How to get a business loan

A business loan is a type of financing that will be used to start, maintain, or expand a business. Business loans come in different forms, including term loans, business lines of credit, equipment financing, business credit cards and commercial mortgages, just to name a few.

We’re going to provide a roadmap for how to get a business loan. You can use these strategies, regardless of the type of business loan you want to apply for.

1. Determine a concrete purpose for a business loan

Obtaining any type of financing comes with a price, and that’s the monthly payment needed to service the debt. If you’re borrowing for business purposes, the monthly payment will represent a reduction in net income. For that reason, you need to have a bankable reason why you want to get a business loan.

Some of the more viable reasons for obtaining a business loan include the following:

New equipment purchase

It should be for equipment that’s very likely to either increase income or reduce expenses.

Business expansion

You may need to acquire additional space, staff, or inventory to grow your business. A business loan may give you that opportunity.

Access to credit

Many businesses experience seasonal fluctuations in revenue. Having a credit line available for immediate access can help to keep your business afloat during slow periods.

Property acquisition

This may become necessary if you want to purchase your business location, rather than lease it. But you may also want to acquire additional property to open a new location.

New business launch

This is not only the riskiest form of business financing, but also the most difficult to get. But if you are planning to enter a capital-intensive business, you may need financing just to get started.

2. Investigate lenders and loan options

Since each of the above-listed business purposes requires a specific type of financing, you’ll need to decide which loan type will provide the best results. Term loans You borrow a fixed amount and repay in equal installments over a set number of months. Interest is built into the loan payments. The application can often be completed online, or in person at the branch office of a lender. Line of credit The financial institution grants you a credit limit from which you can draw when you need the money. Only the amount you borrow is subject to interest. Applying for a line of credit involves going through a credit check by the lender. You are more likely to be approved if your credit score is good. SBA loan This loan is guaranteed by the Small Business Administration, so interest rates are on the low side. You also would be able to borrow large sums of money with long repayment terms. Business owners seeking an SBA loan need to supply specific documents to a lender and fill out an application.

You’ll also need to decide which lenders are the most likely to offer the type of financing you need.

For most business loan types, a bank will be the logical choice. If it’s one that does a lot of business lending, it’s likely it’ll have the type of financing you need. Just as important, taking a loan through a business-centric bank is an excellent way to develop a working business banking relationship.

Hopefully, the bank where you opened your business checking account provides a full suite of business loans and services. If it does, it’ll be your first stop on your shopping trip for financing. If not, you’ll need to shop around among banks in your area that are business-friendly. As you do, look beyond the specific type of financing you need at the moment and toward other options. The bank you choose should have those options covered for the day when you need them.

Banks are particularly good at providing business lines of credit and mortgage funds to purchase business real estate. If you are launching a new business, they’re also a logical source of loans from the Small Business Administration (SBA).

Some of the top small business banks in New Jersey include the following banks and their number of NJ locations: TD Bank: 197. M&T Bank: 107. Peapack-Gladstone Bank: 16. Live Oak Banking Company: fully digital business bank. Lakeland Bank: more than 50.

Online business lenders

Banks aren’t the only sources of business loans. Online business lenders, like OnDeck, bluevine, and Funding Circle, can provide term loans and business lines of credit of up to $250,000. Another option is LendingClub, which offers business loans of up to $500,000, as well as SBA loans.

Yet another option with online business lenders is personal loans. Those are unsecured loans, with fixed rates and terms, that can be used for any purpose. They can be valuable as a source of interim financing, or even the perfect source of startup funding to launch a new business. But as the name implies, personal loans will be in your name individually, and not that of the business.

3. Find out if you’re business is eligible your eligibility

Once you’ve decided what type of financing you need for your business, the next step will be to determine if you qualify. If you are planning to apply through a bank, you should meet with a bank officer to discuss your options. Not only can the officer tell you if you qualify, but he or she can also provide helpful advice to improve your chances and speed up the process.

If you plan to apply for financing through an online source, you’ll probably be able to do a pre-qualification. This can be done online and in a matter of minutes. Just be sure you’re entering accurate information. If not, your pre-qualification can evaporate upon full application.

In either case, qualification will depend on several factors, including your personal or business credit score, any collateral you are able to pledge, as well as total business revenue and net income or loss. The lender will also be interested in the type of business you operate, how long you have been in business, and if – and how many – employees you have.

TIP: Even if a bank or online lender provides business financing, loans may only be available to businesses engaged in certain industries. Most lenders have lists of excluded business types. These commonly include businesses engaged in gambling, pornography, firearms, and fireworks, among others.

Lenders may have lists of additional prohibited businesses, based on their own loan experience in those industries. For example, a bank may refuse to provide financing to a restaurant due to excessive delinquencies and defaults in their previous lending experience. If this is the case with a particular lender, be ready to move on to another.

4. Assemble needed documentation

Once you’ve been pre-qualified for the type of financing you want, you’ll need to be prepared to supply any and all documentation requested by the lender.

As a business applicant you should expect to provide some or all of the following:

• A business license.
• Articles of incorporation, if your business is incorporated.
• A profit and loss statement for the current year.
• Business tax returns covering the most recent two years.
• Personal tax returns covering the most recent two years.
• Business references, such as vendors with whom you have trade lines.
• Business and personal bank statements for as many months as the lender requires them.

