How to Apply for Small Business Loans Online -

Whether you need it to purchase new equipment or to secure a new location, applying for a business loan is a great way to grow or start your business.

Navigating the lending standards and processes can be intimidating if you don’t know what documents you need or what loan to apply for.

Breaking down this process into manageable steps, starting with understanding qualifications and ending with submitting a loan application, can help you secure the money you need for your business.

This brief article will go over how to apply for a business loan and what you need to be eligible for a loan.

Contents

Determine the Type of Loan You Need

All business loan lenders will ask you why you need a loan. Your answer to that question will most likely fall into three categories, and it will also determine which loan is best for you.

SBA or Traditional Term Loans

These loans have the highest borrowing maximums. For example, SBA loans can be as much as five million dollars. There are other lenders who offer different lending products to fit your growing company needs, such as an equipment finance loan for heavy-duty machines.

Start-up Financing

If you are in the start-up phase and need funding for your business, you may need to use a credit card or a personal loan. Most business loan lenders prefer their clients to be in business for at least one or two years before they will even consider your application.

Business Lines of Credit

A business line of credit is helpful if you need to manage the day-to-day expenses. This type of financing is very flexible and allows you to tap into a line of credit to cover expenses such as unexpected repairs or payroll. In a sense, this type of funding is a type of safety net.

Determine if You Qualify for a Business Loan

Most lenders who offer business loan products like to look at your personal and business credit score. You can get your credit report free from Experian, TransUnion, and Equifax. If you have a checking account with any major banking companies such as Chase or Capital One, they offer free credit monitoring services as well.

Many banks prefer their clients to have a personal credit score of about 650 or 680 at minimum to qualify. If your credit score falls below that threshold, you may want to look into a microloan from a nonprofit or small-business loan for bad credit.

How Long Have You Been in Business?

As mentioned above, most traditional business loan lenders prefer for you to be in business for at least two years. If you wish to use an online lender instead, they may require you to be in business for at least one year.

What Is Your Annual Revenue?

Most lenders require businesses to have annual revenue between $50,000 and $260,000 to qualify you for their loans. If you don’t have that much money yearly revenue, you should consider looking into SBA microloans or short-term business loans.

Determine What Payments You Can Afford

Be sure to carefully look at your business’s financials, more specifically, the cash flow portion of your business. Once you take a look, start to evaluate how much of your cash flow you can use to apply towards loan repayment each month.

There are specific lenders who require you to pay once a month, whereas others need you to make daily repayments. To comfortably repay your business loan, your total income needs to be at least 1.25 times your total expenses, including the amount you must repay each month.

For example, if your business brings in $10,000 each month and you pay $7,000 for payroll, rent, and other costs, you will only be able to afford $1,000 a month for your loan repayment.

Decide How to Collateralize the Loan

Not all lenders require collateral, but a few need collateral before they can release the loan. In general, lenders accept business equipment or property as collateral. Putting up collateral is very risky, but it allows the lender to provide you access to higher capital.

If you don’t put up collateral, the lender may require a personal guarantee. This means that if your business cannot repay the loan, you will make the payment out of your personal funds.

Be very careful of signing a personal guarantee. If you default on your loan, the lender has the right to seize your personal assets to repay the debt.

Compare Small-Business Lenders

There are three main ways you can get a small-business loan: traditional banks, nonprofit microlenders, and online lenders. Each of these lenders has multiple lending products, but one lender may be better than the other.

When to Get a Business Loan From Online Lenders

If you lack collateral, need quick funding, or lack time in business, it would be best to reach out to an online lender for your funding needs. Online lenders have the opportunity to provide you with between $1,000 to $4 million in business loans. The average interest rate for online business loans varies between 6% to 90% or more, depending on the lender and the type of the loan.

Other factors that affect your interest rate:

Length of the repayment term
Your personal credit score
If collateral is needed

Online lenders rarely have interest rates as low as traditional banks, but their approval rates are faster and higher than conventional banks. Some businesses can receive their funds within 24 hours.

If you decide to partner with an online lender, be sure to do your research on the company. Most online business loan companies are private lenders who don’t have to follow specific rules and regulations that traditional banks do. This means they can impose unfair interest rates or repayment terms.

When to Get a Business Loan From a Bank

If your business has been in business for at least two years, you don’t need cash fast, and you have good credit, reaching out to a bank for your business lending needs is a better option. Traditional banks can provide you with commercial mortgages, term loans, and lines of credit.

