How to Get a Small Business Loan

Small Business Loans Made Easy

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You’ve got the ideas, the desire, and the plan. All you need at this point is some more money, right? There are plenty of lenders out there offering small business loans – but getting a loan isn’t always easy.

Preparation is the key to making it easier, and you’ll need to focus on two key areas: preparing your documentation, and finding the right lender to work with.

Preparation

Lenders don’t want to lose money, so they’re going to look very closely at you and your business.

The more prepared you are, the more confidence they’ll have (if you can get through the application process with ease, you can probably handle other challenges as well). As a bonus, getting everything organized helps you understand your business and how it can be more profitable.

Your credit: you might think you’re applying for a business loan, but for most new and small businesses, your personal credit is still a big deal. Without a long operating history or significant assets to pledge as collateral (production equipment or vehicles, for example), lenders will make decisions based on your personal credit. Lenders will assume that you run your business in the same manner that you manage your personal finances. Check your credit reports (it’s free for all US consumers) and fix any errors to avoid delays.

Financial statements: lenders need to know about your business’s financial health before approving a small business loan.

They’ll want to see how much the business is worth, how much revenue you bring in, and how much you keep as profit. If you’re serious about getting funded, you’ll also need to prepare detailed pro-forma statements, which give projections about your earnings in future years (and you’ll need a way to justify those predictions).

It’s essential to keep good records and use dedicated business accounts (instead of using personal accounts for business purposes).

Business plan? It’s always a good idea to have a business plan. You need to know (and be able to communicate) how your business works, and how it will succeed. Depending on the lender you use, you might or might not need to provide your business plan to get a small business loan. Traditionally, banks always wanted a business plan, but that’s changing, especially with newer online lenders.

Personal guarantee? If you’re having a hard time getting approved, you might need to make a personal guarantee to get your small business loan. For example, you might pledge personal assets such as your home as collateral (which means you risk losing personal property if the business is unable to repay the loan). Start thinking about what assets you have available, what you’re willing to risk, and how a business failure would impact your loved ones.

Where to Borrow

Once you're prepared, it's time to start asking for money. So where should you go for your small business loan? Traditionally, banks and credit unions (sometimes in partnership with the SBA) have helped businesses get off the ground.

Those options still exist, and online lenders have greatly expanded your options. No matter where you start, be sure to apply with several lenders and compare offers. You'll see different fees and interest rates, and some lenders might be willing to approve your loan without a personal guarantee.

Online Lenders

In the past, you'd head straight to your local bank or credit union to borrow. Unfortunately, those institutions are not always interested in making small loans (small is a relative term here), and they have to pay costs of operating branches and evaluating your loan. Online lenders have eliminated some of those costs, and they're more willing to make small business loans.

If your personal credit is at stake anyway, you might even consider getting a personal loan instead of a business loan.

The process will be easier, and you probably won't have to pledge collateral. The drawback is that you're mixing your personal and business finances. Every business owner does that at the beginning, but it's something you'll want to move away from.

Where can you get a loan online? We don't endorse any of these lenders or guarantee that you'll get a good deal, but some of the most popular lenders are below.

Peer to peer lenders were the first source of online loans, and they’re still worth looking at. Lending Club and Prosper.com are still good options for personal loans (and they offer business-specific loans as well). These loans are probably the least expensive, they’re easy to apply for and get approved, and you’ve got several years to repay.

Online business lenders use technology to evaluate your business. They might require more information about revenues and inventory (and a brand new business might not have enough history to work with), but they can be reliable sources of funding. OnDeck and Kabbage are two major players in this space. These lenders tend to keep loan terms shorter, and as a result, you’ll probably pay higher costs over the long term.

Banks and Credit Unions

They might seem boring, but banks and credit unions are still good choices for small business loans – especially small, local institutions in your community. These banks are interested in investing locally, and you’ll be able to speak with somebody who can explain exactly what it takes to get approved.

Start with institutions that you already do business with. These places know your history and financial behavior, and they’re more likely to give small business loans to those who’ve demonstrated financial responsibility. Remember, a big part of the bank’s risk is uncertainty regarding loan repayment. If they can reduce uncertainty about you, you’re in a better position. If you have your mortgage or business checking with a bank, that’s a good place to start.

Don’t forget to inquire at credit unions. Because these institutions are smaller, customer-owned institutions, you may have a better chance of getting approved. You’ll probably be able to talk directly with higher-level decision makers to plead your case. Larger banks have more rigid rules and processes associated with small business loans.

More Options

Other sources of funding might also help you with small projects. While it’s risky to take on credit card debt (and credit cards are notoriously expensive), it might make sense to use a credit card for a small one-off expense – as long as you have a solid plan to pay off the debt. Friends and family might also be willing to lend you money. You can (and should) formalize the loan with a written agreement and you can even have somebody else handle monthly payments for you.