Money is often the number one obstacle when it comes to starting a business. The good news is there are business loans available to budding business owners. The less than good news is that applying for a business loan can feel scary. But you’re in luck because below are six tips for getting a business loan to start your business.
1. Get Clear About Why You Need the Loan
Before you start asking for money, take a moment to evaluate your financing needs. Think about how much money you need and what you’ll do with it. Lenders will want to know this anyway, so start thinking about it before you even apply for a loan.
The more details you can provide, the better. Just saying that you want the money to start a business isn’t enough. You need to get specific. For example, if you want to start a plumbing business, say that you need the loan to rent a building, lease trucks, and buy plumbing equipment.
2. Decide Which Loan is Best for Your Needs
There are several types of business loans. Some might fit your needs better than others. The most common type of business loan is a term loan. This is a traditional loan where you borrow a specific amount of money, with a predetermined interest rate, and agree to repay it usually within 1 to 10 years.
The term loan is generally best for major investments like property, equipment, or to expand an existing business. This is a favorable type of loan because it has a fixed repayment schedule, interest rates are fixed or variable, and it’s most commonly available from banks and credit unions.
If a term loan isn’t to your liking, you can also consider a business line of credit. A business line of credit lets your business borrow up to a certain amount of money.
The lender only charges interest on the amount of money you borrow. For example, you might have a $1000 line of credit but only borrow $500 of it. So, it’s a flexible loan that gives you access to a set amount of money that you can borrow from as needed.
A business line of credit is often good for handling cash flow, covering short-term expenses, or handling unexpected costs. It’s actually similar to a credit card, but it’s technically a loan.
Another popular business loan option is a loan from the US Small Business Administration (SBA). When you get a business loan backed by the SBA, you get a loan created to help small business owners get affordable financing with lower down payments and longer repayment terms.
The repayment terms for an SBA loan is attractive to most business owners. In some cases, you can get up to 25 years to repay a loan – depending on the type of loan you have. For example, you must repay an SBA microloan within six years. But if you use an SBA 7(a) loan to buy business real estate you have 25 years to repay it.
A less popular option for getting a business loan is asking for money from family and friends. Plenty of businesses start this way, but it’s not necessarily the best option. It might seem like a good way to avoid credit checks and high interest rates, but relationships can go sour if you fail to repay the loan.
In addition to the loans mentioned here, there are more types available. But no matter what type of business loan you choose, each type has its advantages and disadvantages. Just choose wisely and make sure you understand the terms of any loan you consider.
3. Check Your Credit Score
Just like with most types of loans, your credit score affects your ability to get a business loan. Think of your credit score like your financial report card.
Make sure to check it before applying for a business loan. The higher the score, the more likely you are to get good loan terms. If your credit score is low, consider trying to improve it before you apply.
An excellent credit score is typically 800 and higher. A very good credit score is between 740 to 799. Good credit is between 670 to 739. Anything lower than 670 puts you in the fair to very poor credit score range.
4. Prepare Business Financial Statements
This step is for people who already have a business, but are also in need of a business loan. Lenders are more comfortable when you can show them that your business is profitable.
Make sure you have your financial statements ready to show, including your income statement, balance sheet, and cash flow statement. These documents can help convince lenders that you’re trustworthy and will repay the loan.
You can also gather tax returns, bank statements, and any legal paperwork regarding your business. Being organized can speed up the application process.
5. Research Several Lenders
It might take several tries before you find a lender who agrees to give you a loan. That’s why it’s wise to have more than one source in mind.
Spend time researching different lenders to find one that fits your needs. For example, if you’re starting a plumbing business, look for lenders who specialize in lending money to plumbing businesses. If you need money to purchase business real estate, look for lenders who offer favorable terms for business real estate loans.
6. Don’t Wait Until the Last Minute
Getting approval for a business loan takes time. For example, it can take anywhere from 30 to 90 days to get an approval for an SBA loan. But on average, a typical business loan takes between 60 to 90 days before you receive a decision.
Getting a Business Loan
These tips will help you prepare when you’re ready to get a business loan. There’s much more to know, but this is a good starting point.
