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Where To Get A Small Business Loan? – Steps To Take (Updated 2024)
Last Updated on: November 7th, 2024
Starting a business is a very hectic job for most. It can be even more difficult when you do not have the capital to take a loan from the bank.
Acquiring business loans can be confusing for someone who has zero ideas about these financial things.
But you do not have to worry about anything. In this article, you will find some easy ways to secure a bank loan for your business.
Let me tell you Where to Get a Small Business Loan in 2022.
Purpose Of Business Loan
If you are asking for a loan for the first time, then you need to know a few things first. You need to understand the exact purpose of a bank loan and how it can impact your business. Before you find out the answer to the question “Where to Get a Small Business Loan?”, you need to know the purpose of a business loan
1. Starting A New Business
In most cases, bank loans are taken out to start a new business. The money is used in business-related operations. These business loans are provided based on your credit score.
2. Expanding Operation
People like to take out loans to expand their business. Maybe you can buy a piece of land or lease a property to grow the business further.
3. Equipment Purchasing
For any business, you need to have good-quality equipment and machines. And these machines can be costly.
Loans are taken to purchase these machines and pieces of equipment.
4. Purchase Of Inventory
Other than equipment and machines, a business rather than a small business need a large inventory of raw materials or stock. Loans are taken out to buy huge amounts of these inventories as well.
5. To Increase Working Capital
Small businesses, especially, do not always have the required capital to run day-to-day activities. Therefore, loans are useful and very helpful.
Now that you know the purpose of business loans, the next criterion is where to get a loan to start a small business.
How To Get A Business Loan?
The business loan application and the underwriting process depend a lot on the lender. However, the application procedure is the same for all banks. Let’s know where to Get a Small Business Loan.
1. Determine The Type Of Loan You Need
Some lenders are very picky about the industry they would want to fund or how the funds should be used. So, you should determine where you are going to allocate the money. Also, finalize how much you need to borrow. This would impact the type of loan you get.
2. Familiarize Yourself With Your Credit Score
Any lender would look at your credit score before lending you money. You have to score above 680 to qualify for an SBA loan or a traditional bank loan. 630 is required for financing equipment or business line credit.
Short-term financing and even merchant cash require a credit score between 600 and 550.
3. Research The Lenders
Before you go out shopping for a bank loan, make sure to know all the different types of schemes the bank is providing in the loan department. Along with that bank, you should research other banks as well to find out what they are offering and always compare your options.
4. Collect Required Documents
Required documents vary from lender to lender. However, most banks require a business plan for 12 months, bank statements, tax returns for the past two years, and details about any outstanding loan you already have.
They might ask for the business licenses and all legal documents as well. They might even ask for some collateral, just in case.
4. Submit A Loan Application
Once all your research about the best small business loan scheme is done and you have gathered all the required documents as well, now you can formally submit the loan application. The loan process varies from lender to lender, so familiarize yourself with the process and ask questions.
Business Loans With Bad Credit
Even though the loan process is completed, there still is one problem. What if you have a bad credit score? Then, you need to know where to get a small business loan with bad credit:
1. Secured Loans
This is a type of loan where you can pledge any asset as collateral to get the loan amount you need. If you are unable to pay back the money borrowed, then the lender will get your assets. This is the best option for you if you have bad credit.
2. NBFCs
This is an unsecured loan without collateral. Though it is difficult for you to get a loan with bad credit, you can get it with a higher rate of interest.
There are Non-Banking Financial Companies that can give you a loan by combining data and technology to approve your loan. They are flexible with credit scores and credit ratings. However, the rate of interest will be higher.
3. Web-based Lenders
Maybe in the past, you may have failed to pay your bills, but that should not affect your credit score. There are various web-based lenders who target people with bad credit to give you a loan. Their analysis of creditworthiness differs from that of traditional banks.
4. Request Your Current Lender
The last option you have is to go to your local bank, where you have an account. Explain your situation and mistakes to them, and you can request an unsecured loan with a low interest rate.
If they agree, then I must admit you have a great convincing ability.
Important Things to Know Before Choosing a Small Business Loan
When you are looking to finance a small business loan, it is important to choose properly whom you take a loan from. The following are some essential factors you need to consider before you choose a lender to get a small business loan:
1. Make Sure That the Lender is Reputable
Once you choose a reputable lender, you will get a safe and secure lending experience. However, if you choose a small business lender, make sure you take enough time to research the company. The following are some essential aspects that you need to consider in this case:
- Make sure that the lender has good reviews. Here, you can check reviews on various third-party review websites. In those places, you can read about true customer experiences.
- The lender must clearly state factors of financial agreements, including financial responsibility, due dates, and more.
- You must also check any prospective small business lender’s licenses and operations. Check how the lender operates in your state.
- In general, responsible and reputable lenders follow all the industry standards when it comes to security practices. This is crucial for all online lenders.
2. Do the Lender Provide What You Need
Small business financing comes in a variety of forms – credit cards, short-term loans, etc. Hence, it is important to ensure that your financing method suits what you exactly need.
Bank of America states, “Lenders want to make sure you’re using the right product for your needs. Options may include small business credit cards, which are designed to help you manage day-to-day expenses; a line of credit, which is generally used for short-term working capital needs; and a commercial term loan, which is best for financing larger investments over time.“
Therefore, if you are not sure about the type of financing, you can ask the lender for advice. These lenders will help you to look at a variety of options from which you can choose the one that best suits your situation.
3. Convenience to Get the Loan
The loan application process can vary a lot with different lenders. For example, lenders that are SBA-approved, and the ones from traditional banks have a longer application process. On the other hand, the application process with online lenders is fast and easy.
4. Time to Get the Funding
The timeline also matters a lot when it comes to small business lenders. Hence, if you want to get funding sooner, check for online lenders. For example, the turnaround time for traditional and SBA-approved lenders is longer.
Frequently Asked Questions (FAQs):
Check out the most frequently asked questions related to small business loans mentioned below.
- How Do I Get A First-time Small Business Loan?
You will require a strong personal credit score, great business financials, and just-in-case collateral. However, if you apply from online lenders, it is less strict.
- Is It Hard To Get A Small Business Loan?
It can be challenging to apply without a strong credit score or even a solid cash flow from your business. But it is not impossible.
- What Is A Bad Credit Score?
A bad credit score is when you have a score of less than 650. A credit score is a three-digit number ranging from 300 to 900.
On A Closing Note!
From all the loan options you get, you should always choose the option with the least APR and always remember to submit all the required documents.
Keep one thing in mind, credit offices do not distinguish between personal and business loans when your credit score is bad.
Now that you know the answer to your question, “Where to Get a Small Business Loan?”, get to work and collect all the necessary documents to secure the amount of loan you need.
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