Small businesses often need outside money to grow their operations, and one of the most common ways to access capital is through a bank loan. Loan approval rates have edged up in recent years—thanks to the improving economy—yet data show that big banks still only approve about a quarter of all small-business loan applications while small banks approve roughly half of such applications.
How can you beat the odds? Here are key steps to getting a small business loan:
Understand the process
Before you seek loans, understand what lenders expect. They will want to see your business credit score—a score above 600 generally qualifies you for the best financing offers—and possibly your personal credit score as well. They will want to see a list of your company’s assets and any outstanding liabilities to ensure you’re not swimming in debt. They will want to see that you’ve been in business for at least two to five years. (Startup companies generally don’t qualify for business loans, and thus must bootstrap, borrow money from friends and family or attract outside investors.)
Determine your needs—realistically
There are several types of small business loans, but the right type for your business will depend on various factors: how much you’re looking to borrow, your plans for the capital, and how long it will take you to repay the loan. Before you apply for a loan, evaluate how much you need to borrow and how much you will be able to repay realistically. (You certainly don’t want to risk borrowing so much that you risk defaulting on the loan—which could destroy your business, as well as your personal and business credit rating.)
Identify the right lenders
Many banks offer loans to small businesses, but the terms and interest rates can vary. So cast a wide net. Consider large national banks, as well as local community banks and credit unions. You should apply for a loan from at least three lenders to see how the loan offers compare. Websites such as Fundera and LendingTree can let you compare loan options among multiple lenders.
Consider SBA loans
Determine whether your business qualifies for a government-backed loan. The Small Business Administration (SBA) guarantees a portion of loans taken out by qualified small businesses—and those loans can carry lower interest rates and better terms than traditional business loans. Certain banks and credit unions offer SBA loans, so it’s important to work with one of those lenders if that’s an option you wish to pursue. Keep in mind that SBA-backed loans generally require a large amount of paperwork and verification.
Get your ducks in a row
Regardless of what type of loan you’re getting, lenders will want assurance that you can repay them. They often will want to see tax returns from the past few years, a list of executive officers, financial statements for recent years (including a balance sheet, cash flow, and an income and loss statement), state incorporation documents, credit reports and personal financial statements from key executives. (Here’s a more complete list of commonly required loan application documents.) Make sure to have these documents ready so you can produce them in a timely fashion when the lender requests them.
Applying for a business loan isn’t generally a quick and easy process, but it can be worth the effort if it provides you access to the capital you need to bring your company to the next level.
About the Author
Kelly Spors is a freelance writer and editor based in Minneapolis. She previously worked as a staff reporter for The Wall Street Journal, covering small business and entrepreneurship.
All content provided herein is for educational purposes only. It is provided “as is” and neither the author nor Office Depot, Inc. warrant the accuracy of the information provided, nor do they assume any responsibility for errors, omissions or contrary interpretation of the subject matter herein.