How To Get a Loan to Start a Small Business

Choosing the Right Loan Options to Kickstart Your Small Business

Posted 8 months ago by Max Komonov

Starting 껸桂small business in桂this day and桂age often seems like 껸桂daunting task. One of桂the桂most difficult aspects of桂getting ready to桂launch 껸桂business is桂finding 껸桂business loan that meets your store�셲 needs and桂target budget. Luckily, online platforms have completely changed the桂stuffy way lenders traditionally approach business loans.

If桂you�셱e looking to桂kickstart 껸桂small business online without the桂headache, there are 껸桂few simple steps to桂ensuring 껸桂smooth glide path to桂success.

Getting Started

Regardless of桂where you go桂to桂acquire financing for桂your business, there are 껸桂few key factors that any桂lender will look at桂when sizing up桂your business platform for桂껸桂loan. Some lenders won�셳 lend to桂sole proprietors.

Establishing your business as桂껸桂legal entity, like an桂LLC, can make it桂easier to桂access financing and桂could even help lessen lender bias, as桂껸桂recent study in桂the桂 suggests.

First, let�셲 look at桂what lenders look at桂when sizing up桂your business platform.

Do桂You Qualify?

Most lenders like to桂see 껸桂business startup that has already proven its drive to桂succeed. It�셲 possible to桂get 껸桂business loan without revenue, but it�셲 challenging.

Lenders typically want to桂see 껸桂flow of桂revenue and桂profit, but they may consider other factors when deciding whether to桂lend to桂껸桂startup, such as桂껸桂well-written business plan, 껸桂good personal credit score or桂an桂innovative business idea.

If桂you�셶e already started 껸桂store with 붚죕쳔, take 껸桂look at桂past and桂current sales to桂provide lenders 껸桂timeline of桂your repayment options. Lenders are going to桂want to桂see your cost vs. income ratio to桂be桂sure your business has the桂appropriate potential income.

Look at桂Your Credit History

Without substantial revenue and桂time in桂business, lenders will primarily look at桂your credit score to桂assess their risks. The amount you�셱e approved for桂is桂usually determined by桂your personal credit score, business credit score (if applicable), time in桂business, annual revenue and桂debt-to-asset ratio.

The minimum credit score for桂껸桂business loan typically ranges from , depending on桂the桂lender and桂loan type. Traditional banks (around 680桂or桂more), while alternative lenders may accept lower scores (500-600).

Of桂course, lenders are willing to桂look at桂other factors, including:

Age of桂credit history
Amount of桂derogatory remarks
On-time payment history
Your ratio of桂used credit

Even if桂your credit is桂not currently where it桂should be, traditional lenders may be桂willing to桂give you 껸桂chance with 껸桂proper and桂realistic plan for桂growth.

Does Your Store Have Income?

If桂your store has been in桂business for桂껸桂while, lenders may want to桂see your track record.

Normally, lenders will want to桂know that you�셶e earned 껸桂minimum of桂$50,000桂by桂the桂end of桂your second year. Without this, their decision will most likely fall on桂your credit score and桂collateral.

What Do桂You Have to桂Offer?

Offering some type of桂collateral is桂껸桂great way to桂catch 껸桂lender�셲 attention. Some of桂the桂most popular forms of桂collateral are homes, land, vehicles, and桂potential assets.

If桂you have something that the桂lender can use for桂security, this will drastically increase your chances of桂securing 껸桂loan with 껸桂lower APR.

Why Do桂You Need Money?

Any lender is桂going to桂want an桂explanation of桂how you plan to桂use your loan. You will need 껸桂concrete estimate of桂the桂exact dollar amount required to桂finance your goals.

For example, if桂you plan to桂fund operating costs and桂miscellaneous expenses, plan how long it桂will take to桂recoup those funds.

Check Out Your Options

You�셪l want to桂examine multiple lenders and桂loan opportunities before settling for桂your first option.

However, as桂long as桂you do桂your research, you can find plenty of桂finance options to桂kickstart your business goals.

Business credit cards

Credit cards are great for桂smaller loans because of桂the桂fixed interest rates and桂flexibility in桂how much you borrow. Special credit cards allocated to桂business expenses also help you when differentiating business spending from personal spending.

Online lenders

This is桂often the桂best option if桂you decide to桂keep your business on桂an桂online platform like 붚죕쳔. With decent credit and桂an桂established revenue source, you could see 껸桂loan with an桂.

Collateral is桂rarely required with online lenders, and桂your funds are more easily accessible in桂껸桂shorter period.

Traditional banks

A桂traditional bank is桂most often the桂hardest loan to桂get.

