1. Learn how banks assess you.
Before you do anything else, take some time to look at things from the eyes of the lender. What makes them say “yes” to an applicant? Is there a type of borrower that they value most? Banks are in business to make money, and one of their most important jobs is to figure out if they can have a profitable relationship with you. Among the things they consider are credit score, credit history, cash flow, time in business, collateral, industry, and loyalty.
Whether we like it or not, lenders will consider your business and personal credit scores above many other factors. That’s because these numbers are representative of many of the risk factors banks need to know before approving you. Because they will pull these numbers at the time of approval, it’s helpful to get yours before that time. You don’t want to be blindsided by a low score!
A better small business loan will require a higher personal credit score – 700 or above, at least. Business-only lenders, such as those referred through the SBA loan programs, will also want you to have a solid business credit score. Remember that you can get both of the scores for free through Nav.
Separate from your scores – but equally important – is your credit history. This is a more detailed explanation of your credit usage, provided by the credit bureaus. It shows everything from the age of accounts to how much of each credit line you’ve used. Think of your score as a snapshot of this longer, more comprehensive explanation of how you’ve handled your credit over your adult life.
Banks want to see that you are in control of your money, too. Cash coming in vs. cash going out can be a good indication of how well your business is doing and if you’ll even be in business to continue paying on a small business loan. Banks will look at past sales, expenses, and future reporting, too. Don’t be surprised if they want to see things like unpaid invoices or an explainer of what your money situation will look like two years from now.
Time in Business
If your company is still in business plan mode, you may find it a bit tricky to get business financing from many major lenders. They need to see that you have what it takes to be a business owner of a profitable business, and as such, can continue with on-time payments on a loan. Baby businesses are at risk of failing, and brand-new business startups are always a risk. While it’s not impossible to find the money for such fledgling endeavors, it may be more difficult.
Business loans are more likely than other loans to ask for collateral. Whether you agree to allow your business assets to be liquidated in case of non-payment, or you put up your personal property to cover a loan, you’ll get further in the application process if you can guarantee your loan with real, tangible stuff. Unsecured loans do exist, but they are usually smaller and have less favorable terms. Know what you have to secure your loan (and what you won’t be willing to offer) before you begin.
Some industries are notoriously hard to finance. While most banks will lend to any legal, qualified company, some small business lenders have preferences that influence their financing decisions. If your business is in a niche such as gambling, adult entertainment, or unproven tech, your options will be more limited than someone in a more widely-accepted field.
If you already bank with a major lender, you might be able to cash in on some loyalty points! Banks love repeat business. Consider where you already have existing, well-built relationships before you start choosing lenders. Credit unions, in particular, have favorable terms for their members.
2. Decide what type of loan or financing you need.
With so many financing options available, it’s wise to pick one before you start applying. Choose from:
Small Business Administration (SBA) Loan
Available in amounts from $50,000 – $5 million, you’ll get lower rates and favorable repayment terms. Expect the loan process to take up to six months, however. A minimum business score is usually required.
Traditional Bank Loan
Get a direct loan from a bank you already do business with (or a new one) and pay the lowest rats of all the options. Loan amounts vary, and repayment terms range from one to twenty years. Get an answer in less than four months with approved personal or business credit.
These loans don’t consider your credit to be as crucial as other loans, but they still matter. Loan amounts are much smaller (up to $50,000), hence the “micro” name. Get an answer within three months for these loans with rates that are comparable to the better credit cards.
Non-Bank Online Loan
Traditional banks aren’t the only way to get an online approval. If you’re willing to pay up to 30% APR and pay your debt in less than five years, you could possibly get a loan for between $25,000 – $500,000. Credit still counts, but you can get an approval in 2-7 business days.
Business/Merchant Cash Advance
With some of the highest rates in the industry (up to 150%), this is a good option for those who want a very short-term cash infusion. Lines range from $200 – $250,000 and need to be paid back within a year. Even those with bad credit can get approval, however, and the turnaround time is often as soon as 24 hours.
Cash Flow Loan
AS the name implies, this is a loan that takes your credit into account but is also very focused on the money you’ll have coming in within the next year or your cash flow. Get approval within minutes from some lenders for amounts of up to $100,000. Be prepared to pay a minimum of 25% APR and up to 90% APR.
Business Credit Cards
If you’ve had a personal credit card, you know how these work. Pay industry-standard rates of up to 25% for cards that offer between $250 – $25,000. These make better short-term funding solutions, and credit scores are a major approval factor. Find out if you’re qualified within three weeks of applying.
