Growing your business: Use these steps to secure your small business loan

If you are looking for a small business loan, there are important steps to take to increase your chances of approval. According to Forbes Advisor, your approval depends on meeting the lender’s requirements effectively. Therefore, applying without preparation could lead to denial. Here’s how to get started on the loan application process.

Determining whether you need a business loan

According to spokesperson Colin Beresford from Forbes Advisor, a business loan can be beneficial for various reasons. For example, if you want to buy assets that will add long-term value to your company or if the only way to expand your business is with additional funds. Beresford explains, “While struggling businesses often need loans, they can also boost thriving businesses. For instance, a restaurant owner may have too many customers and needs funds to expand or open a new location.”

A loan can help small businesses expand to meet increasing demand. (iStock)

Despite the advantages of a business loan, Beresford advises against taking one if you have concerns about making repayments.

He recommends using a business loan calculator to ensure that your business can handle the debt. If your business cannot, a business loan may not be the right option. Beresford also notes that secured loans can lead to lenders taking possession of your collateral if you fail to repay the loan.

What can be covered by a loan?

There are various types of business loans, each with unique features and coverage. For example, a working capital loan can be used for operating expenses like payroll. “In general, a business loan can cover essential equipment or inventory costs,” says Beresford. “It can also be used for hiring employees or refinancing debt.”

Ultimately, the type of loan you need will depend on your business’ specific needs and areas that require support as your business expands.

A “help wanted” sign is displayed in a window in Manhattan on July 28, 2022, in New York City. A small business loan can help cover the cost of hiring more staff. (Photo by Spencer Platt/Getty Images ((Photo by Spencer Platt/Getty Images / Getty Images)

What factors affect your approval chances?

Lenders consider both personal and business credit scores to evaluate your repayment ability. Beresford explains that higher credit scores increase your chances of loan approval. Most lenders require a personal credit score of at least 680 and consider both personal and business credit scores. However, some lenders may accept scores as low as 580 to 600.

The duration of your business also plays a role. “The longer you’ve been in business, the more likely you are to be approved for a loan,” says Beresford. Traditional banks typically require two years of operation, but online lenders may accept businesses that have operated for as little as six months to one year.

Annual revenue is another factor that lenders consider. Higher revenue indicates your ability to repay the loan. Typically, lenders require businesses to have $100,000 to $250,000 in revenue.

Comparing lending options

One way to compare lending options is to prequalify for a loan, which some lenders offer. This process involves a soft credit inquiry that won’t harm your credit score. By providing basic information about your business, you can receive an estimated interest rate if you are eligible.

You can also compare lending options based on your specific financial needs, timeline, and the likelihood of meeting strict requirements. Beresford suggests that online lenders may be more flexible and faster in funding, while traditional banks may have lower interest rates but longer processing times.

Wilsonville, Oregon – Mar 9, 2019: The exterior of a Bank of America (BofA) branch. Local branch banks will usually provide cheaper loans than online lenders. (iStock)

Preparing the required documentation

When applying for a business loan, you will need to gather multiple documents. It is important to have them on hand and ensure their accuracy to avoid delays. Beresford advises keeping everything in one place and making copies of the documents to streamline the application process.

Typically, you will need at least 12 months of personal and business bank statements, personal and business tax returns for the past two years, and information on current and past business loans. You may also need to provide applicable business licenses, legal documents, articles of incorporation, profit and loss statements, financial statements, and a building lease. Contact your preferred lender to confirm the exact documents required. If your business is new and lacks some of this documentation, you may consider no-doc loans as an option.