How to Get a Small-Business Loan in 5 Steps
Feb 28, · When you apply for a small-business loan, you will need to gather documents that the lender and the SBA will use to determine your lending risk. . Sep 11, · The financial and legal documents you may need for a small-business loan include: Personal and business income tax returns. Balance sheet and income statement. Personal and business bank statements.
You don't have to start at square one to become an entrepreneur. Buying an existing business offers you the opportunity to work for yourself without all the challenges and risks of a startup. This head start comes at a cost, however.
And if your personal savings don't cover the cost of your purchase, chances are you'll be looking to apply for a business loan. Depending on a range of factors, you may be able to get a loan to buy an existing business, but first you'll have to size up your needs and requirements, prepare the right information and documents, and shop for the right lender.
When you're buying an existing business, lenders want to know about both you and the business you want to buy. That's fair: Up to this point, you and your prospective business have had two entirely independent histories. As they would with any loan, lenders want to know about your personal credit what causes dark marks under your eyes. Do you have a history of successfully managing debt?
Do you handle credit responsibly? They'll want information about your income, your current business if you have one and any relevant experience that makes you a good candidate what do you need to get a small business loan running this new business successfully.
Here's a short list of items to prepare:. If you already own a business and are looking to acquire another to expand operations or change your business model, lenders will also want to know about the financial health of your existing company. Check with your lender for a full list of financial information they require, but be prepared to provide the following:.
Further, they'll want to make sure your business strategy is sound and that your proposed business purchase has the income potential to allow you to repay your loan. Proving that could require showing:. Before you can apply for a loanyou need to assemble some basic information. Many of the answers you need will require input from the seller. Although this may seem cumbersome, it's also an opportunity to get some cold, hard facts about the business you're hoping to buy.
The Small Business Administration SBA recommends working with an accountant and an attorney to help you navigate the sales process. Together, they can help you accomplish key objectives, such as:.
Business loans are available from a variety of sources. Your current bank or credit union or the one your prospective business uses is an obvious starting point, but you can also shop around for small business lenders. Online lending platforms like Fundera connect small business borrowers with multiple lending sources for a range of business loans including Small Business Administration SBA loansbusiness lines of credit and term loans.
For many small business owners, SBA loans work where other lending options do not. The SBA doesn't make loans to small businesses; instead, it guarantees loans from lenders like banks and credit unions, which takes some of the risk out of lending. As a result, SBA loans typically have favorable interest rates, but also have specific criteria borrowers must meet to qualify. Some alternative lenders also offer small business financing.
Additional Ways to Finance Buying a Business Getting a loan to fund a business purchase isn't your only option. If you can't find a willing lender or your approved loan amount doesn't cover the cost of the business, consider these alternative funding ideas:. Negotiate seller financing. Although some sellers are looking to cash out and never look back, some may be open to being paid over time.
You can negotiate this type of financing into your sales agreement and skip the bank altogether. Borrow from friends and family. This is not an option to be taken lightly: The emotional cost of defaulting on your loved ones is astronomical. But if you're confident in your ability to repay and are willing to write up an ironclad loan agreement, this can be a viable funding source. Seek out investors or partners. You can share the investment—and the equity in your business.
Just be aware that doing so will affect how you operate your business, who's in control and how profits are distributed. Use your personal funds. In addition to your regular savings, you can consider using investments and other sources of cash to help pay for your new business. Just be wary of tax consequences and the risk of depleting your emergency fund or nest egg: Even the best business opportunity represents how to start international calling card business risk.
You can also take your reserves of personal credit into account, although financing large sums of money at high credit card interest rates isn't an ideal way to fund your business as it can easily cause your credit utilization to shoot up, which could have big credit implications.
If you're hoping to purchase a business with a minimal upfront investment—sometimes described as a leveraged buyout—you might try a combination of these options. A leveraged buyout can help you get into a business you don't have the funds or borrowing power to buy outright.
But the high debt load can also increase your risk, so proceed with caution. A Lender's Perspective Can Bring Clarity Seeking a loan to buy an existing business can be a lot of work, but it may have a how to clean clothes exposed to mold spores benefit.
It requires you to formulate the value of the business you want to buy and your reasons for believing you can succeed. You'll need to examine the business's past financial wins—and losses—and map out what does chemical engineer do you can make money and grow in the future.
Putting yourself through a loan application process can help you understand your investment more clearly. You may even get feedback on the risks and highlights of the opportunity you're considering. On an investment this big, clarity may be even more valuable than cash. What's on Your Credit Report? Editorial Policy: The information contained in Ask Experian is for educational purposes only and is not legal advice. Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities.
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What Do Lenders Consider When You Apply for a Business Loan?
