better interest rates to existing customers. You may be able to save money by applying for a loan from them.
- Competing banks. Even with a discounted interest rate, your bank might not offer the best deal. Evaluate loan terms from two or three other institutions to compare.
- Online lenders. Consider national lenders that support small businesses. Your best loan rates may even be found online.
This research process can help you find lower interest rates and better payment terms before you get into a loan agreement. Keep an eye out for hidden fees and other charges that can drive up your costs before signing on the dotted line.
Keep the Application Process Moving
Each lender has different requirements for loan approval and different speeds for the underwriting process. Once you choose the best lender for your needs, it’s time to start the application process—but simply filling out the application doesn’t mean you’re almost there.
It often takes weeks, if not longer, to get an application completed and approved. For example, an SBA loan can take 60 to 90 days to get approved for funding. As with every step of the loan process, ask for clarity upfront about this timeline. This ensures you can keep track of the timeframe and plan appropriately for the use of your loan.
A simple way to speed up the application process is to be responsive to your lenders. When they ask for supplemental documents, provide them as quickly as you can. Even waiting a few days to respond can push back your timeline to receive the loan.
Get Your Business Loan
Once the funds clear your bank, the loan is yours allowing you to improve your infrastructure, scale your business, or even launch a franchise. If 202 was a hard year for your business, you can even use it to pay off invoices and catch up on overdue expenses.
Don’t forget to make your loan payments on time each month. This will allow you to stay in good standing with your financial provider while protecting your credit score. The next time you need a loan for your business, you can show a reliable history of making loan payments, allowing you to get the help you need.