Other documentation that may be required by the lender includes a business plan, a lease on any business property, and certification letters from a CPA or attorney. In addition, each lender may have its own proprietary document requirements.

5. Apply for your loan

Once you have all the above steps taken care of, it’ll be time to submit a formal application. If you have all the documentation listed in Step 4 above, the application process will go much more quickly.

You should also be prepared to provide verifying information, such as your Social Security number, personal address, and email address, as well as an employer identification number (EIN) for your business. (The EIN is primarily for filing your business income tax returns with the IRS, but it’s frequently requested by lenders.)

If you have partners or multiple owners in your business, the lender will likely request similar information on those individuals.

Once you’ve submitted a completed application, the lender will run a credit report on both you and your business, as well as for any other individuals with an ownership stake. They will then determine your business income, and whether it is sufficient to carry the new debt obligation.

In some cases, the loan decision will be made by an individual loan officer. If that’s the case, you may get an approval within a day or two. If it has to go to a loan committee, the process can take one week or longer. And after you submit your application, don’t be surprised if the lender requests additional information or clarification on the information you already provided. It’s common with business lending.

When should you get a business loan?

Many factors that go into the decision to get a business loan. Simply put, the time to get financing for your business is when you need capital to fund an expense. That could be as straightforward as the need to purchase new inventory, or as complicated as expanding the business to include new lines.

In Step 1 above, we covered determining the business necessity of the loan. But you may also want to consider if there are any alternatives that might provide a better outcome.

For example, you may find that obtaining personal financing provides more favorable terms at a lower cost than a business loan. A good example is taking a home equity loan or line of credit on your home.

But more importantly, you should determine if your business will be able to afford the financing. Even if the loan provides a tangible benefit to your business, you’ll need to evaluate that benefit against the cost. If your business will be unable to comfortably afford the monthly payment, or if your income is too inconsistent to guarantee repayment, you may want to reconsider the financing option.

Tips for getting a business loan

The strategies for obtaining a business loan are similar to those for any type of personal financing:

Know your credit score

Monitor your score regularly and dispute any errors that appear on your credit report. The higher your credit score, the better your chance of loan approval with favorable terms.

Disclose accurate information on the application

The whole point of a lender requesting documentation (Step 4) is to verify the information provided on your application. If there are significant discrepancies, your loan may be declined.

Be prepared to provide the required documentation immediately

One of the biggest reasons why application processes take so long owes to the applicant’s reluctance to supply documentation in a timely fashion. You should have your documents prepared before you apply. Make sure it’s suitable for presentation, meaning it’s organized and can easily be interpreted by a lender.

Provide follow-up information as requested

Subsequent requests for additional information are common in the lending world. Be prepared to respond quickly and completely.

Be ready to negotiate

Business loans are much less standard than personal loans, mortgages, and auto loans. If you don’t get the original terms you’ve applied for, be prepared to modify your request. Business lending is often a give-and-take process.

Frequently asked questions (FAQs)

Who can apply for a small-business loan?

It may be possible for anyone to get a small business loan as long as they meet the qualifications, either personally or through their business.

If your personal income and credit profiles are strong, it may be possible to get a loan for your business, even if it isn’t profitable.

If your business has been up and running for several years and is generating consistent profits, you should qualify for most types of business loans.

Can you get a business loan with no money?

If your business isn’t currently generating a cash flow, you may still be able to obtain financing. However, you’ll need to have a strong personal credit profile. More importantly, you’ll need to have sources of income outside your business that the lender can rely on for repayment. If neither you nor your business are generating significant income, it may not be possible to get a business loan.

How long does a business loan take to get?

With some online lenders as well as banks with loan officers who have the authority, you may get approved and funded for a business loan in just a few days. Smaller loans and business credit cards will have the shortest application term.

If you are looking for a large amount of financing, such as for the purchase of a commercial building, or you are applying for an SBA loan, the process can take several weeks.

Can you get a business loan with bad credit?

It is possible. You may be able to get a business loan for bad credit through a business loan broker or an online source specializing in that loan type. But if you do, the loan amount may be less than you expect and the interest rate may be prohibitive. Many subprime business lenders also charge steep upfront fees that will reduce your net loan proceeds even further.

You may get better terms on a business loan with bad credit if you are able to pledge collateral. This can include real estate, financial assets, vehicles, or similar property. The additional collateral will reduce the risk to the lender, increasing the likelihood of approval, as well as more favorable terms.

What credit score do you need for a business loan?

There’s no standard answer to this question since each lender establishes its own minimum credit score requirement. But if you’re looking to apply with common business lenders, including online sources, you should have a minimum credit score between 650 and 680.

How can I start my own business with no money and bad credit?

There’s no escaping the fact that that is a tall order. Either limitation would be a challenge by itself, but the combination of the two makes it even more unlikely. In fact, the combination of two major negatives should also make you question your own ability to service any type of financing. After all, you’d be looking at a combination of limited loan proceeds, high fees, high interest, and no cash flow to make the payments.

An alternative may be to start your business as a side hustle. You can use your job income as a source of cash flow while you build your business. Since you’ll be starting small, it’s unlikely you’ll need financing anytime soon. But once your side hustle begins to develop a steady cash flow, you’ll be in a better position to apply for business financing, even if you still have bad credit.