To grow your small business, securing a loan can be vital.
In 2024, the steps to getting a small business loan start with understanding your small business financing needs, preparing documents, and researching options. Discover the essentials of securing a loan for your small business to meet your growth and financial objectives.
You’ll also need to submit your application and review the loan agreement carefully.
By following this process, you can find the right loan for your business.
Let’s break down each step so you know exactly what to do next.
The Average Small Business Loan
The average small business loan amount is around $663,000
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Small Business Loan with Bad Credit: Key Steps in the Application Process
Assess Your Needs
Determine the Loan Amount
First, you should figure out how much money you need. You need to be specific. Whether it’s for purchasing equipment, expanding your shop, or covering payroll, pinning down a precise amount helps clarify your ask. Interested in financing your growth strategy or day-to-day operations? Discover the various options available for securing a loan for your small business.
Identify the Purpose of the Loan
Lenders want to know why you need the loan. You should clearly state your objectives. Are you looking to buy new equipment, hire staff, or manage cash flow gaps? Each purpose might affect the type of loan you should pursue.
Forecast Business Growth
Estimate your future business growth. You can create realistic projections. Lenders will scrutinize these figures to assess the feasibility of your loan repayment plans.
Prepare Required Documents
Business Plan
It is better to develop a comprehensive business plan. This should outline your business model, market analysis, and strategy for growth. You can highlight your unique selling propositions and market opportunities.
Financial Statements
You should prepare key financial documents. This includes the balance sheet and income statement. These show your financial health. Providers will look at your revenues, expenses, and profit margins.
Tax Returns
It is better to gather your business tax returns for the last 2-3 years. Lenders use these to verify your income and assess financial stability.
Bank Statements
Compile your business bank statements. Lenders will want to review your cash flow patterns. Generally, they request statements from the last 12 months.
The Debt that Small Business Owners Carry
On average, small business owners carry about $195,000 in debt
Research Your Loan Options
Compare Rates and Terms from Various Lenders
It is better to look at different lenders. You should compare their interest rates and loan terms. Both will affect your overall repayment amount.
Look at Both Traditional Banks and Online Lenders
Traditional banks often have lower interest rates but stricter requirements. Online lenders offer quicker approval but can have higher interest rates. You should determine which option best suits your needs.
Evaluate the Impact on Cash Flow
You should consider how the loan repayments will impact your monthly cash flow. Ensure the loan won’t strain your finances.: cash flow strategies Tools like a cash flow forecast can be useful here.
Submit Your Application
Complete the Lender’s Application Form
You should fill out the lender’s application form accurately. This is your first impression. It is better to double-check all entries to avoid simple mistakes.
Attach Required Documents
You should attach all the necessary documents to your application. Missing documents can delay or jeopardize your approval. You should ensure everything is clear and legible.
Follow Up with the Lender
After submitting, stay in touch with the lender. You should follow up as needed to answer any questions they might have and to check on the status of your application.
Review and Sign the Loan Agreement
Read the Terms and Conditions Carefully
You should read the loan agreement thoroughly. It is better to pay attention to the interest rate, repayment schedule, and any fees. Understanding these terms will prevent future surprises.
Ask Questions If Anything is Unclear
If you don’t understand something, ask. It’s better to clarify now than to get confused later. Remember, it’s your money and your responsibility.
Sign the Agreement and Return it to the Lender
Once you’re clear about the terms and ready to proceed, sign the agreement. You can return it promptly to finalize the loan process.
Addressing Common Questions
Is it Difficult to Get a Small Business Loan?
Yes, it can be challenging. Approval rates for small business loans at big banks are about 14.5%, while alternative lenders approve 27.8% of applications. Preparation and understanding lender requirements can improve your chances.
Concerns of Small Business Owners
A survey found that 77% of small business owners express concerns about their access to credit, reflecting growing economic uncertainty
What Credit Score Do I Need to Get a Small Business Loan?
Typically, a score of 680 or higher is ideal. However, some lenders might accept lower scores, especially online lenders. Good personal credit can significantly boost your chances, as pointed out by Rob Stephens, founder of CFO Perspective: “Maintain a good personal credit score. Banks will require a personal guarantee on the debt.”
