The right loan can help a small business afford a special piece of equipment, take on a great new hire, restock its inventory for a big order, or keep the lights on in between customer payments.
But first deciding if you even need a loan, and then finding the right loan can be pretty tough.
I've asked Meredith Wood, Editor of Fundera to contribute her advice for this article.
For starters, if you’re on the fence of whether or not you should take a loan, ask yourself the following:
- Can I afford to pay it back? Never take on debt you don’t have a clear payment plan for.
- Will this contribute to growing my business? It’s always better to invest in a revenue-generating opportunity than it is to cover a gap in cash flow. Make sure you’re not holding your business together with debt.
- What am I willing to pay? Before starting your search, you won’t know what type of loan you qualify for, so you need to decide the monthly payment your business can afford, and stick to the when you’re searching.
Now for finding a loan—applying for a business loan is often a time-consuming and confusing process—not to mention there’s no guarantee of funding at the end.
So what can you do to spend your time and energy applying for the best loan for your business? Try following these 4 steps.
1. Start your search thoughtfully.
You want to be as deliberate as possible when starting your search for the right loan. There are 2 questions you want to answer before diving deep:
What kind of lender are you looking for?
Have you been in business for a while? Does your business have great financials? Is your credit score excellent? Are you working in a stable industry?
If so, applying for a loan at a bank might be your path. Banks tend to give out the largest, most affordable financing, with long terms and low interest rates.
However, only 1 in 5 small businesses get approved for a bank loan. Plus, bank loans take significantly longer to apply for and to hear back about. So if you don’t think you could get approved or if you’re not willing to wait the weeks or months that bank loans can require, you should consider alternative lending instead.
Rather than going to a bank, you can apply for a loan online from an alternative lender. They’re often smaller and might be more expensive, but usually the entire process is much quicker and easier. Choosing the right kind of lender will make your loan application much smoother.
What kind of loan do you need?
Do you need one lump-sum payment? Or access to revolving capital? Will you be using the loan to finance equipment, or maybe to cover the cash flow gap from late-paying customers?
Different businesses have different needs—and as it turns out, there are plenty of types of loans to choose from. The better you understand why your business could benefit from financing, the more accurately you can pick the type of loan to apply for… Saving you time and energy.
2. Prepare before you apply.
Applying for a small business loan can take a while—26 hours on average, in fact—but you can cut that time down with preparation.
While requirements differ between lenders, types of loans, and specific businesses, you’ll want to at least gather the basic documents before you apply. That way, you won’t have scramble around to create or collect your business financials.
Plus, you’ll understand your business’s needs better. One trick to getting the right business loan is applying for the right business loan in the first place… And that means you need to know what you’re likely to qualify for and how much debt your business can actually deal with.
Here’s a list of the usual requirements that many lenders have:
- Bank statements
- Profit & loss statements
- Tax returns (business and personal)
- Balance sheet
- Business debt schedule
- Cash flow forecast
- Business plan
- Licenses, permits, and proof of ownership
You may need less—or more. But getting the basics together will help the process move faster no matter what.
3. Apply for multiple loans.
After you’ve carefully considered your options and gathered your documents, the next step is applying.
Depending on where you’re applying, this can take minutes, hours, days, or weeks.
But here’s the thing: you’ll want to apply to multiple options. First, that’s to lower the chances that you won’t receive any offers. And second, it’ll let you pick the best offer instead of taking whatever you get.
Which is why the next step is...
4. Compare offers to find the right one.
By now, you know what you’re looking for.
You’ll have an idea of the best kind of loan, the amount you need, the interest rates you can handle, and any specific features you want to include or avoid (like prepayment penalties).
So if you get a few different offers, you have the chance to compare and contrast—and pick the one that matches your needs best. And sometimes you can even haggle for a larger loan or a lower interest rate if you can show that you have a competing offer.
Getting a business loan isn’t the easiest thing in the world, but if you follow these 4 steps, you’re in a good place to find the best loan for your business’s financing needs.