They will likely require at桂least two years of桂experience growing and桂maintaining steady revenue, and桂most banks require 껸桂much higher credit score and桂collateral.

However, 껸桂traditional bank will also most likely have the桂lowest as桂long as桂you qualify.

The easiest banks to桂get 껸桂personal loan from are USAA and桂Wells Fargo. USAA does not disclose 껸桂minimum credit score requirement, but their website indicates they consider , so桂even people with bad credit may be桂able to桂qualify.

Microlenders

These lenders typically work with small businesses that are new or桂have bad credit. Generally, they lend 껸桂maximum of桂, and桂they will want 껸桂detailed plan for桂business growth and桂revenue sources.

Because these lenders work with clients that are considered high risk, they usually come with higher APR than traditional banks. However, they do桂not always require collateral or桂established credit.

Small business (SBA) loans

The SBA 7(a) loan is桂the桂most popular small business loan because it桂covers 껸桂range of桂general expenses like working capital, inventory, payroll, equipment and桂more.

In桂addition to桂meeting the桂numerical standards, your business must:

Be桂껸桂for-profit business of桂any桂legal structure.
Be桂independently owned and桂operated.
Not be桂nationally dominant in桂its field.
Be桂physically located and桂operate in桂the桂U.S. or桂its territories.

SBA loans require 껸桂down payment. The minimum loan down payment requirement is桂10% for桂7(a) and桂504桂loans, although this amount can vary based on桂껸桂business�셲 cash flow and桂collateral.

For example, weak cash flow or桂low-value collateral can increase the桂down payment requirement to桂30% of桂the桂loan amount.

Microloans

A桂microloan is桂most often the桂best loan for桂small businesses.

Funds can be桂used for桂working capital, equipment, inventory or桂other common startup expenses. SBA microloans typically have more lenient credit requirements than other lenders, focusing on桂underserved business owners like minorities, women, veterans or桂low-income entrepreneurs.

SBA Express Loan

This term loan or桂line of桂credit offers fixed or桂variable SBA loan rates as桂well as桂the桂easiest application process, quick approval times, flexible terms, and桂lower down payment requirements than conventional loans.

Term loans

Term loans are among the桂most common types of桂business funding.

These loans can be桂secured or桂unsecured, with the桂amount available often contingent on桂the桂business�셲 credit history. Borrowers receive 껸桂lump sum of桂capital upfront, repayable with interest over an桂agreed-upon period.

Be桂Prepared for桂껸桂Direct Approach

One of桂the桂most important steps in桂securing 껸桂loan is桂preparing 껸桂detailed business model for桂your potential growth and桂cash flow.

Lenders want to桂see evidence that you have 껸桂plan for桂success and桂will follow through.

Prepare your documents

On桂top of桂your business model, you will need several business documents to桂secure 껸桂loan with most lenders. These may include:

All tax documents for桂your business
Personal tax return documents
Financial statements for桂your business
Any legal documents you have for桂business operations
Plan for桂business expenses vs. projected income

Have these ready before contacting the桂business. Coming in桂fully prepared will inspire more faith and桂confidence in桂your business potential.

How long have you been in桂business?

If桂you are fresh on桂붚죕쳔, you may have only been in桂business for桂껸桂few days, weeks, or桂months, but you may still qualify for桂껸桂business loan.

Lenders typically want to桂see established businesses with at桂least two years of桂documented income. However, with great credit and桂collateral, this may not be桂necessary.

If桂you are on桂this online platform and桂do桂not currently have collateral, there may be桂online lenders still willing to桂work with you. Of桂course, if桂you�셶e generated revenue, that�셲 껸桂great start, but online lenders understand that sometimes loans are necessary for桂building your business.

What expenses are essential?

Lenders want to桂see what their money will be桂funding.

Of桂course, this guarantees that their money will not be桂buying someone 껸桂yacht instead of桂funding 껸桂business. However, it桂also shows them that you can plan and桂coordinate everyday business operations.

Come to桂your lenders with 껸桂detailed outline of桂current and桂projected business expenses and桂what type of桂revenue those expenses generate. This includes the桂cost of桂daily business operations, as桂well as桂the桂cost of桂producing your products and桂services.

Go桂Ahead and桂Apply!

You�셶e put in桂the桂work and桂time, so桂now it�셲 time to桂contact 껸桂lender. If桂you have decided to桂pursue online options, log into your chosen platform with your plans in桂hand. Then, fill out any桂required forms, and桂then finally, hit that submit button.

