A business loan is often the best way to get the funding you need to start or grow your business, but getting one can seem like a daunting task if you’ve never done it before. Fortunately, with some preparation and effort, securing financing from one of the many different types of lenders out there can be very achievable – especially if you’re familiar with these seven steps on how to get a business loan.
Step 1. Research the Right Loan
The first step is deciding what type of loan you’ll need. Banks and credit unions have plenty of loan options, such as secured loans and unsecured loans, so do your research before applying. Just knowing what’s out there can make it easier to decide which one is right for you, even if it isn’t immediately clear whether you should take out a business line of credit or apply for an SBA-backed loan. As always, your financial institution is your best resource when it comes to understanding all of your options. And remember that while smaller banks and credit unions might not offer exactly what you’re looking for from an online lender or peer-to-peer lending service, they may be able to get you better rates than larger institutions.
Step 2. Find Alternative Financing Options
As you start your business, you might think that getting a bank loan is your only option. But it isn’t. Securing bank financing can be difficult, especially for first-time entrepreneurs. If that’s not an option for you, there are other options for financing your business. You can take out a loan from an existing company or ask family and friends to invest in your startup by buying equity or convertible debt. Or you could apply for an SBA-backed loan through a network of local lenders. While they may not come with great interest rates, these loans are easier to obtain than regular bank loans because they’re backed by Uncle Sam—but only if you have good credit history and strong management skills (and evidence of previous business success).
Step 3. Calculate Your Needs
First, take an inventory of what you have. Now ask yourself whether it’s enough to start your business. If not, make a wish list and estimate how much more capital you will need. Be realistic: Don’t inflate costs or downplay revenue potential. It is better to be conservative at first; if you fall short, you can always get back for more funds later on.
Step 4. Speak with Local Lenders
You’ll need help to get that loan, so talk with banks and credit unions about business lending options. Are you a local company? Will your community benefit from your business idea? If you can answer yes to these questions, then you’re likely an attractive candidate for lenders, especially those in rural areas who want their capital invested locally. Also know that it may take longer—and be more expensive—to get loans from smaller institutions than it would be if you went through a big bank.
Step 5. Check Out Small Business Loans Online
Most banks offer small business loans, but some are better than others. A good place to start looking is at a bank you’re already familiar with; their customer service and loan specialists will be able to help you make sure your credit score is as high as possible, and give you tips on writing your business plan. If you’re not comfortable taking out a loan from one of your local banks, there are plenty of online lenders who cater specifically to small businesses. They can still offer competitive rates and may even provide more convenient funding options for both business owners and entrepreneurs because they operate online-only instead of having physical locations.
Step 6. Know Your Credit Score
Your credit score has a direct impact on your ability to secure financing for your business. Your FICO® Credit Score is an algorithm that uses financial data such as payments, debts and savings, among other things, to estimate your likelihood of repaying loans and helping lenders make lending decisions. Having good credit will help you get approved for loans and make it possible for you to qualify for lower interest rates on loans. Contact one of these three major agencies — Experian, Equifax or TransUnion — and request copies of their reports about you.
Step 7. Visit Local Banks
Visit your local banks and credit unions, as these institutions typically offer business loans. You can also visit online lending companies that can help you secure financing. The Small Business Administration’s online search tool makes it easy to find lenders that are approved by SBA, but keep in mind: Many of them will charge fees and/or have a more limited range of offerings (e.g., loan amounts). If you’re applying for an SBA-backed loan, make sure you compare rates from other lending sources so you’ll know what rate is fair.