How to get a small business loan in 5 steps

Elorus Team
Elorus Team

There comes a point in every successful small business owner’s career that they need to expand their trade. This could mean all kinds of things like investing in new equipment, conquer a new market, undertaking a big project or spending more money on their marketing and promotional efforts. As one can easily figure out, every scenario mentioned above requires a great deal of cash apart from a solid plan to make it happen.

The most popular way to fund your small business is by taking a small business loan. However, borrowing money from lenders, especially banks, means a lot of preparation, paperwork and a little homework on your behalf.

In this article, we are going to help you understand what taking a loan entails, the different types available out there and how to get the most out of it!

Let’s dive in…

Small business loan success in 5 easy steps

Step #1 Find a good reason

The first and most important step when considering to apply for a loan is determining your needs. You need to mark down your cash requirements so you can have a clear picture of the amount you will borrow and if it will a long term or short term loan. Good reasons to consider a loan for your small business include, and are not limited to:

  1. Funding an expansion
  2. Investing in new equipment and technology
  3. Investing in training your employees
  4. Raising your marketing budget to gain more clients
  5. Real estate

However, there a few not-so-good reasons to apply for a loan and you need to avoid taking them into account. Namely:

  1. To cover losses
  2. To buy non-essential business assets
  3. To pay for other obligations, pay off another loan etc.

Why are they not good enough? Because they perpetuate your financial problem rather than solving it. Plus, it’s highly unlikely that you’ll be able to pay off the loan you took.

Always keep in mind that every time you borrow money, you set a credit record that needs to be as “clean” as possible. This credit score determines your reliability so you can borrow more than once if needed. Finally, bear in mind that lending organizations don’t accept applications from owners with a bad credit.

Step #2 Decide how much money you need

Lenders love applicants that know what they need and have a financial plan in place. You must have an estimation about the capital required to fund whatever it is you are funding.

This is where you need to draft a well-thought budget, backed up by financial projections such as profit and loss statement, cash flow statements etc.

Overestimating the amount of money you will borrow will make lenders doubt your judgment and credibility, which consequently may lead to rejecting your application. On the other hand, underestimating your capital requirements may lead to additional cash flow problems sooner than planned.

Step #3 Decide which type of small business loan suits your needs

There are several types of loan available depending on its purpose, the terms of payment and its length. Let’s go through them!

Working capital loans: Companies choose this type of business loan to manage revenues and expenses fluctuations as a result of seasonality. Essentially, it’s a debt borrowing vehicle to finance daily operations. Working capital loans don’t require a collateral from the business owner unless the company has little to non-existent credit score. Finally, they tend to be short-term, spanning from 30 days to a year and range from $5.000 to $100.000 for small businesses.

SBA small business loans: Certain banks offer business loans that come with attractive terms due to the U.S. SBA’s (Small Business Administration) guarantee that backs them up. This type of loans have low-interest rates and their repayment terms are favorable compared to other loans. The amounts one can borrow range from 30k to 5 million, but the loan process is long and has strict requirements.

Accounts receivable financing: As the name implies, this type of lending can help you manage your cash flow effectively by relying on your accounts receivable. This line of credit gives you cash that will be later be paid off as soon as your clients pay you. The amount of this loan is variable as is its interest rate. Everything depends on the small business’s accounts receivable level.

Small business line of credit: If your company’s cash flow is suffering and you need extra cash to cover unexpected expenses, this type is ideal for your situation. Your company can access needed funds with a cap (e.g. $50.000) and you don’t have to pay interest before the moment you decide to use it. Τhen, typically there is a monthly interest rate and the amount you draw down is being amortized over years. However, this line of credit has a setup fee which is typically charged annually after the required renewal. If you don’t wish to renew the line of credit, you have to pay the full amount immediately.

Equipment loans: If you need cash to replace old and rusty machinery, update your company software, or buy vehicles, your small business could benefit from an equipment loan. Typically, you need to pay 20% of the expense up front and the loan is secured by the equipment. The loan’s interest is usually paid on a monthly basis and the principal over a 2-4 years period. Finally, equipment loans range between $5.000 to $500.000 and can also be converted into leasing contracts.

Small business credit cards: Apart from the small business loan solution, you can also choose to get a credit card as a kind of small business financing. Interest rates vary per case, the credit card’s limit and the business owner’s reliability and credit profile. Lending institutions that issue credit cards for small businesses include American Express, Bank of America, and many others located in the U.S. This way you can make purchases of relatively small amounts, pay off in installments and enjoy the benefits of a reward program that most credit cards offer! Bonus point: Small business credit cards usually offer attractive interest rates and sometimes 0% for the 1st year or so.

Step #4 Research online business loans options

Apart from the traditional form of financing via the banking system, you can also get the needed funds from online sites.

The obvious advantages of such choice are the easiness of applying and the compressed time in which the whole process takes.

Swift Capital is one of the best and most reliable companies that offer loans online such as working capital loans and short-term loans that range from $5.000 to $500.000 in affordable interest rates. Also, you can check out Fundera and LendingTree which enable you to apply to multiple lenders via one simple process that does away with repetitive and tedious paperwork!

Step #5 Have your financial statements in check

Before applying for a loan, you need to be ready for the lender’s assessment that will ultimately determine whether you’re going to get financing or not.

Your financial statements and accounting records have to be as neat and correct as possible because they will be scrutinized by the lender. Financial statements that will be reviewed include your company’s balance sheet, cash flow statement and income/loss statements.

By analyzing those statements, the lender will draw conclusions on your ability of repayment. Therefore, it’s important to have your accountant check them beforehand so as to avoid complications.

Conclusion

Applying for a small business loan can be a stressful process, especially if it’s the first time. Always remember to keep your book-keeping “clean” and ask for an accountant’s perspective before going to a lending institution.

Assess your company’s financing needs and choose the right type of small business loan that will properly address your cash requirements. Then, all you have to do is provide the lenders with a thoroughly thought plan on what you wish to invest the money into.

Did you succeed in getting a small business loan? If so, feel free to leave your experience in the comments below!