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How To Get a Small Business Loan In 5 Steps

1. Determine Why You Need a Small Business Loan

Before you decide to take out a small business loan, it’s important to figure out not just the amount that you need, but also the reason why you want to borrow.

These reasons can range from starting a new business from scratch and purchasing new equipment to funding immediate financial needs after a disaster or major theft. In addition to your personal qualifications, your borrowing purpose will determine what kind of loan and which lender is right for you.

Starting a business: If you’re just starting a new business, getting a startup loan may be the right option for you. A startup loan can help you fund the initial costs associated with a new business including hiring costs, new equipment and new office space.

» MORE: Compare start up business loans

Buying a business: Buying a business is a very different process than starting a new business. When you buy a business, you may be taking on an already-established set of employees, work spaces, materials and revenue history. Getting a loan for this purpose can be easier than borrowing to start a business.

Day to Day working capital: You may need to finance the daily expenses associated with running your business. A working capital loan can help you fund business basics from payroll to marketing costs.

Grow Your Business: Whether it means buying new property or new equipment, if you want to grow your business but don’t have the out-of-pocket cash to fund your plan, you might turn to a small business loan.

Emergency Spending: Sudden events like damages, disasters or theft may require immediate funding.

Equipment Financing: You might need a loan to purchase new company vehicles, machinery, factory equipment or computers for your business.

Invoice Financing: If you have several unpaid customer invoices, your business may be missing a revenue stream that is necessary to keep the company afloat. An invoice factoring or financing service can help you with that.

2. Solidify Your Business Plan

With so many different types of loans, lenders and amounts, choosing the right small business loan can seem like a daunting task. Developing a business plan before applying for a loan can not only help you understand the direction of your business and your financial needs, but will also help you determine whether a loan will make it easier for you to meet those needs or not.

Because loans come with extra fees and interest, it’s important to make sure that you need the money you want to borrow. Having a well thought out business plan will guide you in your decisions on both the type of loan you need and your desired amount.

The urgency with which you need the money also makes a difference; If you have financial needs for your business that can wait three months to be funded, you might be eligible for a loan with a lower interest rate.

Not only is your plan an important component of understand your entrepreneurial goals, but many lenders also require a comprehensive business plan with your loan application. Along with revenue history and debt-to-income ratio, your plan can be a deciding factor in what loan amounts and rates you are offered.

3. Which Small Business Lender Is Right For You?

Once you have developed your business plan and determined your budget, reason for borrowing and desired loan amount, it’s time to figure out what kind of lender will best fit your needs.

Use Online Lenders: Online lenders offer large loan amounts and typically have faster funding times than with traditional bank loans. Whereas with a traditional business loan the borrower may have to wait up to three months for, online loans are often dispersed within one business day to a week.

Additionally, online loans usually have simpler applications and faster decision times, with some lenders giving applicants a decision within minutes.

This type of lender may be worth looking into if you have immediate or short-term financial needs, such as repairing unexpected damages or purchasing new supplies.

SBA Loans: SBA loans are offered by banks and other lenders and are guaranteed by the Small Business Administration. These often have higher lending ceilings and lower rates than online lenders offer. Their repayment periods are based on the borrowing purpose. For example, the typical term for working capital is seven years while the term for real estate expansion is 25 years.

These loans are, however, more difficult to qualify for and slower to fund, so they’re best for businesses without immediate cash needs.

Short-Term Business Loans: Similar to term or personal loans, these loans are issued in one lump sum. However, they usually have a maximum repayment term of one year and are typically repaid within 120 days.

This type of loan is ideal for seasonal or retail businesses with needs such as inventory expansion, payroll payments and covering expenses while waiting for customer invoice payments.

Business Lines of Credit: While loans are usually issued to the borrower in one lump sum, a business line of credit allows you to borrow funds as you need them, as long as they don’t exceed the given credit limit. You also only pay interest on what you’ve borrowed.

A line of credit can be good for recurring expenses such as materials, utility bills or employee travel.

4. Prepare Paperwork/Documents

Most loan applications require cash flow projects, a comprehensive business plan and projected financial statements.

While gathering all of the necessary documents for a loan application can require a lot of time and energy, it’s important that your documents and application are as detailed as possible. Be prepared to take the time to thoroughly answer all of the questions.

If you’re applying for an SBA or USDA loan, you should also be ready to submit documents to both the federal government and the lender.

5. Apply

Once you have identified your loan purpose, written a business plan and gathered all of your documents, you are ready to apply!

As long as you understand why and how much you are borrowing, and have all of the necessary paperwork, applying for a loan should be a smooth process. As different lenders have varying requirements, make sure to take the time to compare a few different quotes before making a final decision.

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