If you’re a small business owner exploring your financing options, applying for a business loan is a good way to get the funds you need to grow. Loans enable you to make purchases for your business, hire team members, and cover your everyday expenses as you scale.
Securing a loan isn’t always straightforward and the process can be time-consuming, especially if you choose a traditional lender like a bank. In this article, we’ll share some of the processes and requirements for most loan applications so that you can get a better idea of what goes into applying for a business loan before you get started.
Get your business ready for a loan
The first thing to do before you apply for a loan is to determine exactly how you’ll use the funds.
If you need financing right away to cover immediate expenses like payroll or rent, you’ll need to look for a loan option that offers a quick approval process and more flexible business credit.
If you’re looking for a large sum to invest in your first piece of equipment, you might want to look for loans that use that purchase as collateral if you do not have any other assets yet. Many lenders need you to detail how you’ll use the loan, so this step will help you build your case going forward.
The next thing to take a look at is your business’s current financial position. Ensure that your business and personal finances are clearly separated to get a full picture of how the business is doing. Lenders will be looking into your financial history and your past and projected sales as part of the approval process.
Check both your personal and business credit scores from reporting agencies like Dun & Bradstreet, TransUnion, and Equifax. Pay down your current debt, including balances on your business and personal credit cards. Using 20 to 30 percent of your credit can help boost your credit score. Making sure that you’re in good financial standing with your suppliers and catching up on past-due accounts can also help you quickly boost your credit score.
Your creditworthiness affects whether you’ll be approved for the loan, but keep in mind that it also affects the annual percentage rate (APR) you’ll pay on the loan. The better your credit, the lower your interest rates will be.
Understand the application process
One of the factors you should look at before applying for a loan is the application process itself. Depending on the lender, you could be spending more time and resources than you bargained for preparing an application and waiting for approval.
Traditional bank loans and loans from the Small Business Administration (SBA) typically have the most involved application processes and you might have to wait for a credit decision. Loans from online lenders tend to have applications you can complete in minutes to receive a fast credit decision.
Applying for a bank loan
Bank loans aren’t always the best option for small businesses, in part because the application process is so rigorous. Banks can offer the best APR to businesses with a credit score of 750 or higher, a strong history of revenue, and several years in operation.
You can still qualify for bank loans with a score between 700-749, but you’ll need to build a good case for your business. Part of the application process is presenting a business plan and detailing how the funds will be used.
Banks also require you to provide information like sales, sales projections, expenses, and cash flow. They need to be sure your cash flow will accommodate regular payments on the loan.
Applying for an SBA-backed loan
SBA loans — including the SBA 7(a) loan, CDC/504 loan, and microloans — are provided through banks and community development financial institutions (CDFIs). The SBA provides some guidelines and requirements for these loans, but lenders also have their own eligibility requirements.
To apply for an SBA loan, you’ll need to have a credit score of at least 680 and provide thorough documentation that includes your business tax returns, profit and loss statement, loan application history, business licenses and registration, and the resumes of your principal leadership.
Be aware that the SBA loan application process can take from 30 to 90 days depending on the loan you’re applying for and the lender you choose. SBA Preferred Lenders can process applications faster, but expect to wait a month at minimum for approval. The best way to speed up the approval process is to have all of your documentation in order.
Applying for loan from an online lender
Many online lenders and fintech platforms offer term loans as well as lines of credit, merchant cash advances, and invoice factoring and financing. One of the benefits of online platforms is that the application process is significantly quicker and simpler than applying for a loan from a traditional lender.
For example, Fundbox’s application process requires you to answer a few questions about your business and connect your business checking account and accounting software. A credit decision is made in as little as three minutes, and you can receive funds in your account within three business days.
When it comes to credit score requirements, most online lenders, including Fundbox, look for scores above 600. Some invoice financing and merchant cash advance providers will not take your credit score into account at all, but you’ll be on the hook for a steeper APR.
Assess the costs
Finally, as you shop around for loan options, keep in mind that taking on debt will cost you. Advertised interest rates likely will not reflect your APR, which includes additional charges like origination fees and ongoing service fees.
Knowing exactly how you’ll use your loan will come in handy when you’re deciding how much money you’d like. Choosing the loan amount that fits your needs can save you money in the future. Many lenders charge prepayment fees, which means that even if you do not use the full loan amount, you have to continue to repay on a regular basis for the remainder of your repayment term if you want to avoid this penalty.
While not a direct cost to you, bear in mind that secured loans require collateral. Equipment loans or mortgages use the property itself as collateral while loans for other purchases are usually secured with a UCC-1 or “blanket” lien, which uses all your business assets as collateral. It can be extremely costly to replace your assets if they are repossessed.
Some loans, including SBA loans, also require a personal guarantee, which means that personal assets are used as collateral, too. Unsecured loans do not require collateral, but you’ll pay much higher interest rates.
Ready to apply for a business loan?
Fundbox offers term loans and lines of credit up to $150,000* for small businesses that need funding quickly. Term loans_†_ are paid over 24 or 52 weeks and there are no origination or prepayment penalties. Lines of credit are paid over 12 or 24 weeks and your available credit replenishes as you pay.
Apply to see if you qualify for financing from Fundbox and get extra working capital for everything from your everyday expenses to investing in your most ambitious business goals.
*Credit line amounts, rates, and terms are based on creditworthiness and subject to change. Additional documentation may be required.
†The Fundbox Term Loan offering is currently in beta and is not available to all applicants
Disclaimer: Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Fundbox makes capital available to businesses through business loans and lines of credit made by First Electronic Bank, a Utah chartered Industrial Bank, member FDIC, in addition to invoice-clearing advances, business loans and lines of credit made directly by Fundbox.