Learn How to Get a Business Loan
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 to start or grow your business, get started and get organized long before you fill out an application. Lenders want to be sure that they’ll get repaid, which means they’re looking for several criteria:
- The loan makes good business sense
- You personally (or your business) have a strong credit history
- The people managing the business are qualified to put the money to good use
- The bank can manage their own risk
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 profits – and revenue 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 show, with specific numbers, how you’ll earn money, how you’ll spend it, and your big-picture strategy. Explain who all of the players are in your business, especially management, marketing, and sales roles – those individuals will bring in new business that helps pay for the loan. It’s okay if you do all of those jobs – just explain why that is and your 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 important.
Banks want to see a history of successful borrowing anytime they make 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 scores 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. If your credit is “thin” because you haven’t borrowed much in the past (or if it’s in need of some repair), you may need to build your credit before lenders are likely to approve you for a loan.
You’re applying for a business loan, and you may even be organized as a corporation or LLC. However, lenders will almost always want to hold you personally responsible for the loan. If they don’t do that and the business fails, there’s nobody left to repay them. But if you make a personal guarantee on the loan (which is likely a requirement), they can go after you personally, and your personal credit will suffer if you don’t repay.
If you a have collateral to pledge for the loan, you’re more likely to get approved. With some businesses, you might be able to pledge business assets like vehicles and equipment (if your business has those types of assets). It’s more likely that you’ll have to pledge personal property such as your home or your financial accounts.
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. For best results, talk with lenders to understand their requirements and how they work – don’t just fill out an application and hope for a “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 choice 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 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 sense.
Microlenders might be willing to help if you meet certain criteria. Especially if you’re investing in communities that microlenders are interested in or you have a low income, these lenders might approve loans that banks will not.
Online personal loans are an option when nobody will approve you for a business loan. Ideally, you’ll borrow in the name of your business – it’s cleaner and more professional that way. But some small business owners can only get personal loans. Try marketplace lenders and peer to peer lenders, which tend to offer competitive rates and quick turnaround on applications.