If you are in the market for a small business loan, there are pivotal steps to take to increase your chances. Forbes Advisor says your chances of approval depend on the lender's requirements and how well you meet them, so applying with little to no preparation risks denial. Here’s how to set the process in motion.
Colin Beresford, spokesperson with Forbes Advisor, says a business loan could be beneficial for many reasons, such as if you’re buying assets that will contribute to the long-term value of your company or if the only way to expand your business is with additional funds. "While many may expect that only a struggling business requires a loan, they can provide a boost to thriving businesses. For example, a restaurant owner may be drawing in too many customers and is unable to fit them in, so a loan could provide the funds needed to expand or open a new location," Beresford tells FOX Business.
A loan can help small business expand to meet increasing demand. (iStock)
However, despite the advantages of a business loan, it’s crucial to never take out a business loan if you have concerns about making the repayments, he says.
Beresford recommends using a business loan calculator to ensure that your business can repay any debt that it takes on, and if not, a business loan might not be a good option. "This is especially important if you're considered a secured loan, which can end with your lender taking possession of your collateral if you fail to repay the loan," he cautions.
Beresford explains how there are various business loans, and each have unique features, such as what they can cover, how the funds are disbursed or how the debt is repaid; for example, a working capital loan can be used for business operating expenses such as payroll. "Generally speaking, a business loan can cover many things, including the cost of essential equipment or inventory," he continues. "As well as this, a loan can be used to hire employees and even to refinance debt. "
Ultimately, Beresford says, your needs as a business will determine the type of loan that you require, so it’s important to identify any areas that could benefit from support, as well as what could be affected in the future as your business expands.
A "help wanted" sign is displayed in a window in Manhattan on July 28, 2022, in New York City. A small business loan can help cover the cost of hiring more staff. (Photo by Spencer Platt/Getty Images ((Photo by Spencer Platt/Getty Images / Getty Images)
Lenders consider both personal credit scores and business credit scores to determine your ability to repay your loan. "The higher your score, the higher the chance of being accepted for a loan, but most lenders will require a personal credit score of at least 680 and will take both personal and business credit scores into account," Beresford says. Although, he says, some lenders will accept scores of 580 to 600.
Longevity in business can also be part of the mix. "The more time you’ve spent in business, the more likely you are to be approved for a loan," Beresford tells FOX Business. Traditional banks usually require two years of operation, but businesses that have been operating for as short as six months to one year may be accepted by an online lender, he says.
Beresford also notes how annual revenue is another factor considered by lenders, so the higher the better, but typically they require $100,000 to $250,000. "This is incredibly important to lenders as it indicates your ability to repay the loan," he adds.
One way to compare lending options is to prequalify for a loan, which some lenders offer, he says. "Doing so consists of a soft credit inquiry, which won’t harm your score, and you can simply enter some basic information about your business to receive an interest rate estimate if you are eligible," explains Beresford.
You can also compare lending options to consider exactly what you need the financial help for, when you need it, and how likely it will be that you would meet strict requirements in order to narrow down your search, Beresford says. "As traditional banks tend to be stricter with the requirements, the best option would be to compare online lenders – this is also recommended if you need the funding quicker, as the turnaround can be slower with traditional banks," he says.
If you don’t need the money instantly, and meeting the requirements is not an issue, he says, then comparing loans from traditional banks may be your best option. "Typically, you’ll find that the interest rates are much lower with a bank than an online lender, but it may take several weeks or even months for your loan to process," Beresford tells FOX Business.
Wilsonville, Oregon - Mar 9, 2019: The exterior of a Bank of America (BofA) branch. Local branch banks will usually provide cheaper loans then online lenders. (iStock)
There are multiple documents that are required for a business loan application, so it’s sensible to take time to gather them and read through to ensure everything is correct to avoid any setbacks, he says. "Keep everything in one place, and make copies of the documents to prevent a longer application process," suggests Beresford.
According to Beresford, usually you will need a minimum of 12 months of personal and business bank statements, personal and business tax returns for at least two years and any details about current and past business loans.
He points out that you will typically need to provide copies of applicable business licenses and legal documents, articles of incorporation, profit and loss statements, financial statements and a building lease. "Before you apply, contact your preferred lender to discuss the exact documents you will need, to ensure they are up to date," says Beresford. "If your business hasn't been around long enough to have all of this documentation, no-doc loans could be a good option."