The Definitive Guide to Applying Online for Small Business Loans
December 1, 2022 | Last Updated on: January 27, 2023
December 1, 2022 | Last Updated on: January 27, 2023
Most small businesses will be faced with the prospect of seeking financing at some point during their existence, very often during the startup phase, but also commonly beyond that point. But there is a range of financing options in the 21st century that wasn’t available to entrepreneurs a generation or two ago thanks to the Internet. It may no longer be necessary to spend valuable time in a bank being interrogated before receiving bank loan approval — or rejection.
Can you get a business loan online? Applying for a loan online has become a simplified process, and the steps it takes to seek out financing have certainly become more streamlined. Small business owners should know, however, that while applying for funding online is easier than ever, it is not a guarantee of success. Business fundamentals required of potential borrowers remain the same (being able to produce finance data, profit-and-loss, revenue growth, and projections).
The first step prior to starting an online application for a small business loan is to determine what loan programs it is that you need. How you plan to use the money will influence what type of loan you are hunting for. If you intend to purchase a place to conduct your business, you may need to look for a commercial real estate loan. If it’s a piece of machinery to help generate a physical product that your company sells, equipment financing might be up your alley. In order to get financing that you’ll be able to use frequently, a business line of credit might be most appropriate.
What distinguishes these business financing options from each other?
Any real estate that is used exclusively for business purposes is considered commercial real estate. Business owners may purchase commercial real estate either as a place to conduct or expand their own company or as an investment used to generate capital.
Small business owners who are just starting out, or those who see rapid growth in their company, may decide that expansion to a new location or a significant overhaul of their present real estate space is on order.
But even entrepreneurs possessed with worlds of savvy in their own chosen business field might need some guidelines when it comes to navigating the sometimes tricky and confusing labyrinth of funding options of commercial real estate loans.
A business owner might decide to purchase either a new commercial property or an existing piece of commercial real estate, including an office building, an industrial building, a restaurant or retail structure, a multifamily dwelling, hotels, and hospitality or land.
A loan that is secured for the purpose of buying equipment, an equipment financing loan is secured by the equipment itself. A business that can’t afford to pay off the loan would end up surrendering the equipment as collateral.
If cash flow impedes the purchase of vehicles or machinery, small businesses can turn to small equipment loans to finance the heavy-duty parts they need to make a go of things. A number of providers ranging from traditional banks to alternative lenders are available to lend money for equipment. The rates for an equipment loan could be anywhere from 6 percent to 9 percent.
There are three reasons business owners would apply for an equipment loan:
Some of the businesses that would most likely be in the market for an equipment loan include auto body shops, farming businesses, construction companies, healthcare providers, restaurants, shipping companies, manufacturers, creative agencies, and IT firms, among others.
When a lender provides pre-approved funding with a maximum credit limit, it is known as a business line of credit.
If the borrower is approved for this credit line, funds can be accessed whenever they are needed until the established credit limit has been reached. Very often, this product can have what’s known as a floating interest rate, or a rate that will change in conjunction with changes in the economy. This is otherwise known as a variable interest rate.
Because the borrowers pay interest on the amount that he or she withdraws, a business line of credit can be advantageous for business owners who are uncertain of the loan amount of business funding they will actually require, or when they might need it.
The drawback to a business line of credit is that the loan will be at a rate that might be considerably higher than other business loan options. How costly that actually would be is heavily dependent on the amount of funds the entrepreneur ends up using.
If a business owner needs to establish a favorable credit history and show a track record of timely payments to allay creditors’ concerns about the company’s creditworthiness, a business line of credit could help the owner do that.
Other types of online business loans you can apply for include an SBA loan, a merchant cash advance, a P2P loan, and invoice factoring.
The U.S. Small Business Administration (SBA) offer commercial financing backed by the SBA. What is the easiest SBA loan to get? The most common type of SBA loans, an SBA 7(a) loan assists businesses in the purchase or refinancing of owner-occupied commercial properties up to $5 million. This loan also gives the business owner a chance for working capital loans. These loans are suited to assist businesses that are unable to secure credit anywhere else.
A merchant cash advance is when a company grants the business owner access to cash. The borrower is then required to pay a portion of his or her sales made with a business credit card and debit card, as well as an additional fee. A merchant cash advance does not require collateral or personal guarantee or a minimum credit score. However, merchant cash advances to business owners involve higher costs than most other forms of borrowing. A merchant cash advance is an expedient way for a business owner to get his hands on capital when the need for cash becomes extremely pressing.
