How to Successfully Apply for a Small Business Loan

Small business financing is vital to a new business's success. Small business loans are a great way to help finance small-business owners' initial startup costs. Your startup costs and loan amount depend on your business needs. Startup costs range from equipment for a gym to purchasing real estate to build an apartment complex.

For instance, suppose you have an excellent idea for a cycling gym but need the initial capital to buy the spin bikes. You can apply for a business loan to cover those essential equipment costs needed to open your business.

If this is your first business loan application, this article and proper financial planning can help you prepare for success. This article can't guarantee that you will get approved, but it can help you prepare for your initial meeting with a lender. As a borrower, you will feel more confident and show you've done your homework.

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Financing Options

What type of financing borrowers choose depends on the eligibility requirements of each loan program or online lender. Some financing options and loan offers require a minimum credit score.

SBA Loans

The U.S. Small Business Administration (SBA) offers Small Business Administration loans to small business borrowers. To meet the criteria for an SBA loan, check this guide, as SBA defines small businesses differently than you might think.

Under the SBA 7(a) loan program, SBA lenders offer loans to small businesses that cannot secure traditional loans with financial institutions. SBA 504 loans are longer-term loans to help finance equipment, land, and buildings. The SBA microloans only finance up to $50,000.

Types of Business Loans

Traditional banks are the most common option for small business loans when someone has excellent credit or even good credit.

Your loan amount depends on the amount of cash flow you need. Interest rates fluctuate and rely on a variety of factors, like the economy and your credit score. Interest rates typically increase the lower your credit score is and are based on what the economy is doing. You can lower your rate if you raise your down payment.

Below is a list of common types of funding options:

• Business line of credit
• Term loans, which are loans for a certain length of time (one to five or up to 15 years)
• Short-term loans are loans for one to three years with no collateral needed. Your credit score is a significant factor in determining your eligibility.
• Equipment loan term lengths vary, but interest rates can be very high. These are loans for machinery or equipment, like the spin bikes mentioned earlier in this article.
• Personal loan you take out as an individual, not a business
• Business credit cards are also a financing option but tend to have higher interest rates. They are a good option to increase your business credit score.
• Merchant cash advances give the business a lump-sum payment based on future credit card sales.

Preparing for a Meeting With a Lender

The following are steps to take before meeting with a lender.

Know Your Credit Score

You can check your creditworthiness online if you need to know your credit score. Many credit unions offer free credit checks that look at your credit history to determine your credit score. You can have a personal credit score and a business credit score (if you are open already).

Increase Your Credit Score

If you have low or bad credit, consider working on increasing your credit score before applying for financing or meeting with any lenders. Business credit scores can be grown relatively quickly.

If you cannot wait for your credit score to increase, a financial institution may ask for a personal guarantee. This means you are personally responsible if your business does not make monthly payments on its loan or defaults on it. It also means your personal assets, like your home or car, can have a lien put on them.

Bring Financial Records

Here is a list of the financial records your lender will want to see before offering financing or funding options:

• Bring your last three years of tax returns (personal and corporate if you have any)
• The company's business plan
• A copy of your EIN or tax identification number. You need this even if you are a nonprofit.
• The last few years of accounts receivable for the company (if you have any). If you have not opened yet, bring a projection or market averages for your industry.
• The last three years of bank statements, personally and professionally
• The last three years of financial statements, personally and professionally
• A list of collateral and business assets (also known as working capital) you have available. Learn their market value and what portions you can use as collateral in the future.

Mentally Prepare for the Meeting

First impressions count. Arrive to the meeting early if you can with your documents organized. If a lender believes you have done a thorough job presenting your request for a loan, it is more likely to have confidence in your management abilities and your company. You may get multiple loan options as a result.

Ask the Right Questions

Know the answer to certain questions before you agree to repayment terms. Below is a list of Frequently Asked Questions (FAQs) that may help entrepreneurs figure out financing:

• What are the repayment terms? Do you pay in monthly installments?
• How do you receive the funds? Is it a lump sum, or do you get installments?
• What is the interest rate? This is the amount that attaches to the principal you have to repay.
• What is the length of the financing?
• What is the annual percentage rate?
• Do you sign the financing paperwork in person or use an electronic signature (or e-signature)?

Read the Fine Print

Before agreeing to any financing option, compare terms, conditions, interest rates, and repayment timelines. They can vary dramatically from lender to lender. Shop for a loan like you would for any other product or service. Look for the best deal for your company and read every clause in the document before agreeing to it.

Need a Lawyer To Help You With a Small Business Loan?

Consider consulting with a lawyer before or during the loan application process to help you better understand your legal obligations. Do this before you sign on the dotted line for your business loan. Contact an experienced business law attorney in your area to learn more.

For more information, visit FindLaw's Starting a Business section.