How Much Can I Realistically Get for a Small Business Loan?
This depends on various factors, including your business’s financial health and the type of loan. For example, SBA 7(a) loans can range from $50,000 to $5 million.
How to Improve Your Chances of Getting a Small Business Loan?
Preparation and organization are key. You should have all your documents ready. It is better to maintain a good credit score. You should research and find the right lender. A strong business plan can also strengthen your application. As Rob Misheloff, founder of Smarter Finance USA, emphasizes: “Preparation is key.”
Understanding Small Business Loan Requirements for 2024
Credit Score Requirements
A minimum personal FICO score of 500 required
Aim for a score above 680 for better loan options.
Improve business credit for stronger applications
Minimum Credit Score Typically Required
For small business loans in 2024, you’ll typically need a personal FICO Score of at least 500. However, the best interest rates are usually reserved for those with excellent credit, specifically scores above 700. Discover the prevailing interest rates for small business loans in 2024 and get tips on achieving the most favorable terms for your enterprise.
How Your Credit Score Impacts Your Options
A higher credit score improves your chances of getting a loan and securing better terms. For example, SBA 7(a) loans, known for their borrower-friendly terms, often favor applicants with a credit score above 680.
Ways to Improve Your Credit Score if Needed
If your credit score falls short, there are steps you can take to improve it. For example, paying down existing debts can boost your score. Additionally, It is better to make sure to regularly monitor both your personal and business credit reports for errors. Businesses should aim for a high business credit score from agencies like Experian, Equifax, or Dun & Bradstreet.
Collateral and Personal Guarantees
Collateral is required for larger loans.
Personal guarantees needed from major owners
Be aware of risks with collateral and guarantees
What Collateral Might Be Needed
For loan amounts over $25,000, you generally need to provide collateral. This could include real estate, equipment, or other valuable assets.
The Role of Personal Guarantees in Securing a Loan
Personal guarantees are another common requirement, particularly for SBA loans. All owners with a 20% stake or more typically need to provide personal guarantees. As Nav explains, “SBA loans require personal guarantees from all owners with 20% or more ownership.” This means if the business can’t repay the loan, the personal assets of these owners might be at risk.
Risks Involved with Collateral and Guarantees
Offering collateral and personal guarantees involves significant risks. While using collateral can make your loan application more attractive, it also means you risk losing these assets if you default.
Business Performance Metrics
Ensure strong revenue and profit figures.
Maintain a low debt-to-income ratio.
Show consistent performance to lenders
Revenue and Profit Benchmarks
Lenders want to see healthy revenue and profit figures. Your business needs to generate enough cash flow to cover existing obligations and handle new loan repayments.
Debt-to-Income Ratio Requirements
A favorable debt-to-income ratio is crucial. Lenders typically prefer this ratio to be 36% or less. In simpler terms, only 36% of your gross revenue should go towards debt repayments. Bankrate adds, “Lenders often want to see a debt-to-income ratio of 36 percent or less, which means that your debt only amounts to 36 percent of your revenue.” A higher ratio might signal to lenders that you’re over-leveraged.
Importance of Consistent Business Performance
Showing consistent business performance over the past one to two years strengthens your loan application. Lenders are reassured by stable, predictable income. LendingTree notes, “Your business will be in a stronger position to borrow if you can prove you have a track record of solid revenue over the past one to two years.” This historical financial stability signals lower risk to lenders.
Industry-Specific Criteria
Requirements vary by industry.
High-risk industries face more scrutiny.
Make sure your industry qualifies
Any Additional Requirements Based on Your Industry
Some industries have specific loan requirements or restrictions. It’s important to confirm that your business falls into an SBA-eligible category. Non-profit, illegal, or speculative businesses are excluded from SBA loans.
