How to Get a Business Loan

How do you begin your search for a business loan?

Many banks and alternative lenders are out there vying for your attention. Once you decide on a lender, what’s next?

Here are the steps to obtaining your business loan:

Step 1. Determine why you need the money.

This will drive your choice of lender and loan type. Different kinds of loans can be used to:

• Cover the costs of launching a business.
• Help you buy an existing business.
• Purchase specialized equipment.
• Provide working capital for payroll, marketing and hiring.
• Resolve cash-flow problems — often needed for a seasonal business.
• Help you expand your business.
• Refinance an existing loan at more favorable terms.

Step 2. Calculate how much financing you can afford.

Determine your debt service coverage ratio by looking into your finances. Take the following steps:

• Use a business loan calculator to find the monthly payment on your loan before you commit.
• Check out your company’s profit and loss statement. Will incoming revenue be enough to cover the monthly payment?
• Determine your debt service coverage ratio or DSCR. Take your average monthly net income and divide it by your monthly loan payment. It should be above one. If it’s below, maybe a smaller loan with a better interest rate will work.

Step 3. Consider different loan products.

Consider the following options:

• Bank loans — The cheapest financing option. Interest rates can be as low as 5%. There are some hurdles: You’ll need a great personal credit score, your business should be profitable and you’ll need personal or business assets to use as collateral.
• SBA loans — Slightly more expensive than bank loans and easier to qualify for. Rates range from 5% to 10%.
• Medium-term alternative loans — A faster online counterpart to SBA loans or bank loans. Interest rates may be as high as 20%, but you can get approval in less than two weeks.
• Short-term alternative loans — Just three to 18 months to be repaid with daily or weekly repayments. Interest rates can be very high, but you’re paying for convenience and quick approval. These may be the best (or only) alternative you have if you’ve been in business for less than a year or you have a weak credit score.

Step 4. Get your loan documents in order.

This includes all your financial statements and tax documents. (Depending on your situation, you may need an audit, review or compilation.) No matter which options you choose, you’ll need paperwork to move forward.

• Be aware the more difficult it is to qualify for the loan, the more paperwork is required.
• Expect to be asked for your credit score, your average bank balance, how long you’ve been in business, your annual revenue, a profit and loss statement and a balance sheet, as well as personal and business tax returns.
• Take into account costs, which may include application fees, origination fees, guarantee fees for SBA loans, credit check fees, prepayment fees for paying back the loan early, and late payment fees.

A final tip

This is just an introduction to a complex process. Getting a business loan is a big step, so whatever you do, be sure to get the advice of a financial professional before moving forward.

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