Personal loans are widely available, but if you’re trying to borrow for a small business, you’ll find that the process is more difficult. If you’re thinking of borrowing money to start or grow your business, you'll need to put in plenty of work before you even start to fill out an application.
Lenders want to be sure that they’ll get repaid. That means they’re looking to ensure that the loan makes good business sense, you (or your business) have a strong credit history, the bank can manage the risk, and the people managing the business are qualified and responsible.
Good Business Sense
Lenders only want to make a loan that helps you grow your business. You might be confident that the money will help, but you need to convince them of that fact. To do so, create an airtight case that proves (without exaggerating) how the funds will lead to greater revenue—and greater profits you can use to repay the loan.
Your business plan is essential to get approved for a loan. If you don’t have one yet, it’s time to create one. You need to use specific numbers that detail your big-picture strategy, including how you’ll earn money, how much money you'll earn, and how you’ll spend that cash. Explain all of the major players in your business, with an emphasis on the roles of management, marketing, and sales—those individuals will bring in new business that helps pay for the loan.
It’s okay if you do all of those jobs yourself. Lenders just need you to explain why you take on so many roles, and you'll need to show a track record of success in those areas. Your business plan should also include basic financial statements, pro-forma statements, and information about your personal resources.
Building the Foundation
Here’s the frustrating fact about most small business loans: your personal finances are also important.
Banks want to see a history of successful borrowing any time they issue a loan. That includes loans for your business. Unfortunately, many businesses don’t have any history of borrowing (especially new businesses), so lenders look at your personal credit score instead. If you’ve got good credit, that’s a good sign that you’ll handle the business loans well. If you’ve got bad credit, lenders will be more skittish about lending and you may not qualify. If your credit is “thin” because you haven’t borrowed much in the past (or if it needs some repair), you might not get approved immediately, but you may be able to build your credit and prove to lenders that you deserve the loan.
You may organize your business as a corporation or LLC. Regardless, lenders will almost always want to hold you personally responsible for the loan. If they don’t do that, and the business fails, the debt disappears with the business. But if you make a personal guarantee on the loan (which is likely a requirement), you will be responsible for paying back the loan, no matter how the business performs. If you can't repay, your credit will suffer.
If you have collateral to pledge for the loan, you’re more likely to get approved. With some businesses, you might be able to pledge assets associated with the work, such as vehicles and equipment. If your business doesn't own a sufficient amount of assets, you’ll have to pledge personal property like your home.
Where to Borrow
Once you’re organized and you know what to expect, it’s time to start talking with lenders. You have several options for borrowing, and each option comes with pros and cons. Borrowers are best served by talking with a variety of lenders to gain a full understanding of their requirements and options for a loan. Don’t just fill out applications and take the loan from the first lender to say “yes.”
Banks and credit unions are traditional sources for small business loans, and they’re a good place to start. Especially with small institutions, you’ll be able to meet with a lender who can guide you through the process. Larger banks might take a more hands-off approach. To improve your chances of getting approved, ask about SBA loans, which reduce the bank’s risk and feature interest rate caps. The loan process at banks and credit unions can be slow, so be prepared for a long process and a thorough review from the bank.
Online business lenders are a relatively new option, and they might provide more choices than you can find locally. You might also find it easier to get approved—these lenders are more interested in funding loans and growing than conservative, established banks and credit unions. Online lenders might also move faster than traditional lenders. That said, they’re not looking to lose money, so the loan still needs to make financial sense to the lender. Easier and quicker access to money could come with drawbacks like higher rates.
Microlenders might be willing to help if you meet certain criteria. These lenders may not have the same level of resources as a traditional bank, so you might not get as big of a loan, but microlenders are usually less concerned with profit and more concerned with development. Lenders in this space want to see businesses grow and become stable. They may bundle the loan with coaching and training to help get your business on firm financial footing.
Microlenders often prefer to invest in underserved communities or low-income individuals. They're attempting to fill a void left by traditional banking. If you have significant income and could easily qualify for a traditional loan, microlenders might not be as eager to issue your loan.
Online personal loans are an option when nobody will approve you for a business loan. Ideally, you would borrow in the name of your business—it’s cleaner and more professional that way. But if you can't convince a lender to issue a loan for your business, you can try again for a personal loan. These are easier to secure, but the loans come in smaller amounts, and the terms of the loan may not be as attractive. For competitive rates and a quick approval process, try marketplace lenders and peer-to-peer lenders.