High-Risk Industries and How They Are Treated Differently
High-risk industries, such as those in construction or hospitality, often face stricter lending criteria and might incur higher interest rates. These sectors are riskier for lenders due to market volatility. Nav highlights, “High-risk industries may face stricter eligibility requirements or higher interest rates.” If your business falls into a high-risk category, you might need to work harder to prove your financial stability and ability to repay the loan.
Minimum Credit Score to Get a Small Business Loan
Aim for a minimum credit score of 500
Higher scores open better loan options.
Low scores can narrow lender choices
A minimum credit score of 500 is generally required for small business loans. Higher scores around the 700 mark are ideal for securing favorable rates and terms. Lower scores can limit your lending options and subject you to higher interest rates.
By understanding and meeting these requirements, you can improve your chances of approval for a small business loan and secure better terms to get working capital to help your business grow.
Comparing Small Business Loan Options
Traditional Bank Loans
Traditional bank loans are a common option for small businesses looking for financing.
Key Features
Types: Both long-term and short-term loans are available.
Rates: Offers fixed and variable interest rates.
Requirements: Requires strong personal credit scores and solid business revenue.
Benefits
Typically, traditional bank loans have lower interest rates compared to other options.
They provide longer repayment periods.
Challenges
The strict qualification requirements can make it difficult for new businesses to secure funding.
NerdWallet highlights that these loans are ideal for businesses with established credit histories but can be hard for startups to qualify for.
SBA Loans (Small Business Administration)
SBA loans are a good option for small businesses that do not qualify for traditional bank loans.
Popular SBA Loan Programs
7(a) Loans
Flexible use
Maximum loan amount of $5 million
CDC/504 Loans
Used for major fixed assets like equipment or real estate
50% funded by a third-party lender
Microloans
For smaller amounts up to $50,000
SBA Loans
In fiscal year 2023, the SBA provided approximately $27.5 billion through more than 57,300 7(a) loans, with nearly 70% being loans of $350,000 or less
Benefits
Lower interest rates due to government guarantees.
Longer repayment terms.
Application Process
More complex and detailed than most other loans.
The approval rate for these loans is around 52%.
LendingTree explains that the government guarantee reduces lender risk, making the guaranteed SBA 7(a) loan a favorable option.
Online Lenders
Online lenders offer small businesses faster approval times and easier applications.
Key Features
Faster Process: Approval times are significantly quicker than traditional banks.
Flexibility: More relaxed eligibility guidelines.
Examples
OnDeck
Kabbage
Benefits
Accessible to businesses with fair-to-bad credit.
Less cumbersome application process.
Drawbacks
Higher interest rates than traditional bank and SBA loans.
Forbes Advisor mentions that online lenders like OnDeck provide faster approval times but at higher interest rates.
Business Lines of Credit
Business lines of credit provide flexible borrowing and repayment terms, making them suitable for managing cash flow.
Key Features
Flexible Use: Borrow what you need, when you need it.
Repayment: Pay interest only on the amount drawn.
Benefits
Useful for covering short-term needs and unforeseen expenses.
Drawbacks
Generally, have variable interest rates which can fluctuate over time.
NerdWallet suggests that business lines of credit are an excellent way to manage cash flow due to their flexible terms.
Merchant Cash Advances
Merchant cash advances (MCAs) provide quick access to funds by advancing cash against future credit card sales.
Key Features
Fast Access: Quick approval and disbursement of funds.
Repayment: Automated repayments based on a percentage of daily credit card sales.
Benefits
Suitable for businesses that generate a significant volume of credit card transactions.
Drawbacks
Higher cost of capital compared to other loan options.
Can impact daily cash flow due to the repayment structure.
Tips for Securing a Small Business Loan
Improve Your Credit Score Early
Raise your credit score by paying down debt.
Keep personal and business credit separate but strong.
Higher credit scores mean better loan terms and approval chances.
Steps to Take to Raise Your Credit Score
First, It is better to check your credit reports for errors. You can use services to get free reports from Equifax, Experian, and TransUnion. You can make errors by contacting the credit bureaus directly.
Second, start paying down existing debt. You should focus on high-interest debts first. This reduces your credit utilization rate, which affects 30% of your score.
