If your business has reached a point where it needs an infusion of funds in order to grow, you may be in the market for a business loan. A business loan can help a struggling small business establish itself better, or help a thriving company expand its line of products, open an additional location, move to a larger site, hire new team members or purchase expensive equipment.
Here’s all you need to know about applying for a business loan:
Make sure your credit is in order
Before applying for a business loan, check your personal and business credit health.
A personal credit score is measured in the hundreds, with scores ranging from 300-850. A score that falls from 580-669 is considered fair, 670-739 is good, 740-799 is very good, and 800-850 is considered exceptional. You can check your personal credit report once a year at no cost from AnnualCreditReport.com. Review your score for any inaccuracies or fraudulent charges and be sure to dispute these immediately through any of the credit bureau websites: Experian, Equifax or TransUnion.
Business credit scores are measured differently.
Experian uses Intelliscore Plus as its credit scoring model, with scores ranging between 1 and 100.
Equifax assigns each business three different scores: a payment index score, which assesses the company’s payment history with the score ranging between 0 and 100; a credit-risk score evaluating how likely it is the business will not meet on-time payments with the score ranging between 100 and 992; and a business failure score measuring how likely a business will fail, with the score ranging between 1,000 and 1,880.
Business credit scores are also measured by the Dun & Bradstreet Corporation. The D&B score range is 0 to 100 and the key factor it considers is the timeliness of payments made to previous creditors. In order to receive a D&B score, a business must file for a free DUNS number and information about the company’s borrowing habits must be provided by a minimum of four lenders or suppliers.
Finally, the FICO Small Business Scoring Service (SBSS) score ranges from 0 to 300 and considers variables, such as the business owner’s personal credit score, the company’s payment history, number of employees and the age of the business.
If your personal and/or business credit scores are low, work on improving your credit before applying for a loan by meeting your monthly payments on time and keeping credit utilization low.
Update your business plan
Be sure to have a fully crafted business plan to show a prospective lender before applying for a loan. The plan should include details about how the company intends to use the funds from the loan, the anticipated increase in revenue and plans for repaying the loan.
Consider arranging supplemental collateral
Lenders generally prefer to reduce the risk of a borrower defaulting on a loan by securing collateral for the loan. For business loans, this usually takes the form of the company’s inventory, equipment, titled vehicles, commercial real estate or other valuable assets. The lender can seize the collateral if the business fails and the borrower cannot repay the loan.
When applying for a business loan, you can offer additional collateral to the lender, such as personal assets, like real estate or other valuables. This will make you more likely to qualify for the loan and may bring down the interest rate on your loan as well.
Organize your personal and business documents
You’ll need the following documents and identifying paperwork to apply for a business loan:
- Photo ID
- Personal and business tax returns from the past three years
- Accurate, up to date, financial statements
- Up to date business and personal balance sheet
- Any commercial leases
- Business insurance plans
- Payroll records
- Incorporation documents
- Current financial obligations
- Three months of business and personal bank statements
- Collateral, if required
Research potential lenders
It’s best to take some time researching potential lenders before applying for a loan. Learn about each lender’s eligibility criteria so you can anticipate whether or not you will qualify for a loan. Look up average loan interest rates for each lender, as well.
As you complete this step, choose a general source for your loan.
Startups may not qualify for a large loan and can be better off pursuing a microloan, or a small, short-term loan offered by a nonprofit lender.
If you need a larger loan, consider applying for a business loan through a credit union. A credit union will offer you personalized service, looser qualifying criteria and a competitive interest rate that will help you keep more money in your business throughout the life of the loan.
Submit your application
Once you’ve gotten all of your paperwork in order and you’ve chosen a lender, you’re ready to apply for a loan. Depending on your lender, you may be able to begin and/or complete the application process online. Be patient; loans can take anywhere from one day to several months from application to funding. With luck, you’ll soon have the funds you need to take your business to the next level.