For lenders with 껸桂physical location, call and桂set up桂an桂appointment, dress the桂part, and桂prepare to桂answer their questions thoughtfully. Again, present your best self to桂establish 껸桂good rapport with your potential lenders. With 껸桂solid plan and桂honest confidence in桂your success, nothing can slow you down!

What to桂do桂When Your Loan is桂Rejected

It桂may happen that your application for桂껸桂business loan gets rejected. This is桂not unusual. In桂fact, according to桂the桂, 22桂percent of桂employer firms were denied business loans in桂the桂past 12桂months. Another 28桂percent were only partially approved.

Economic pressures and桂an桂increasing per-capita debt in桂the桂U.S. is桂causing lending standards to桂tighten and桂denials may increase in桂the桂future.

Possible Reasons for桂Denials

First off, the桂most important thing is桂to桂find out why your loan application was rejected.

More often than not, rejection letters are very general and桂may not give the桂exact reason. Key is桂to桂reach out to桂the桂lender and桂get their exact concerns.

Some of桂the桂most common reasons for桂denial are:

Bad credit
Too much debt
Not enough collateral
Not enough cash flow
High-risk industry
Bad Credit

If桂your credit is桂poor or桂bad, lenders may conclude that you have trouble managing your finances. Collections, charge-offs and桂defaults on桂loans are red flags for桂any桂lender.

The solution is桂to桂start rebuilding your credit by桂making 껸桂series of桂on-time payments and桂get rid of桂collections. Key is桂to桂get 껸桂copy of桂your credit report from the桂three credit bureaus and桂see if桂you can dispute any桂errors and桂inaccuracies.

It�셲 껸桂common fact that most credit reports have incorrect information and桂correcting the桂inaccuracies can gain 20桂points or桂more. But essentially, the桂best remedy is桂to桂build your credit with on-time payments.

Too much debt

Lenders view excessive debt as桂껸桂risk because it桂can lead to桂default. And if桂you default on桂껸桂business loan, the桂lender may seize business or桂personal property.

If桂your denial is桂based on桂too much debt but you do桂have more income or桂껸桂collateral, you can renegotiate your loan. You can also lower your existing debt by桂negotiating with creditors for桂껸桂favorable pay-off, or桂lower payments.

Another option is桂to桂consolidate your loans and桂payments.

Not enough collateral

A桂collateral is桂used as桂껸桂means to桂repay the桂loan if桂your business no桂longer can make payments. But if桂the桂value of桂your assets doesn�셳 cover 껸桂significant portion of桂the桂loan, 껸桂lender may deny the桂application.

When this happens, you can turn to桂unsecured loans, short-term loans or桂loans that rely on桂your future income instead of桂collateral, invoice financing, invoice factoring and桂other such options.

Not enough cash flow

Lenders may deny 껸桂business loan if桂your level of桂revenue doesn�셳 support repaying the桂loan in桂addition to桂your other business expenses.桂 Lenders typically set the桂minimum amount of桂revenue between $100,000桂and桂$250,000.

At桂the桂same time, the桂exact amount of桂cash flow that lenders consider reasonable is桂subjective. To桂get approved with low revenue, search for桂lenders that have more lenient requirements.

Online or桂alternative lenders are typically more flexible if桂you are only looking for桂껸桂business loan of桂$100,000桂or桂less.

High-risk Industry

Some lenders consider certain industries 껸桂higher risk, due to桂the桂odds of桂failure or桂unstable revenue. For example, restaurants and桂real estate businesses may fall into this category. Most lenders will list the桂excluded industries on桂their websites or桂in桂the桂fine print of桂the桂application.

If桂you are unsure whether or桂not your business falls into 껸桂high-risk category, contact your lender and桂find out what exactly their objections are. It桂may be桂that there is桂some misconception about your business which can be桂set straight, so桂you can reapply.

If桂not, there are many alternative lenders who don�셳 have the桂same industry restrictions, but they may come at桂껸桂higher price due to桂higher interest and桂fees.

Overall

If桂the桂reason for桂the桂loan denial is桂something you can�셳 change immediately, you can look for桂lenders that will take your business in桂its current state.

Every lender sets requirements for桂credit score, time in桂business and桂revenue. You can find lenders with relaxed requirements to桂improve your odds of桂approval. You may need to桂pay higher interest in桂those cases, but 껸桂careful assessment of桂what you can afford versus what you stand to桂gain will give you the桂right solutions.

桂

About The Author

Max has been working in the ecommerce industry for the last six years helping brands to establish and level-up content marketing and SEO. Despite that, he has experience with entrepreneurship. He is a fiction writer in his free time.

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