When to Get a Loan From Microlenders

If you are a new business with no credit history or bad credit and you can’t get a loan through traditional means, microlenders are an excellent place to start. Microlenders are nonprofits that lend short-term loans up to $50,000. The interest rates on these loans tend to be higher than traditional bank loans, and the application process is lengthy.

Gather Your Documents

Before you start the application process, you will want to ensure that you have the documentation required by the lender. Depending on the lender, you will need to have your personal and business tax returns on hand.

Apply for Your Loan

With all of your documents in hand, a lender in mind, and a complete application, you can go ahead and send in your application. Before you apply for your loan, you may want to reach out to a business professional in your industry to help you review your application to ensure everything looks good to go. If you are not ready to fully apply for a loan, check to see if your lender has a pre-approval process.

How to Apply for SBA Loans

If you wish to apply for an SBA loan for your business, there are three main types of SBA loans. Each of these loans differs slightly, so be sure to read them over before you apply.

SBA 7(a) Loan

The SBA 7(a) loan is a general-purpose loan ideal for short or long-term working capital, buying a franchise or business, or expanding your business. You also can use these funds to refinance debt or purchase land and equipment.

You have the opportunity to access up to $5 million through this loan program with interest rates as low as 2.20%. The Small Business Administration guarantees up to 85% of the loan and charges up to 3% of the guaranteed amount. This guaranteed amount fee does not apply if your loan is less than $150,000.

SBA 504/CDC Loans

This loan targets small business purchases of significant fixed assets such as building renovations, office space, land, or equipment. This loan is quite unique because there are two parties involved, an SBA-approved certified development company, also known as CDC, and the bank.

This loan allows you access up to $5 million on the CDC portion of the loan with interest rates around 4% to 5%. Interest rates on the banks’ end vary and are typically determined by your business and personal credit score. There may be additional fees of about 4% of the loan amount you will have to pay.

SBA Microloans

SBA Microloans serve newer and smaller businesses, also known as SBA start-up loans. Funds for these loans are excellent for short-term working capital, securing inventory, business start-up costs, equipment, and fixtures.

You should consider this loan if you need less than $50,000 of capital. Interest rates for these loans tend to be on the higher side of about 8% up to 13%. Keep in mind that the interest rate will vary by the lender who authorizes the loan.

Determine Your Eligibility

Once you decide which SBA loan program is best for you, the next step is to determine your eligibility. It is important to note that the application process is very competitive, regardless of which program you choose. You will need to have strong credit and financial history to qualify.

SBA Minimum Requirements

Before you can even think about sending your application, you will want to make sure you meet the bare minimum requirements. For example, you will need to be a small business defined by the SBA.

Other minimum requirements:

You operate for profit
Invest some of your personal finances and time into the business
Use alternative financial resources before seeking financial assistance
Be engaged in business in the United States or its territories
Not have any previous or current delinquencies or defaults on government loans

Because the loan you receive doesn’t necessarily come directly from the SBA, you will also have to meet specific requirements for the lender. In addition to the SBA minimum requirements, you will also need to have a personal score of at least 640.

Additional lender requirements:

At least $100,000 in annual revenue
At least two years in business

If you are a newer business, you won’t need to be in business for at least two years. Instead, you may qualify for a microloan. You may also be able to receive a 7(a) loan with some collateral.

Find an SBA Lender and Apply

Once you’ve determined that you are eligible for your loan program, you will need to find a lender. Depending on the type of program you wish to apply to, you may be able to apply at a nonprofit lender or your local bank. If you already have a traditional bank that you use for a checking account or other loan products, you can see if they authorize SBA loans.

Many lenders allow you to apply for the program online, whereas others will want you to come in to complete the process. When you find a few lenders, there are a few questions that you should ask them to ensure they are a good fit for you and your business.

Questions to ask potential lenders:

What is your average loan size
What are your average loan rates
What is the SBA timeline
Do you require collateral?
Who will be working with my business to complete the process?

Of course, as you go through the process, more questions will arise. These questions are great starting points to ensure that the lender you wish to work with is reliable and suitable for your business needs.

Secure the Right Business Loan

Starting up a new business or obtaining financing to keep the one you currently have afloat can be a stressful process, especially if you aren’t sure what you are looking for. If you have any questions about getting the right loan for you, you can always reach out to the SBA’s to learn more about their available programs. You can also look at our blog for more business loan information and tax help.