A P2P loan (peer-to-peer) is offered directly to individuals without either a bank or traditional lenders serving as “the middleman.” Online lending platforms fund borrowers via institutional lending partners. Business owners with good credit who need a small amount of working capital quickly may be able to meet small, short-term working capital needs with a peer-to-peer loan. This type of loan must be repaid with interest in a period of one to five years.
Short-term loans from online lenders may be easier to get approval than some other types of loans. Choosing to apply for a short-term loan comes with the expectation that you might have just a couple of weeks of repayment. If you have an installment loan, you have up to six months to pay it off. A short-term loan application is completed online and normally takes a matter of minutes to be approved.
The rapid application process is one of the main attractions of a short-term online loan. Sometimes approval could take only a couple of business days or even the same day the small business loan application is placed. In addition to fast approval, other advantages of short-term online business loans for working capital include paying less interest, the chance to improve a bad credit rating, and flexibility.
Some short-term loans actually come with penalties for early repayment. Short-term loans generally have a term of 12 months or less. Payments on short-term loans are required frequently — sometimes as often as once a week. Although the eligibility requirements are not as strict for short-term loans as they are for regular-term loans, the frequent repayment terms may be a drawback for someone in a new business who does not have a robust cash flow at that moment.
Even if you are taking advantage of the convenience of applying for a loan online, you’ll still need to arm yourself with a lot of material to ensure the best chance of getting approved:
Applicants are entitled to a free credit report once a year from each of the three major consumer reporting companies: Equifax, TransUnion, and Experian. You can request a copy from AnnualCreditReport.com.
Needed for both personal and business bank accounts
The last 12 months of your bank statements are a way for the lender to verify the other financial information that you have provided. They also provide further insights into an applicant’s spending patterns.
A profit-and-loss statement displays annual revenues and expenses for an accounting period and indicates whether a business is making a profit.
In contrast to an income statement, a balance sheet lists the assets and liabilities of a company and owner’s equity. Assets are what you own; liabilities are what you owe.
This type of statement indicates the amount of cash entering and leaving your business in a given time frame. A properly prepared cash flow statement will exhibit how much cash a company has on hand for a specific period of time.
Most business plans fall into one of two common categories: traditional or lean startup. Writing a traditional business plan with a standard structure entails going into considerable detail in each section of the document. A traditional business plan is a lot of work, because of the elaboration involved.
A lean business plan, on the other hand, outlines the most vital components of the plan in a much more streamlined format that might only take up a single page.
Register your small business with a business license or certificate. Neglecting to do so might cause the lender to view the legitimacy of your company with skepticism.
Registering a company is a vital element in the journey to receiving approval for small business financing. A business can be registered as a sole proprietorship, a partnership, a limited liability corporation (LLC), or a C-Corp, which makes your business a separate entity from the owners.
An LLC is a legal entity that can be formed to own and operate a business. An advantage of registering as an LLC is that it provides the same limited liability as a corporation, but it is easier to form and less expensive to operate.
A C-Corp is a legal structure in which the owners, or shareholders, are taxed separately from the entity. C-Corps, which are very common, are subject to corporate income taxes. The taxing of profits from the business is at both corporate and personal levels, so C-Corps incur double taxes. A C-Corp is legally viewed as an individual entity, separate from its owners, who are now shareholders.
Even if you are applying for a loan online, the lender is going to want some indication that you’re a good risk and that you’ll be able to pay off the loan. You should be able to able to present the prospective lender with your business loan application history. Did you pay all your installments on time? How many times did you try to access credit? Were you approved or denied prior loan requests? In either case, a statement itemizing your previous loan applications can help the lender determine whether you are a good risk (i.e., a viable applicant for credit).
Gather your business and personal income tax returns for the last three years. This is information that a lender must see before considering whether to approve your loan request. Make sure the tax returns are signed and feature the correct information before submitting them to your lender.
Lenders usually expect an applicant to be able to present one year’s worth of personal and business bank statements before completing the loan process to verify the other financial information that you have provided. They also provide further insights into an applicant’s spending patterns.
A small business owner who applies for a loan online still will need to prepare and present a business plan to the lender. Anyone who owns a company and has come this far is probably already familiar with the concept of a business plan, but it’s important to craft the presentation in this particular business plan to suit what the lender is looking for.
A business plan should include an executive summary, description, opportunities and competition analysis, and marketing and contingency plans. You should also include in the business plan your intentions for using the loan money, your vision for how the financing will enhance the company’s growth prospects, and projections for future profits. If the loan applicant believes there will be a subsequent need for more financing, you should be upfront about your business needs rather than neglecting to mention them.
If you are wondering about anything related to financing, come check out FAQs, There are answers to many of the most common questions that small business owners have about financing with Biz2Credit. We ensure businesses of all kinds are connected to the best funding solutions for their needs.