Whether you’re thinking about starting a business or have been running one for years, you’ll inevitably need to figure out how to fund it.
While getting a business loan may seem like the most obvious solution, the actual process of doing so can be intimidating. But rest assured — there are many lending options for small business owners and securing funding may not be as difficult as you think.
To get started, follow these four easy steps for how to get a business loan.
1. Nail down the “why”
Almost any business would benefit from an influx of capital, but it helps to have an idea how you plan to use it. In fact, your lender will need to know the purpose of the loan you’re requesting, so determining that is your first step in the process. Here are some of the most common reasons to get a business loan:
- Startup costs
- Equipment financing
- Emergency spending
- Cash flow problems
- Refinancing debt
- Covering day-to-day expenses
- Planning for growth or expansion, including purchasing an existing business
If you have a business plan, you may have already determined some of these reasons. Here are some tips for creating a business plan.
2. Determine how big a loan you can afford to take on
While you might be tempted to ask for as much funding as you can get, it’s a bad idea. By taking on too large a loan, your business could end up drowning in debt. To figure out how much you can afford to borrow and make sure you have enough revenue coming in to cover your anticipated monthly payment, consider:
- Using a calculator to crunch the numbers
- Calculating your debt service coverage ratio (DCSR) by dividing your average monthly net income by your anticipated monthly loan payment (it should at least be greater than one)
- Doing a free loan performance analysis online
3. Figure out which type of business loan is right for you
Your local bank is a good place to start, whether you’re looking to refinance debt, purchase equipment and inventory, purchase commercial real estate, grow your business or cover daily expenses. Other options include applying for a term loan or business line of credit. Some banks also offer special rates for low- to moderate-income business owners through community lending programs. You can also use invoice financing if you’re having a cash flow problem or apply for a merchant cash advance, but these two options can be expensive.
4. Take the time to prepare before you apply
Depending on how many years you’ve been in business, your personal credit score and/or your business credit score, your loan options might be limited. You may need to bring those scores up before you can apply for a loan. You should also keep an average balance of at least $5,000 in your business checking account. Lenders will also require some, or all, of the following documentation:
- Income statement
- Balance sheet
- Annual revenue
- Personal tax returns
- Business tax returns
Now that you’ve figured out which business loan is right for you and have your paperwork in order, you’re ready to go! Stick to applying to no more than two loans at a time, otherwise, it can hurt your credit score. And don’t be afraid to compare loans to find the best option. Once your application is approved, you’ll need to be patient—the underwriting process can take a while. Lastly, before you sign your loan agreement, be sure to review it for hidden or unexpected fees.
