What is required to get a small business loan: Things you need to know

If you’re just starting out, it’s possible you don’t know what is required to get a small business loan. After all, most people start a business to turn their passion into a career – but aside from raw enthusiasm, what else do you need? Where do you go? Who do you ask? Many don’t even know where to begin – and what’s more, so much information is full of jargon. This leaves many would-be business owners feeling a little lost and deflated.


On the flip side, you might already own your own business. If your customer base is growing, the products are selling, and revenue is increasing, it’s likely you’ll be thinking about expanding. In order to grow, you might need a little helping hand. For instance, you may want to buy extra inventory, hire more staff, or get larger premises. However, as many business owners know, getting a loan isn’t easy. Most established lenders require extensive documentation, which they closely scrutinize.


Therefore, it’s important to gather together all the tools you need to make your application as strong as possible – whether you’re just starting out or looking to expand. In this article, we cover what is required to get a small business loan or alternative funding.


1. Figure out what kind of loan you need

There are many different types of business funding out there, so you need to determine which is right for you. Often, most startups and small businesses opt for a combination of traditional and alternative lending. For example, if your business is seasonal, you might need to keep cash flow steady during downtime. Therefore, a line of credit may be more suitable than a long-term loan. Equally, if you need to make a single significant purchase, then perhaps a company credit card is more appropriate. Either way, once you’ve established what type of funding best suits you, then you can narrow down what you need to prepare.


2. Compare what is required to get a small business loan from different lenders

Only banks give out loans, right? Wrong. There are many different avenues through which to get finance for your business. A good start is to check out the SBA, the government department for small enterprises. Although they don’t give out grants themselves, they connect startups with lenders that comply with their guidelines. Equally, alternative lending products like merchant cash advances can provide affordable short-term solutions. However, this isn’t to say you shouldn’t check with your bank. If you have a positive, long-term relationship with a local bank, they can give you a good rate.


Whichever route you choose, ensure your loan meets your business goals. Always compare interest rates, fees, and penalties. Remember, being unable to meet your monthly repayments is a recipe for bankruptcy. In addition, you need to make sure you understand the loan covenants. Loan covenants are a list of specifications from the lender about what a company can and can’t do during the loan term. Contravening these conditions can lead to penalties, so make sure they’re clear. Furthermore, you need to familiarize yourself with the lender’s requirements. Some financial institutions will only lend to companies of a certain age, size, net worth or liquidity.


3. Get your financial statements in order

This step applies to those who are looking to expand their business. Once you’ve figured out what you need and who you need it from, it’s time to pull together your documentation. Before applying, gather together all the financial information about your business. This includes your articles of incorporation, balance sheet, income statement, and cash flow records. If you’re applying for a traditional bank loan, then it’s likely that they’ll want to see at least three years of records. However, if you’re going with an alternative lender, they may need less – so double check the stipulations.


4. Gather your personal documentation

Your business’s financial statements aren’t only what is required to get a small business loan. Often, lenders will require personal financial information such as bank statements, your federal tax ID number, state registrations, and state filings. Make sure you have is this information ready and in order to present to the lender.


5. Check your credit score

Credit scores – don’t you just hate them? Unfortunately, checking your business and personal credit score is essential before applying for business credit. For a belt-and-suspenders approach, check your score with all three of the major credit reporters – Experian, Equifax, Annual Credit Report, and TransUnion. Once you have both your personal and business credit reports, be sure to dispute any errors. Remember, if a lender turns down your funding application, it can damage your credit rating. Therefore, it’s crucial you take a proactive approach to your credit scores before you apply.


6. Prepare a nest egg

Most banks and financial institutions will evaluate your assets as part of your application. Therefore, it’s good to save up a portion of the money to contribute to towards costs. For example, the SBA advises that most lenders require applicants to provide 30% of their startup equity. In plain English, that means if you want to borrow $10,000 you should prepare a nest egg of $3,000 to prove to the lender you’re a responsible debtor. Furthermore, many traditional lenders will require collateral before granting a business loan or line of credit. Collateral are assets that act as security in the event of a default. This could include vehicles, equipment, inventory, or real estate.


7. Have a business plan

When applying for a loan, you need to be prepared to present your business plan. This document will show the lender that you have carefully researched your market, ensuring you will make a profit. However, it’s important to keep projections realistic. Remember, lenders don’t like risk. They want to be confident you can afford the interest or principal payments, so they’ll prefer a conservative estimate over inflated forecasts. This step is especially important when applying for small business loans for start-up; the lender will want to be assured your venture will be a success.


Remember – whether you’re just starting out or looking to grow, getting funding requires care and attention. As stressed above, when applying for a loan, it’s important to be confident the odds are in your favor. Applying for finance should never be taken lightly, as unsuccessful credit applications can make gaining future funding more challenging. Preparation is the key to success, so ensure you have everything you need before you contact a prospective lender. The more you educate yourself, the better your chances are of finding finance that works for you and your business. Once you’re familiar with what is required to get a small business loan or alternative funding, then it’s time to start realizing your vision.