Applying for a Small Business Loan: What You Need to Know
Knowing when and how to apply for a small business loan will help increase your opportunities for funding. Many business owners are realizing they need a little extra cash to ensure their operations can continue successfully over the next few months. If you are searching for help with your financial situation, here’s what you need to know about applying for a small business loan.
The US Small Business Administration (SBA)
The SBA does not lend money directly, but it does work with lenders to provide loans to small businesses. The organization sets guidelines for loans made by its partnering lenders, community development organizations, and micro-lending institutions. The SBA reduces risk for lenders and makes it easier for them to access capital, which makes it easier for small businesses to get loans.
SBA-guaranteed loans generally have rates and fees that are comparable to non-guaranteed loans. They involve lower down payments, flexible overhead requirements, and no collateral needed for some loans. In addition to helping with the loan process, the SBA offers continued support to help you start and run your business.
There are several things that you can do to increase your chances of obtaining a loan. The SBA advises that, whether you go through them or through a traditional lending institution to apply for a loan, you will need to have a business plan prepared.
The business plan describes your business along with your skills and experience, including how you will market your business and detailed financial information showing how you will repay the loan. Your business plan should include a complete set of projected financial statements, including profit and loss, cash flow, and a balance sheet.
Documents for a Lender
Before meeting with any lender, gather all the information you will need about your business as well as about your own experience in business so that you can make a convincing case that you are loan-worthy. Prepare a package that includes:
- Personal information, including a resume. Prepare basic information such as previous addresses, names used, criminal record, educational background, etc., as well as evidence of management or business experience, particularly for loans that are intended to be used to start a new business.
- Personal Credit Report: Your lender will obtain your personal credit report as part of the application process. However, you should obtain a credit report from all three major consumer credit rating agencies before submitting a loan application to the lender to ensure it is accurate.
- Business Credit Report: If you are already in business, you should be prepared to submit a credit report for your business. As with the personal credit report, it is important to review your business’ credit report before beginning the application process.
- Income Tax Returns: Most loan programs require applicants to submit personal and business income tax returns for the previous 3 years.
- Financial Statements: Many loan programs require owners with more than a 20 percent stake in your business to submit signed personal financial statements.
- Bank Statements: Many loan programs require one year of personal and business bank statements to be submitted as part of a loan package.
- Collateral: Collateral requirements vary greatly. Some loan programs do not require collateral. However, loans involving higher risk factors for default require substantial collateral. Strong business plans and financial statements can help you avoid putting up collateral. In any case, it is a good idea to prepare a collateral document that describes value of personal or business property that will be used to secure a loan.
- Legal Documents: Depending on a loan’s specific requirements, your lender may require you to submit one or more legal documents. Make sure you have any business licenses and registrations required for you to conduct business, articles of incorporation if applicable, and any additional relevant documents such as a franchise agreement or commercial lease.
Types of Loans
When applying for a small business loan, it is important to have a clear picture of your specific needs. That will determine what type of loan would be most appropriate for you. Common types of small business loans include:
- Business term loan: This traditional bank loan option operates similarly to a personal loan in some respects.
- Line of credit: If approved, your small business can borrow up to a certain amount of money from the bank. As you accrue debt, you only pay interest on the amount you’ve used so far.
- Commercial mortgage. If your business is looking to acquire a location to expand, a commercial mortgage is the type of loan you need.
- Equipment lease. Similar to leasing a car, equipment leases spread out the cost of a major equipment purchase over a set amount of time.
- Letter of credit. A letter of credit is a guarantee from a bank that a seller will receive the correct payment owed on time.
- Unsecured business loan. An unsecured business loan doesn’t require any collateral against the amount they’re borrowing.
CONTACT CLEAR VIEW BUSINESS SOLUTIONS FOR HELP WITH YOUR SMALL BUSINESS
The professionals at Clear View can help ensure your financial records are in good shape before you apply for a small business loan. Learn more about how we can help you and your business by contacting Clear View Business Solutions to speak to our team about our services. Give us a call at (520) 544-0177.