Starting From Scratch: How to Get a Business Loan

How to Get a Business Loan

You have an idea for starting a business. You begin to put the plan into action by thinking about equipment, supplies, employees, or advertising. You realize that your business needs money upfront: money that you don’t have. So now what?

It’s time to consider a business loan.

Keep reading to learn how to get a business loan to pump money into your business. Your success and failure could rest on getting adequate funding.

How Is a Business Loan Different?

Many people are familiar with the process of getting a home loan or a car loan. Business loans are different from these loans in that no two loans are the same, just like no two businesses are the same.

Home loans or car loans (also called consumer loans) are more straightforward. Lenders look at the borrower’s income, how much other debt that borrower has, borrower’s history of paying back other loans.

Collecting this information is relatively easy. Paystubs or tax returns prove income. A credit report shows credit cards, other loans, and whether those obligations have been paid on time.

With a business, this is a bit more nuanced – particularly for a new business. The lender still wants to know how the loan will be paid back. But the business may not have a steady income yet.

What Type of Loan Is Right for Your Business?

Unlike a consumer loan, business loans are structured in many different ways. You need to decide the type of loan that will help your business grow and make sense in terms of repayment. 

Here are some common types of business loans:

  • Accounts Receivable Financing: Also called invoice factoring, these loans allow you to advance the cash from your unpaid invoices
  • Equipment Financing: The proceeds of the loan are used to purchase equipment, with the equipment used as collateral for the loan
  • Line of Credit: This loan functions much like a credit card, where you have access to an amount of money to draw upon as needed
  • SBA Loans: The Small Business Administration is a government organization that works with approved lenders to provide loans to borrowers
  • Term Loans: Term loans are for a fixed loan amount for a fixed period of time. They can have a variety of purposes and payment structures.
  • Working Capital Loans: These loans are to cover the operational costs of the business, especially when the business is short on cash

Of course, other types of business loans are available, and each lender has different options. When deciding the right type of loan for your business, you will want to consider the purpose of the loan.

Is it to cover the cost of purchasing new equipment? Does a lot of time pass before borrowers pay their invoices? Does the business have seasonal dips in sales, meaning there may be issues with cash flow?

How to Get a Business Loan

Fortunately, business lenders are knowledgeable in working with borrowers who are seeking loans.  However, it still helps to know what to expect during the loan application process.

1. Know How Lenders Approve Loans 

Many lenders still consider the “5 C’s of Credit” when evaluating a business loan.  While each loan must be considered on its own merit, the “5 C’s” provide a tried and true baseline for evaluation.

Character: Does the lender feel the borrower is trustworthy? Lenders have to believe that the borrower is motivated to repay the loan.

Capacity: Does the borrower have the ability to repay the loan? The business needs to produce enough cash to make payments.

Capital: Does the owner have some money invested in the company? This shows “skin in the game.”

Conditions: Is the business growing or struggling? Are there outside factors that are impacting the business?

Collateral: Is an asset being pledged to secure the loan? This reduces the risk to the lender.

Each lender is unique in how they approve loans, but the 5 C’s of Credit can give you some general guidance on what lenders use to evaluate business loan applications.

2. Know Your Business Credit Score

Much like consumer loans, lenders for business loans also need to determine how the loan will be repaid. This is called the creditworthiness. One method of determining creditworthiness is a business credit score

Much like a consumer credit score, a business credit score reflects many of the same factors, such as:

  • Repayment history
  • How much debt the business has
  • Age of the oldest obligation
  • Size of the company
  • Risk of the business’s industry

New businesses can work to build their credit score over time. By obtaining loans, the business can begin to show a history of making timely payments.

3. Submit a Business Loan Application

Once you have decided on the type of loan you need, you can submit an application to a lender.

A business loan application will typically need you to identify the following:

  • The legal entity type of your business (Sub S Corp, LLC, Sole Proprietor, etc.)
  • The type of loan you are seeking
  • The loan amount
  • The purpose of the loan
  • Other information that lender requires

Once the loan application is received, the lender will contact you regarding the next steps in the process.

4. Provide Documentation

The lender will likely require you to submit some supporting documentation with your application. Typically, these documents include financial statements, tax returns, and proof of legal organization.

Providing the documentation quickly will make the application process go more smoothly. Being prepared with the documents that are commonly requested will allow you to respond promptly to the lender.

Finding the Right Lender to Approve Your Loan

Knowing how to get a business loan is the first step. Applying for a loan is the next step in growing your business

You could submit your application to a traditional bank. Without knowing if the loan will be approved, you may need to submit multiple applications.

Or, you can submit an application to a pool of lenders. Doing this saves you time and allows you to easily compare offers for your business loan.

{Client Call-to-Action Here}