A Short Guide to Getting a Small Business Loan

By Suzanne Robertson on June 4, 2018

This article is written by our friends at SmartBiz Loans.

Have big plans for your small business? You’ll probably need more money, which means a business loan.

The entire process of finding a lender, figuring out the terms, gathering paperwork, and completing a long application is neither fast, nor fun. But you can make things a little easier by understanding in advance how the loan process works.

Why get a loan?

It’s a common question: “If my business is healthy, why would I need to take on debt?” If you have a healthy business, you don’t need a loan. But if you have ambitious goals, you almost always need more capital.

Here are a few ways real business owners have used funds from a small business loan.

Purchasing additional inventory is one way to grow and save money. Bryan Tracey, the founder of Skate SX, used this strategy to his advantage. In August, he invests heavily in inventory to prep for the busy holiday season. Last year, Tracey took out an SBA loan to meet the demand for their popular kid-sized skateboards. He said, “Because we’re ordering more, we’re getting better prices and our dollar is going so much further with this additional money. Having cash on hand is a difference maker.”

Another smart strategy is to get a loan to pay off high-interest debt. This can help free-up cash flow.

Milton Martinez owns a successful towing business in the Dallas area. He had two small loans requiring daily payments, leaving him cash strapped. “I needed to create additional income instead of paying outlandish interest rates,” he said. His bank offered a line of credit but the rates and terms were unfavorable. He was ultimately able to pay off that expensive debt with an SBA loan. “By getting rid of the two small loans I’m saving $15,000 – $18,000 dollars,” he said.  “That’s money I can put back into growing my business or into savings.”

Ask for the right amount of money

Determine if you can afford the loan by knowing your monthly payments and Annual Percentage Rate. To help nail down an amount, take a look at your business plan and cash flow analysis. You can also talk to your accountant or another financial professional. Your goal should be to strike a balance between borrowing too little and borrowing too much.

As a rule of thumb, the profits generated from a loan should exceed the cost of the loan. Your business should generate enough cash flow to easily cover monthly payments for the life of the loan. You want this money to work for you, not stress your finances.

Determine how to use the loan

Depending on your lender, low-cost funds can be used for things like equipment purchases, hiring and debt refinance. Most lenders want to know how you’ll use loan proceeds, so determine this before you get started.

The most popular ways to use money from a loan:

  • Covering day-to-day business expenses
  • Increasing inventory
  • Purchasing big assets like equipment
  • Paying down debt
  • Purchasing commercial real estate
  • A big marketing push
  • Hiring employees

Lenders want to know you have a plan for their money. If you have an answer ready when asked how you’ll use the loan, your chances of getting the loan will be improved.

Assess the financial health of your business

Lenders want to know the financial state of your business, to see if you can realistically make your loan payments.

At a minimum, they’ll want to see financial statements from the last few years (if you have them). If you don’t have those, you can always work with an online bookkeeping service like Bench to do some catch-up bookkeeping and produce historical financial statements for you.

It’s also a good idea to chat with an accountant before you apply for a loan. They can provide an expert opinion on whether a business loan is the right move for your business. And if they agree a loan is a smart move, they can provide recommendations on how to get your business loan-ready.

Choose a lender

Before you choose a lender, look at their products. These days there are lots of options to fund a small business including SBA loans, business lines of credit, merchant cash advances, and more. Your goal should be to secure a loan with the lowest interest rates, the longest terms, and no prepayment penalties. If you’re buying or refinancing commercial real estate property, look for a lender that offers a low-cost loan with no balloon payments.

SBA loans are generally known as the “gold standard” for small business financing because of low rates, long terms, and low monthly payments. If you can qualify, an SBA loan can be your best bet to save money and grow your business.

Ideally, research lenders who have a streamlined loan application option. You’ll avoid faxing and mailing by using an online lender, which will speed up the process.

There are lots of websites that feature reviews from real customers. Check out Google Reviews, TrustPilot or Consumer Affairs and search for the name of your lender.

Gather paperwork

Time to produce the paperwork! Organization is your best friend here. You or your bookkeeper/accountant will need to provide financial documents. Typical requests include profit and loss statements, cash flow statements and balance sheets. Legal documents, evidence of collateral and owner resumes might also be required. Lenders review documents along with credit scores and other financial ratios to know where your business stands.

Be aware that small business loans are not created equal. Each lender has specific credit criteria and varied paperwork requirements. Strive to work with a lender that has a good reputation, an easy application process, fast funding and stellar customer support. With the right low-cost funds, you can successfully expand your business.

Thinking of getting an SBA loan? Sign up for SmartBiz Advisor™, an educational online tool to help you learn how to get funding you deserve.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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