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5 Simple Steps to Securing Your Next Business Loan

Securing a small business loan for your business might seem difficult during times of tighter lending practices. However, it’s a hurdle you must overcome when you need money to cover inventory or payroll expenses. Let’s take a look at how to confidently get your next business loan.

Ask Yourself Why You Need the Loan

The reason you need to get clear about the purpose of the loan is because lenders will want to know the answer. Most likely, your answer will be one of these:

Figure Out Which Type of Loan You Need

The type of loan your business needs depends on what your reason is for needing the money. It’s almost impossible to secure a loan if you’re just starting the business. Startups are usually disqualified right away because lenders want to see cash flow to support the loan repayment schedule.

If you need startup money, then business credit cards, crowdfunding options, borrowing from family, personal loans or micro-loans from a nonprofit lender are your best options. If you can prove one year or more of business history, you have a few more options available to you:

Determine Your Best Small Business Lender Options

There are several places to get your loan from:

A micro-lender is the proper option when your business is too small to get a traditional loan. Typically, you’ll find that nonprofit micro-lenders will give out short-term loans of less than $35,000.

These are the situations when it’s best to use a bank:

Online lenders are a good option when:

Find Out Whether You Qualify

One of the factors that determines whether you qualify for a business loan is your credit score. Every year, you can get a free credit report from the three credit bureaus. Contact Experian, Equifax and TransUnion and order your credit reports. Most likely, you’ll find that banks want your credit score to be at or above 680 in order to work with you. If your credit score is below 680, then consider working with a nonprofit micro-lender or one of the online loan companies that work with bad credit borrowers.

Lenders are also going to factor in how long you’ve been in business. They will want to know your annual revenue. Find out what minimum annual revenue each lender requires before applying. Figure out how much your business can pay out to support a loan’s monthly payment. Some of the online lenders will want to get paid back through daily or twice-monthly repayment plans.

A good rule of thumb is to have a total revenue number that is at least 1.25 times your total monthly expenses. For example, you would be able to comfortably handle a loan requiring $1,000 per month if your monthly business revenue is $10,000, with $7,000 in monthly expenses.

Get All the Required Documents Together

Make a decision regarding the type of loan and lender you’ll target. Gain an understanding of how your credit score affects your borrowing options. Now, gather all the financial documents that you’re going to need throughout the application process. Keep in mind that each lender will require a different combination of financial documentation from you. Here is a list of the documents you might need:

Don’t let this process intimidate you. Go through each of the above steps one by one. Take your time so you feel prepared. Remember that you can apply to many small business loan options within a short period of time without negatively impacting your credit score. Take this entire process step-by-step until you secure your needed funding.