Whether you’re looking for startup funding or money to take your business to new heights, you’ll need to explore your options for getting a small business loan at some point in the life of your small business.
Some entrepreneurs prefer to use funds from personal savings, family, friends, and even credit card advances. However, most small business owners would rather establish a good relationship with a lender and secure a small business loan to meet their financial needs.
Here are five tips to help you find a small business loan.
1. Know Your Credit Score
Before approaching any lender, it’s vital to know your personal and business credit score. A low credit score is one of the most common reasons for loan rejection.
As a sole proprietor, all you have to rely on is your personal credit score. In a partnership, all partners can expect to have their credit scores checked. If your business is a separate legal entity, such as an LLC or C Corp, the company has its own credit score. In that case, you can expect the loan provider to consider the business credit score and the owners’ personal credit scores.
The magic number that gets you a small business loan depends on the lender and the amount you’re seeking, among several other factors.
2. Have a Business Plan
If your business is relatively new or you’re in an industry regarded as “risky” (such as a restaurant), you may have a more challenging time finding a lender willing to give you a business loan.
In that case, a comprehensive and well-organized business plan goes a long in showing investors you are serious. A business plan outlines your company in minute details with market and industry analysis, operations and team management plans, marketing strategies, and financial projections.
A good tip is to look for lenders that specialize in your industry since they’re more likely to take a chance on your business.
3. Determine Collateral and Cash Flow
Most traditional lenders require collateral to obtain a business loan. Assets such as equipment, buildings, accounts receivables, inventory, and personal assets are common collateral sources. If you do not have enough collateral or the right type of collateral, look for lenders offering unsecured loans. Because lenders of unsecured loans do not require collateral, these types of small business loans will typically have smaller amounts and higher interest rates.
For established businesses, lenders look carefully at cash flow when deciding whether to approve a small business loan. They expect you to have enough cash flow to cover expenses and pay back the loan. Before applying for a loan, talk to your accountant about how to increase cash flow before applying for a loan.
4. Know Your Options
- Bank Loans – While a small business can get a bank loan, in today’s present economic climate, you may find traditional banks stretched thin due to the coronavirus pandemic. SBA-backed loans are a better bet.
- Small Business Administration (SBA) Loans – Although the CARES Act forgivable loans are no longer available, SBA Economic Injury Disaster Loans (EIDL) still are. EIDL loans are long-term direct loans backed by the SBA and accessible through SBA-approved lenders. The loan provides for six months of working capital. Terms are 30-years at 3.75% APR fixed, and the first payment is deferred for one year. Applicants must complete and submit SBA Form 1201 Borrower Payments on Pay.gov. Applicants must be U.S. citizens.
Besides EIDL, the SBA has several other types of small business loans available. Use their free online tool Lender Match to get connected with lenders interested in funding your business.
- Local Funding – Cities and counties hoping to keep their economies going are offering loans and grants to local businesses. For instance, Los Angeles County has created the LA Regional COVID-19 Recovery Fund to provide funding resources for local small businesses. Check with your city and county business development offices to see what opportunities exist.
- Fintech Loans – Fintech lenders use online technology to match businesses with financing options. Fintech loans are mostly unsecured loans, so they are short-term loans with higher interest rates. Top fintech lenders include Fundbox, Funding Circle, OnDeck, and PayPal.
5. Understand Your Business Structure
The entity of your business (or business structure) will influence how easy it is to get a small business loan. Although lenders will consider personal assets when deciding whether to approve a loan, they’d prefer personal assets are not involved in the business. Small business lenders prefer the company to be a separate entity with separate finances. Most lenders also require the business to have a separate business bank account. Incorporating your enterprise [or registering as a Limited Liability Corporation (LLC)] creates a separate entity where all liabilities belong to the business. Therefore, if your company gets sued, your personal assets are safe.
Whether you choose to incorporate or form an LLC, both require obtaining a Federal Tax ID Number and registering the entity with the business’s home state. Corporations must also file Articles of Incorporation and the corporation’s bylaws. LLCs file official documents called Articles of Organization and must create an operating agreement, although the filing of that document is not required.
The differences between the two structures come down to formality requirements, with the C Corp necessitating more formal documents, more fees, and more regular compliance deadlines. On the other hand, corporations can sell shares of company stock to raise capital, and LLCs cannot. LLCs can, however, add new, financially contributing members.
How Can We Help?
No matter what structure you choose, CorpNet is here to help you navigate the process of getting a small business loan without hassle or confusion. Contact us today!