Oct 21, · Online lending platforms like Fundera connect small business borrowers with multiple lending sources for a range of business loans including Small Business Administration (SBA) loans, business lines of credit and term loans. According to Fundera's website, borrowers with at least $, in annual revenues, one or more years in business and.
Determine if you qualify for a business loan. Decide what type of loan you need. Compare small-business lenders. Gather your documents. Apply for a business loan. Update March 29, Small-business owners now have until May 31, , to apply for a first- or second-draw loan through the Paycheck Protection Program. Lenders will have until June 30 to process outstanding PPP applications.
For the latest information, read our PPP page. A business loan can help you start or grow your company, but navigating the loan process, as well as tightened lending standards, can be intimidating. Breaking it down to manageable steps — from qualifications to shopping for lenders and applying for a loan — can help you secure the funding your business needs.
Here's how to get a small-business loan in five simple steps. Answer these questions to help determine whether you might qualify for a small-business loan :. You can get your credit report for free from each of the three major credit bureaus: Equifax, Experian and TransUnion. You can also get your credit score for free from several credit card issuers and personal finance websites, including NerdWallet. Banks prefer to offer their low-rate business loans to borrowers with credit scores above at least, says Suzanne Darden, a finance specialist at the Alabama Small Business Development Center.
If your credit score falls below that threshold, consider small-business loans for borrowers with bad credit or loans from a nonprofit microlender. Lenders will consider how long your business has been operating. You need to have been in business at least one year to qualify for most online small-business loans and at least two years to qualify for most bank loans.
Calculate your revenue and find out the minimum a given lender requires before you apply. Some online lenders require daily repayments, so make sure to factor that in. To comfortably repay your loan each month, your total income should be at least 1.
You can get secured and unsecured business loans from many lenders. A secured loan requires business collateral , such as property or equipment, that the lender can seize if you fail to repay the loan.
Putting up collateral is risky, but it can also raise the amount lenders let you borrow and get you a lower interest rate. Lenders may also require a personal guarantee — even for unsecured loans. This means you'll personally repay the loan if your business can't, and may let a lender come after things like your house or car in instances of nonpayment. Lenders will ask why you need to get a small-business loan. Your answer will likely fall into one of three categories and determine which type of business loan is right for you:.
You want to start a business. Lenders require cash flow to support repayment of the loan, so companies in their first year typically can't get business loans.
You want to manage day-to-day expenses. A business line of credit could make sense. This flexible kind of funding lets you tap into financing as needed to cover expenses like payroll or unexpected costs like repairs, offering a useful safety net as needed. You want to grow your business. Many lenders also offer specific products to fit a growing company's needs, such as loans for equipment or vehicle purchases.
There are three main sources for getting small-business loans: online lenders, banks and nonprofit microlenders. Each typically has multiple products, but one may be better in certain instances than others. These lenders rarely have APRs as low as those at traditional banks, but approval rates are higher and funding is faster than with banks — as fast as 12 hours. Traditional bank options include term loans, lines of credit and commercial mortgages to buy properties or refinance. Through banks, the U.
Small Business Administration provides general small-business loans with its 7 a loan program, short-term microloans and disaster loans. Taking out a small-business loan from a bank can be tough due to factors like lower sales volume and cash reserves. Add bad personal credit or no collateral to that, and many small-business owners come up empty-handed. Getting funded takes longer than other options, but banks are usually the lowest-APR option.
The APR on these loans is typically higher than that of bank loans. The application may require a detailed business plan , financial statements and a description of what the loan will be used for, making it a lengthy process.
Before you apply, make sure you have all the required documentation. Locating these files now and having them easily accessible will help streamline the process of getting a small-business loan.
Business legal documents e. You made it! Start by looking at two or three similar options based on loan terms and annual percentage rate, or APR. Because APR includes all loan fees in addition to the interest rate, it's the best way to understand the total cost of a business loan for the year.
You will need a strong personal credit score, solid business financials, such as revenue, at least a year in business and in some cases collateral to qualify for a small-business loan at a bank. Online lenders require less stringent requirements. If you're just starting out, consider alternatives such as business credit cards. See our list of startup funding options.
It can be challenging to qualify for a small-business loan without a strong personal score starting around and a solid cash flow from your business.
Those are among common reasons why your business loan application can be denied. Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money. Steps 1. Show More. What's your credit score?
How long have you been in business? Do you make enough money? Can you afford the payments? Do you have collateral? When to get a business loan from online lenders:. You lack collateral. You lack time in business. You need funding quickly. When to get a business loan from banks :. You've been in business at least two years.
You have good credit. You don't need cash fast. When to get a business loan from microlenders:. You have bad credit or no credit history. You are a new business. You can't get a traditional loan. Estimate the cost of getting a business loan. Business and personal tax returns. Business and personal bank statements. Business financial statements.
Frequently asked questions How do I get a first time small-business loan? Is it hard to get a small-business loan?