Small Business Lending 101: How to Take Out a Small Business Loan in 8 Steps

Planning to take out a business loan to fund your small business? Whether you need money to buy equipment, pay rent, or manage cash flow, there’s a wide range of business lending options you may consider. 

Lenders will look into your qualifications, including your credit score, income, existing debts, assets, age of business, and industry to decide whether or not you’re eligible. And depending on your qualifications, you may get business loans from banks, small business lenders, and other financial institutions – each with their own terms and conditions. 

With several factors and lending options to consider, you may get a little overwhelmed with your business loan process. This is why we’re here to make the tedious process easier to understand.

Regardless of your business lending plans, here are 8 crucial steps to keep in mind. 

1. Understand the purpose of your loan

The first step to taking out the right business loan is to determine your reason for doing so. It’s one of the first questions lenders will ask you. 

Your loan purpose will likely fall into one of these categories: 

  • To help start your business
  • To manage your daily expenses and cash flow
  • To fund your business growth
  • To have an emergency fund or safety cushion
  • To buy a vehicle for your business

2. Work out on loan amount

Whether you’re planning to take out a loan to buy an asset with a straightforward price or to cover a potential cash shortfall, make sure you borrow an amount you can afford to repay. 

Determine what you can afford to repay each month. Look at your business’ past financials and complete cash flow forecasts. Keep in mind that the length of the loan will affect your repayment amounts, so ask your lender to outline the different loan term options in detail. 

3. Decide which type of loan is suitable for you

Your reasons for taking out the loan will dictate the type of business loan you’ll get. 

If you’re just starting a business, with no cash flow yet to support the repayment, it’s virtually impossible to get qualified for bigger financing options. Instead, you’ll have to rely on personal loans, business credit cards, crowdfunding, or a microloan from a nonprofit lender. 

If your business has a year or more of revenue and history, your financing options expand. You may be eligible for SBA loans, term loans, and business lines of credit. 

4. Compare small business lenders

You can get business loans from a wide range of places, including banks, non-profit microlenders, and online lenders. 

Traditional banks

  • Banks offer financing vehicles including term loans, lines of credit, and commercial mortgages.
  • Best used if you can provide collateral
  • If you have a good credit
  • If you don’t need cash fast. 
  • Lowest APR option

Microlenders

  • Microlenders offer short-term loans
  • Best used if you can’t get a traditional loan from the bank because your company is too small.
  • If you have a poor personal credit
  • If you lack collateral. 

Online lenders

  • If you need funding ASAP
  • If you lack collateral
  • If you lack time in business
  • High APR

Compare options based on the annual percentage rate (APR) or the total borrowing cost. Compare them based on terms too. Of the loans you qualify for, go with the one with the lowest APR, as long as you’ll have no problems handling the loan’s regular payments. 

5. Decide between a secured or unsecured loan

When choosing the type of loan you’re getting, you’ll be able to have your loans secured or unsecured. Each has its pros and cons. 

Secured Loans: 

  • You offer an asset (collateral) for a loan, such as property
  • The lender may sell your asset should you fail to repay the loan
  • Secured loans usually have a lower interest rate than unsecured loans

Unsecured:

  • No collateral is offered
  • The interest rate is higher
  • It’s more difficult to be approved for

6. Find out if you qualify 

Next to determining the type of small business loan you need, make sure you know your eligibility. 

Firstly, find out your credit score, which will determine which loans you’ll qualify for. Banks, which offer the least expensive business loans, approve borrowers with higher credit scores (at least above 680). If you find your score falling below the threshold, you could be qualified for online loans, which offer higher interest rates.

Secondly, determine how long you have been in business. You need to be at least two years to qualify for most bank loans, and at least one year for most small-business loans. 

Lastly, know how much money you’re able to make. Lenders look carefully at your capacity to repay and will require a minimum annual revenue. 

Experts suggest to work on your credit score and profile before taking out a loan, so you’ll be qualified for better funding options. 

7. Read the fine print

Before signing the contract, make sure you understand the true cost of the loan. Compare all of the charges which may include establishment or application fees, monthly fees, early repayment fees, exit fees, and valuation fees. 

8. Get your paperwork ready

After you’ve figured out the best loan type for your small business, compared your options, and worked on your credit profile, it’s time to apply for the loans suitable for your financing needs.

Depending on the lender, you’ll have to submit a combination of the following documents:

  • Business and personal tax returns
  • Business and personal bank statements
  • Business financial statements
  • Business legal documents, like commercial lease or franchise agreement

Author Bio: Carmina Natividad is a passionate resident writer for Lending Connect, a business lending platform in Australia which helps connect clients to a specialist business loan provider that suits their business needs. She enjoys sharing her insights about business and finance. 

Author Bio: Carmina Natividad is a passionate resident writer for Lending Connect, a business lending platform in Australia which connects clients to a specialist business loan provider that suits their business needs. She enjoys sharing her insights about business and finance.