February 22, 2022
So, you want to get a loan to start or grow a business, improve cash flow or increase working capital in 2022.
Are you finding it challenging to get small business financing or refinancing? Qualifying isn’t as difficult as you think!
Knowing the steps required to get financing or refinancing before applying for it can help reduce the frustration you’re feeling and increase your chances of getting approved.
In this article, I’ll walk you through those steps, and make them easy to understand and navigate. It will take away the mystery of getting a loan and turn you into a confident small business owner who knows how to shop for the right loan to meet your needs in 2022.
It may seem obvious, but this is a first step that’s often missed.
You can’t start the loan shopping process unless you have a clear understanding of how much cash you need and the loan amount you should apply for.
Some business owners underestimate it, thinking it will make them more likely to get approved. Others go into it requesting money to do everything they want which will likely get their application rejected. The reality is that you must figure out how much money you require based on your business needs and a realistic plan for how you’ll use it so you can earn revenue to pay the money back.
If you’re not sure how to calculate your financial needs, get help from your accountant, financial advisor, or a professional at your loan company.
Once you’ve figured out how much cash you need, your next step is to define the primary reason you need it. Is it for a big, long-term issue or a quick, short-term problem? If you have a clear understanding of why you need cash, you can select the financing option that’s best for you and your type of business. Here are the top loan options:
Knowing why you need a loan will help you identify the right type to meet your needs.
Answer these questions to determine your eligibility for small business financing:
Creditworthiness is a key factor in determining small business loan eligibility. Get a credit report from one of the top three credit bureaus: Equifax, Experian, or TransUnion. You may also be able to find out your credit score through your bank or other financial providers. Many offer it as a free service. Online lenders and traditional financial firms prefer to make loans to business owners with a minimum credit score of 680. If your credit rating falls below that level, consider looking into alternative loans reserved for people with poor credit at community banks or from nonprofit microlenders.
You must be in business for at least one year to qualify for most small business loans offered by online providers and at least two for most loans from traditional lenders, banks, and financial institutions. The longer you’re in business, the more likely you’ll be to get a loan with favorable terms.
Many lenders require a minimum annual revenue, which can range anywhere between $50,000 and $250,000 per year for a business to qualify for a loan. If your revenue levels aren’t high enough to get approved for traditional financing, look into short-term business loans, microloans backed by the SBA, or even things like equipment financing offered through a supplier.
Once you’ve answered these questions, you should know whether it’s worth it for you to apply for a small business loan.
Carefully review your business finances. Pay special attention to your cash flow. See how much “extra” cash you have to pay toward a loan. Be conservative! Don’t forget that an economic or business downturn could happen at any time.
Rule of thumb: To comfortably repay your loan each month, your total business income should be AT LEAST 1.25 times your total expenses, including loan repayments. Anything less than that could seriously put your business at risk.
Biz2Credit’s loan calculator can help you figure out monthly loan payments.
Remember: Check the repayment frequency and timing before you agree to a loan. Some lenders require payments more than once a month. A few even require daily repayments. Monthly payments will have a very different impact on your cash flow than daily ones.
A secured (collateralized) loan requires you to put up something of value owned by your business such as property or equipment as a guarantee against the loan. Your lender can take it if you fail to repay the loan. Putting up collateral is a risky thing to do, but it can also raise the maximum loan amount lenders will offer you, and doing so will typically allow you to pay interest at lower rates of the loan. Before you put up collateral, consider the impact it could have on your business if you lose it because you default on the loan.
In addition to business collateral, some lenders may also require a personal guarantee, even for unsecured loans. If you agree to this, you’ll have to personally repay the loan if your business can’t. On top of this, a personal guarantee may allow a lender to come after things like your house, vehicle, and other personal property if you fail to repay your loan.
There are three main types of small-business loan providers:
Each of these lenders typically offers different loan types, but one may be better for you based on your circumstances than the others. Here’s what you need to know to select the best one for your operation.
It probably makes sense to get financing from an online lender if you:
Online lenders offer small business loans and lines of credit from about $1,000 to $5 million. The average annual percentage rate (APR) on loans from online lenders starts at six percent and can go all the way up to 99. The APR depends on the lender, type and size of loan, repayment term, the borrower’s credit history, and whether the business is putting up collateral.
Online lenders typically have APRs that are higher than those offered by traditional banks. However, your chance of getting approved is greater and you’re likely to get funding much faster than you would with a traditional lender. In many cases, you can get cash deposited into your business banking account within one business day of putting in an online application.
Not familiar with online lenders? Here at Biz2Credit we are a top-rated and established online lender. We focus on offering our clients flexibility and variety when it comes to lending options. We provide fast funding with an online process that is easy to use and simple to navigate. Indeed, we were named best by CNBC for multiple types of business loans, showcasing the array of loan products we offer small businesses. While there are other online lenders out there, the online lending industry is not as regulated as brick-and-mortar banks, meaning you have to do your research and due diligence before settling on one. As such, it is best to go with trusted industry names that have a track record of customer service, transparency, and credibility.
It usually makes sense to get financing from a traditional lender if you:
Traditional financial institutions typically offer term loans, special purpose loans, lines of credit, and mortgages to help purchase commercial real estate.
The U.S. Small Business Administration offers small business loans mostly through approved banks, along with some online lenders. The SBA provides loans through its SBA 7(a) loan program, short-term microloans, and disaster loans. The SBA offers loans up to $5.5 million.
The SBA also has a 504 loan program that helps promote economic development by funding fixed asset purchases such as land, real estate, and equipment through long-term, fixed-rate financing.
Banks and traditional lenders typically offer the lowest interest rates, but it’s much harder to get approved for a small business loan through a bank compared with an online lender. They usually have higher credit score requirements. It also takes longer to get financing. If you have an established business and long-term, larger-scale financing needs, a bank could be a good option for you. If not, it would be smart to seek out other alternatives for your financing needs.
It probably makes sense to turn to a microlender if you:
Microlenders are nonprofit organizations that typically offer short-term loans of less than $50,000 (usually much less than that). The APR on microloans is higher than that of bank loans because they’re made to riskier businesses. The application process is more intensive than for many other loan types. It may require a complete business plan, financial statements, and an explanation of what the loan money will be used for.
If you need a lot of cash fast, a microloan is not the right option for you. However, these loans often work out well for smaller companies or startups that can’t qualify for traditional bank loans due to a limited operating history, bad credit, lack of collateral, or history of being at a social disadvantage.
Tip: Check online ratings and reviews to make certain a loan provider you’re considering doing business with is above board, reputable, and provides good service.
Before you apply for a small business loan, make sure you have all the documents you will be required to submit. Having them handy will make the loan application process much faster and easier.
Depending on the lender, you’ll need to submit some — or all — of the following documents:
Now that you’ve figured out which type of loan and lender are right for you, it’s time to apply.
Submit applications to two or three similar lenders so you can compare loan terms, annual percentage rates, upfront and origination fees, prepayment penalties if you make a lump sum early repayment of your loan, and other things to find the best small business loan package for you,
If there’s anything you don’t understand about a loan offer, ask questions. You don’t want to get a surprise after you receive your financing.
