A small business loan can be incredibly helpful for your operation. These loans can help you survive an impending cash crunch or help you take your company to the next level. You can use funding to buy new equipment, hire employees, or open new locations. Even if you are turning a profit, a business loan can help you stay afloat during an unexpected cash flow issue and repayment helps you build your credit.
There are many different options for small business loans, so the concept of a “business loan” itself is murky. While different lenders with different financial products have varying requirements, there are a few specific items to consider before filling out an application.
Know Your Business’s Needs
Before taking any meetings with bankers or doing extensive research online, think about how funding will impact your business. How can you best capitalize on an influx of money to reach your business goals? You want to ensure that you aren’t overburdening your business with repayments, which can be a deadly situation for a small business.
Do you need funding that gets you to the end of the quarter because you are waiting on outstanding invoices? Do you need money for a specific goal, like hiring a part-time assistant? Think about how much it will cost to reach that goal. Furthermore, think about how that business goal will, in turn, help your business grow its revenue.
Know Your Lending Options
Right now, dozens of different types of business financing are available to small business owners, with several providers competing within each form of funding. You can apply for traditional term loans from banks, business credit cards, ACH cash flow loans, accounts receivable financing, equipment financing, and merchant cash advances, among other products.
Do your research—each option has different requirements, interest rates, and maximum principals. By knowing all of your options, you will be better prepared to determine how to best fulfill your business’s financing goals.
A Detailed Business Plan
For many lenders, a business plan is an essential document in their decision-making process. You should write up a business plan even if you aren’t currently seeking funding—this document is great to reference as your business grows in the future.
A business plan includes several specific elements, like an income statement, a cash flow statement, and a balance statement. These reports provide a snapshot of the financial health of your business in the short term.
Additionally, you can beef up your business plan by doing some financial forecasting. These predictive documents look at how your business will fare given different variables, such as an economic downturn, a marketing push that results in a rush of new customers, or if business stays steady. Armed with a financial forecast, you can show lenders that you have an eye to the future.
Business plans should be dynamic and revisited at least once a quarter, especially when your business is young.
Your Financial Documentation
Whether you’re applying for a loan in-person at a bank or online, you should gather some documentation about the financial health of your company. Compile bank statements, business tax returns, and a list of your business assets. These documents will help a lender decide your creditworthiness and show how your business has done in recent times. Sometimes, certain assets will be useful as collateral for a loan. Printing out a personal credit report can be helpful, too.
A Good-to-Excellent Personal Credit Score
Your personal credit score will have a significant bearing on your ability to get a business loan, especially if your business has not been around long. Large, traditional lending institutions like banks will want you to have an excellent credit score—typically above 800 and at least above 720. Other lenders will consider your application if your score is above 600. In some cases, like with ACH cash flow loans, there will not be a hard pull on your credit.
Proof of Your Business’s Age
Lenders that offer large term loans usually want you to have at least 2 years of business history. Since term loan repayment periods can span decades, the lenders must believe that your small business will be around for a while. Other lending products are available if your business is younger, but usually you will have to be open for at least 3 months. Because of this requirement, it can be difficult to find loans for starting up a business and other funding sources, like personal savings or family, might need to be utilized.
Consistent Business Revenue
Along with business age, you will need to show how much revenue your business owns via bank statements and tax returns. For a term loan, banks usually require an annual revenue of $100,000. Other options, like a business credit card, are typically satisfied with $50,000 in annual revenue. For smaller loans, like accounts receivable financing, a minimum monthly revenue of $4,000 is generally required.