Tips For Business Loans

Securing small business financing is one of the first things a new business owner needs to consider. Financing the startup phase is important for your success. Although a potential lender may want to see how the business can repay them, business loan applications sometimes require a personal guarantee .

This FindLaw article provides tips for getting a small business loan for a startup business.

We make business formation EASY. Learn about our DIY business formation services here.

Prepare a Business Plan Before You Apply

Put together all the information needed for your application. This includes your business plan , business tax returns , and personal tax returns . A well-developed business plan helps you understand how much money you need and the types of small business loans you can secure.

Your business plan should identify:

With this information, you can decide what financing your business needs . It also helps you decide whether to submit your loan application now or later.

You may need six to 24 months of business experience and a cash flow analysis before qualifying to apply for some business loans. That may mean personal borrowing to start your business until you’ve got enough documents under the existing business . These documents include financial statements to show your business is viable.

Check Your Personal Credit Score Before Applying for a Small Business Loan

In the months when a business is too new to qualify for traditional business loans, many business owners turn to:

• A personal loan from a bank, a credit union , or an online vendor

• A personal line of credit against a home mortgage

• A personal credit card

• A business credit card

Personal loans , credit cards, and business credit cards are unsecured. They require no collateral. Your home or real estate is collateral to secure a line of credit against a home mortgage. These funding sources need a good personal credit rating.

Before you apply, look at your bank statements , credit report, and credit history . Will the bank or credit card company see someone whose personal finances are in order?

If your credit score is 630 or below, you need to improve your credit score . If you secure a credit card, it’s likely to have a very high interest rate . Even if you repay interest only, your new business could end up in trouble, and your personal credit rating could suffer even more.

You may need to take time to improve your credit score before starting your business.

Review Small Business Loan Alternatives

If you are unable to obtain a traditional bank loan or line of credit, you may need to expand your financing options .

• Apply for a microloan of up to $50,000 through a community development financial institution

• Apply for a Small Business Administration (SBA) loan

• Ask friends and family for personal loans

• Review crowdfunding sources

Although they only provide a little money, some microloan funds are open to new businesses and those with bad credit . When an entrepreneur gets a loan from someone they know, they may offer a lower interest rate than a bank would. Always have a promissory note in writing for these loans, even if it’s from friends and family.

Be Clear About Why You Need the Small Business Loan

There are many types of business loans . Some are for specific purposes, some for particular industries, and some for certain business owners or geographic areas. Before you look for a loan or business line of credit , write down these details:

• How much money do you need (the loan amount )?

• What is the loan for? Startup costs, working capital , expansion, equipment purchase, purchase of long-term assets like real estate or machinery, inventory, supplies, or export sales?

• How long will you need the loan? It’s easier to pay higher interest on a short- term loan rather than long-term financing for an extended period.

There are more options for established businesses than for a startup .

What Terms Are You Looking For?

Go back to the financial information you gathered for your business plan . Knowing the loan amount you need, what loan terms work best for you?

• Annual percentage rate (APR): The APR includes loan and interest fees. The APR on an SBA loan is capped, but online small-business lenders can have APRs as high as 99%.

• Interest rate : The lower the better, obviously

• Monthly payments : Knowing your set amount on the loan (principal and interest amounts) each month makes planning easier

• Repayment terms : Make sure you know the length of the loan and other important elements

The best small business loan is one that fits your needs. Make sure you know what you require before signing a loan contract.

Identify All Business Financing Options

There are a lot of business loan options out there. Only some of those loans will be right for your business.

The U.S. Small Business Administration is often the lender of choice for small businesses. They offer:

• 504 loans up to $5.5 million for long-term expenses

• 7(A) loans up to $5 million

• Community advantage loans up to $250,000

• Export and International Trade loans up to $5 million

• Express loans up to $500,000

• SBA disaster loans up to $2 million

• SBA microloans up to $50,000

Business banks typically offer small-business loans with the lowest interest rates and most competitive terms. Many small-business lenders require at least a year in business to qualify for financing. They want to see a credit score in the 700s and substantial revenue.

Community Development Financial Institutions (CDFIs) can be banks, credit unions , small business loan funds, or venture capital providers. Their goal is to expand economic opportunity in low-income communities. CDFIs bring together public and private sector investors to offer low-interest loan programs .

Credit unions can make it easier for small businesses to get a loan, especially if the business owner is a member and has a bank account .

Online lenders offer personal business loans based on the business owner’s credit history . An online lender could be the answer for borrowers with no business history or a low credit score . They tend to have more flexible eligibility requirements , a more straightforward application process , and faster approvals, but charge a higher interest rate .

Microloans offer discounted interest rates for certain types of borrowers . They allow borrowers with poor credit to apply. The SBA and nonprofit organizations that focus on underserved communities offer microloans up to $50,000.

Lines of Credit: The SBA offers lines of credit that are a flexible form of short-term financing. A line of credit provides a reservoir of money you can draw on as needed. You pay interest only on the amount you borrow. There are five available SBA lines of credit:

• Builders CAPLines: For builders and general contractors who work on residential or commercial buildings

• Contract CAPLines: For small businesses that need funding to execute contracts

• SBA Express Lines: Offering faster funding but with lower borrowing maximums

• Seasonal CAPLines: For small businesses with seasonal ups and downs in revenue

• Working CAPLines: For small-business owners who need working capital for operating expenses

The SBA isn’t the only agency offering lines of credit. Commercial lenders and online lenders do, too.

Personal and business credit cards can provide cash advances at a higher interest rate than a loan or line of credit. Business grants are available, too. City economic development departments and neighborhood business associations often offer grants to spur small business development in certain areas.

Overcoming Loan Barriers

You’ve applied for small business loans which you feel you should have been approved for, but instead you were turned down. What could be standing in your way of getting a business loan?

• Impaired credit: A FICO credit score below 630 would disqualify most applicants, as lenders would like to see a score of 720 or higher

• No collateral: Lenders often ask the borrower to put up collateral and a down payment on the loan, which can be cash and an asset the bank can hold as security for repaying the loan

• No skin in the game: If you have assets but don’t want to use them, you will have difficulty getting an SBA-guaranteed loan

• Prior default: If you defaulted on prior loans, your chances of getting a new loan are poor. For an SBA loan , a default on any other government loan (your student loan or FHA home loan) means there is no chance for a business loan. If you are behind on loan payments, pay first before applying.

You can work on repairing your credit score even after a bankruptcy or default.

Learn More About Startup Financing

FindLaw’s Start a Business section offers much more information about financing your startup small business. See Startup Financing for ideas on getting money from family and friends, financing basics, crowdfunding, venture capital, and more.