Another often-overlooked options, you can get between $1,000 and $100,000 from a vendor you already contract with. Some charge no interest, but the repayment time is short (as soon as ten days.) Those with a good business credit history might get an approval within hours.
Lines of Credit
One final option for an existing business is the line of credit, which can generally be borrowed against again and again. Expect to pay more interest than a credit card. A credit score is a major factor for these loans, which range from $1,000 – $100,000 for qualified borrowers.
3. Decide on a Lender
Now that you know what qualifications you’ll need to bring to the table – and what loan product is best for your needs – you can start with the next step of picking a lender. Not all lenders provide all of the services mentioned, so you’ll be able to easily narrow your choices down to a few that will lend based on your unique borrowing situation and creditworthiness.
Lenders usually fall into one of the following categories:
These are your banks, credit unions, and investors who want to work with their borrowers one-on-one. You won’t go through a third-party intermediary to make your loan application or get your payouts. (Note, that the SBA loan program will match you with appropriate lenders, but they do not handle the actual loan process. You still would have a direct relationship with the companies they find for you.)
This option takes many of the lenders out there and puts them in one aggregate. You can enter your information one time and get the best choice for your credit situation and financing needs. You’ll need to have good credit to get approved through these, and – since they are completely online – applications are relatively quick compared to more traditional lending scenarios.
Short for “peer-to-peer,” the P2P lending space has been growing in recent years and may be a good option for someone who has been turned down by a traditional lender. Since you have a chance to share your story, explain your case, and get funding from a lender who is genuinely interested in your business, you might be able to find funding even with average credit. Many of the lenders on the marketplace are also business owners.
Ask the following questions to better determine which lender is right for you?
- Do I have good credit?
- Can I pay the money back right away?
- Do I need access to a continuous line of credit?
- Will I need my funds in cash? Or will credit or charge accounts work?
- Which banks do I have an existing relationship with?
- How much money do I need?
- Am I willing to put up personal or business assets for collateral?
Remember that some lender characteristics are things you can work around, while others will be considered closed doors. A bank only giving loans to those with an 800 FICO is an actual barrier to getting financing. A bank offering a higher rate of interest than what you ideally want isn’t a closed door, but it may not be favorable. Make a list of those things that you can compromise on if you have to, and understand that some factors are non-negotiable.
4. Determine your chances of getting approved.
While some loans will prequalify you based on basic information, the actual loan application process will require a hard inquiry on your credit report. For this reason, you should save a completed application for just the one lender you want to work with, and avoid applying unless you’re pretty certain they will say “yes.”
If you have a score less than 700, you can probably avoid those high-end business loans through the SBA, for example. An online bank with an incredibly high-interest rate, however, is more likely to say yes. Figure out your odds before you take the time and effort to apply. While an approval will leave you with a tiny dip in points on your credit score, a disapproval will leave you with that same dip – and no financing.
Some lenders can tell you your chances with a few brief questions. You’ll get a “yes” or “no” within minutes, and then will have to provide additional information to find out how much you’ll get and what you’ll pay in interest and fees. Other lenders won’t give you any indication of your approval until your months into the process and sign those final papers.
5. Gather your documentation.
In the case of a more formal business loan, especially those offered through the SBA, you’ll need quite the stack of documentation to get through your approval. Here are just a few of the most common things they’ll ask for, but this is not an exhaustive list:
- Updated business plan with details on your growth and marketing strategies
- Business and personal credit report (although the bank will pull their own copies of these, as well)
- Business forecast with details on future cash flow and costs
- Tax returns and supporting IRS documents for both your business and personal tax accounts
- Any applicable licenses and registrations for doing business in your state
- All financial documents that would be deemed relevant (including bank statements, credit card sales, unpaid invoices, and accounts receivable due to you)
- Any legal contracts that would be relevant (franchise, incorporation, leasing)
- Documentation of underserved representation (for loans aimed at women-owned businesses, for example)
The short answer to “what should I bring?” is that you need to include any piece of paper or electronic document that you used when coming up with your business plan and financial statements. Banks won’t take your word for it that you will be profitable and can pay the money back. They need to see proof of your lending status.
6. Fill out the application.
The rules for applying are pretty much the same whether you’re sitting in an office somewhere with pen and paper or typing on your computer from home. Filling out the application may take time, but thanks to the documentation you gathered in step 5, it won’t be nearly as laborious as it might have been. Once you’ve done it, expect to wait between 24 hours and six months – depending on the loan type you chose.
How to get a business loan from a bank
By following the steps above, you’ve already learned how to apply for a business loan from a bank. Banks have some of the strictest application requirements, but the payoff is lower rates and a continued partnership with an established lending partner who can serve other parts of your business, too.