Navigating the Small Business Loan Procedure: A Step-by-Step Guide to Financing Your Business

1. Navigating the Small Business Loan Procedure: A Step-by-Step Guide to Financing Your Business

If it's time for your startup to start going up, a small-business loan may just be what you need. The process of applying for a small-business loan can be confusing, but we're here to help guide you through the process. Below are five manageable steps to securing funding for your business needs—whether that's for expansion or handling the day-to-day. If you need any help along the way, a representative from SELCO's Commercial & Business Banking division is at the ready.

2. See if you qualify

Before you get too far down the lending path, the first step is to make sure you qualify. There are a few factors that determine eligibility:

Credit Score

Lenders will require a personal credit score and, in some cases, a business credit score. The former indicates your ability to repay personal debts, while the latter shows how likely you are to pay back lenders. Solid scores in both increase your chances of getting a loan (and at a better rate). So, it's crucial to maintain a good credit history.

Business Tenure

To land a small-business loan through most credit unions and banks, you'll need to have been in business for at least two years. Through online-only lenders, a minimum of one year is typically required. The longer you've been in business, the more credible you appear to lenders.

Annual Revenue

Do you make enough money at your business? Many lenders set a minimum annual revenue requirement—typically ranging from $50,000 to $250,000—which again serves as a safeguard for ensuring you can repay them. It's essential to demonstrate a healthy income to secure the loan.

What You Can Afford

Weigh your business's income against rent, payroll, and all other day-to-day expenses to see how much you can devote to loan payments. If your monthly income is at least 1.25 times your total expenses—including your new repayment amount for a loan—you're in good shape. A clear financial plan is key to making this determination.

Collateral

Many lenders will require you to put up a piece of property or equipment as collateral. Even if collateral isn't required, offering one up may get you a larger loan and lower rate. Consider your assets and their potential as collateral.

3. Establish Loan Type

Now that you qualify, what type of loan will you need? This will likely be determined by business need:

Starting a Business

As mentioned above, a business must be fairly established to qualify for a small-business loan. But if you need help getting a new business off the ground, a Small Business Administration (SBA) microloan or personal loan are your best bets. These options are tailored to startup needs and can provide essential capital.

Managing Day-to-Day

Need help bridging the gap between sales and collecting accounts receivable/selling inventory, or covering expenses like unexpected repairs and general equipment upkeep? A business line of credit or credit card could offer a safety net to tap into when the need arises. These options are ideal for addressing short-term financial fluctuations.

Growing Your Business

If you're looking to expand—whether it be your workforce, equipment, or space—consider a government-backed SBA loan or traditional term loan. These loans offer the flexibility and funds needed to fuel growth. Planning for expansion is a critical part of this step.

4. Compare Lenders

There's no shortage of lenders out there. Who should you go with? The good news is, there are a number of sources that cater to a business's situation.

Online Lenders

Borrowing from an online lender is beneficial if your business is still relatively new, you need funding quickly, or you lack collateral. This is often the quickest way to secure a loan, too—sometimes in less than a day. Online lenders provide convenience and speed, making them a suitable choice for tech-savvy entrepreneurs.

Credit Union or Bank

If you've been in business for two-plus years and your business operations and credit are healthy, a loan from a credit union or bank could be the way to go. By checking the good-credit and years-in-operation boxes, you'll likely get a great rate, too. Traditional lenders offer stability and competitive rates for established businesses.

Small Business Administration

If your business is brand new, or you have poor credit or no collateral, an SBA microloan (ranging from $500 to $50,000, with the average loan coming in at $13,000) may be the best option. The SBA provides support for entrepreneurs facing obstacles in traditional lending.

5. Gather Documents

Time to round up the paperwork. Locating and organizing the proper documentation will help streamline the application process for a small-business loan. Depending on the lender, here's what you'll need:

• Business and personal tax returns
• Business and personal financial statements
• Business legal documents (e.g., articles of incorporation, commercial lease, franchise agreement)
• Business plan, detailing your goals and how you will achieve them.

Ensuring your documentation is complete and well-organized can expedite the application process and improve your chances of approval.

6. Apply

Once you've determined the loan and lender type and have your required documents ready, there's nothing left but to apply. Place a few similar options side-by-side and take stock in each lender's annual percentage rate (APR) along with their requirements (collateral, minimum annual revenue, etc.), and make your choice from there. If you're lucky, you'll be able to complete the application fairly quickly. The speed of funding can vary greatly, though—from a day to several months—so be patient.

By going through the heavy lifting leading up to the main event, applying for a business loan becomes the easy part. Then hopefully your reward is right around the corner—collecting the funds you need to take your business to the next level.

In conclusion, securing a small-business loan is a pivotal step in the growth and success of your business. By understanding the qualification criteria, choosing the right loan type, and selecting the most suitable lender, you can pave the way for your business to thrive. Don't let financing obstacles hold you back; use this guide to unlock the financial resources your business needs to soar.