Do you need financing for your small business? Even as a startup or growing business, there are options available to help you access the money you need.
Before you can access financing, it’s important to build up your business credit, create positive financial habits, find the loan options that are most relevant to your business and gather the essential documents required by your financial institution of choice. This process can look slightly different for each business, depending on your company’s history and the amount of money you require. But these basic concepts are almost always true.
How to Get a Small Business Loan
If you’re looking to obtain a loan for the first time or are just interested in learning the ins and outs of business financing, here are some of the essential steps involved in securing a small business loan.
Build Business Credit
Before you can ever apply for a loan, you need to build up some credit worthiness. This shows banks and potential lenders that you’ll be able to repay whatever you borrow. At the crux of this is your business’s credit score.
A good credit score depends on what type of financing you need and the loan terms that you require. But credit reporting agencies tend to look at amount borrowed, repayment schedules and business assets to determine your ability to repay any future loans.
To build a positive score that will help you receive financing, you should start by opening up specific business accounts, applying for small amounts of financing and paying all loans quickly.
Avoid Poor Financial Decisions
While attempting to build credit, many business owners tend to make mistakes that actually set back their credit worthiness, like making late payments or mixing business and personal accounts.
There are some loan options for those with poor business credit. But the terms are usually not especially favorable. And building up a positive credit score is a good idea even if you don’t need it for immediate financing. If you already have bad credit, it’s important to gradually work on building up your score by only utilizing necessary credit and paying back loans quickly and on time. Having a lot of outstanding loans or late payments can make it significantly more difficult to receive financing. And it can take a long time to recover.
Find the Right Lending Options
Once you determine that you need a small business loan, you need to consider the main options available. Of course, there are traditional bank loans. But not every small business qualifies for that type of financing. You can also look into alternative lenders, online loan marketplaces, crowdfunding and various other financial resources designed to help underserved small businesses.
You may need to compare several financing options to find the solution that best fits with your needs and that you can actually obtain with your business’s resources and credit score. Start by considering the purpose of the loan. If you need money to cover an equipment purchase, you might consider equipment financing. If you just need to cover cash flow while you wait for clients to make late invoice payments, you could consider factoring.
Any lender will want to know what you plan on using borrowed money for, so start by determining the purpose and amount. Then you can work on finding a lender that meets those needs.
Gather Essential Documents
In order to qualify for a small business loan, you need to gather documents that prove your credit worthiness. The exact documents you need depend on what type of loan you choose to apply for, but you are likely to at least need basic financial statements, expense reports and loan applications.
Once you find a lender that suits your needs, work with them to determine the exact documentation that is required to obtain financing. There may be some items that are required and others that are just recommended. As a small business, it’s always a good idea to provide as much information as possible that proves your ability to repay a loan. So plan on working hard to gather all relevant financial documentation throughout the process.