Third, you can just avoid new credit inquiries. Applying for new credit cards or loans can lower your score temporarily. It is better to be sure to stick to essential credit applications only.
Lastly, you should ensure timely bill payments. Late payments can significantly impact your score. You can set up automatic payments to avoid missing due payment dates.
Importance of Maintaining Personal and Business Credit History
Keeping separate but strong credit histories for both personal and business is crucial. Lenders look at both to assess risk.
For personal credit: You shouldn’t max out your credit cards. Stay below 30% of your credit limit. This shows you’re not reliant on credit.
For business credit: It is better to open a business credit account and use it responsibly. You should make timely monthly payments. A strong business credit score boosts your credibility with lenders.
Financing Needs Of Small Business Owners
Only about 48% of small businesses meet their financing needs, with many struggling to secure the necessary capital
Create a Strong Business Plan
Include detailed market analysis, financial projections, and a clear strategy.
Convince lenders you have a viable business model and capability to repay the loan.
What to Include in a Business Plan
Your business plan should start with an executive summary. A brief outline of your business, mission statement, and reasons for loan application.
Next, conduct a market analysis. It is better to include data on industry trends, target market, and competitive landscape.
Then, you can add your business operations to an organizational structure section. You can describe your business’s organizational hierarchy, the management team, and their roles.
You should provide detailed financial projections. Include profit and loss statements, cash flow statements, and balance sheets. Projections should cover at least three years.
Lastly, outline a marketing and sales strategy. It is better to detail how you plan to attract and retain customers.
How a Well-Structured Plan Can Strengthen Your Loan Application
A well-structured plan shows lenders that you are prepared. It demonstrates your understanding of the market and your clear path to profitability.
It is better to be sure to include realistic financial projections. You can show how you plan to meet loan repayments. This reassures lenders about their investment.
Maintain Detailed Financial Records
Accurate financial records show your business’s health.
Use accounting software to keep records up-to-date and error-free.
Importance of Accurate and Up-to-Date Financial Statements
Accurate financial records are essential for transparency. Lenders want to see real-time financial health.
You can submit financial statements such as income statements, balance sheets, and cash flow statements. These documents show your business’s revenue streams, expenses, and profit margins.
Using Accounting Software to Streamline Record-Keeping
You should invest in good accounting software like QuickBooks or Xero. These platforms automate record-keeping and generate financial reports.
You can regularly update your transactions. Automating this reduces human error. Reconcile your bank statements monthly to catch discrepancies early.
Seek Professional Advice
Financial advisors or consultants can guide you through the loan process.
Understand the costs involved with professional services.
Financial Advisors or Consultants
Hiring a financial advisor can be a wise move. They help you understand complex loan terms and conditions. Advisors craft financial strategies tailored to your needs.
It is better to look for certified advisors or consultants with experience in small business loans.
How They Can Help You Navigate the Loan Process
Advisors help in multiple ways. They can review your business plan, ensure financial documents are accurate, and advise on the best type of loan.
They also act as mediators with lenders, making the process less stressful. Advisors ensure that you meet all lender requirements, increasing your chances of approval.
Costs Involved with Professional Services
The cost of hiring an advisor varies. Some charge hourly rates, others offer fixed packages. Hourly rates usually range from $150 to $400.
It is better to consider this as an investment. Professional advice can save you money in the long run by securing better loan terms and conditions.
That wraps up the tips for securing a small business loan. Let’s ensure we’ve taken all the necessary steps before hitting submit.
The Average Interest Rate for Small Business Loan
The average interest rate for small business loans is approximately 6.4%, but it can vary significantly based on creditworthiness and loan type
Ready to Secure Your Small Business Loan?
Understanding your financial needs, preparing documents, and knowing your options can make all the difference. The right loan can propel your business forward.
you should review what you need and prepare. It is better to talk to different lenders and compare rates. Submit your application and follow up. You should always read the fine print before signing.
It is better to have everything ready before you apply. Get advice if needed. What’s your current credit score and how can you improve it?
You can start your loan application with confidence. So, are you ready to get that loan and grow your business?
