A business loan is a straightforward solution if your small business needs funds to cover expenses, support operations, buy new equipment, and more. However, for companies that haven’t used business loans previously, being unfamiliar with what it takes to get this type of funding isn’t uncommon. Fortunately, the process for getting a business loan isn’t complex. Here’s a look at how to get a business loan.
What Are the Requirements?
Companies interested in getting a business loan need to meet specific requirements. Generally, both the business and the owner need suitable credit scores. The company is evaluated based on its FICO Small Business Scoring Service score, while individuals are usually examined based on more traditional FICO scores. The minimum credit score needed in each category can vary by lender.
Lenders may have minimum annual revenue and debt-to-income ratio requirements to ensure companies can shoulder the related debt. Time-in-business minimums are also typical, and those can vary from one lender to the next.
For an SBA loan – which is backed by the U.S. Small Business Administration (SBA), a federal government agency – there are also size standards. Essentially, that ensures the SBA loans only support companies that qualify as small businesses.
For secured business loans, collateral is required. In some cases, lenders also make a personal guarantee mandatory, essentially ensuring the business owner is willing to repay the debt personally if the company can’t meet the obligation.
What Does the Application Process Look Like?
Applying for a business loan is relatively straightforward. Companies begin by providing information about the business, including its name, address, and tax ID, as well as contact details for an appropriate company representative. Often, sending in copies of financial statements is a must, so prepare to provide tax returns, profit and loss statements, bank account statements, and more.
In most cases, borrowers also need to provide information on the business owners. Essentially, if an individual owns a minimum amount of the company – with the exact minimum percentage varying by lender – the person’s name, Social Security number, and address are required during the process.
For secured business loans, details about the associated collateral are also needed. Generally, that includes listing the type of collateral, its estimated value, and similar information.
At times, lenders also require a personal guarantee. Essentially, that’s an agreement that states the borrower will handle the debt if the company defaults.
What Happens Once You’re Approved?
Once you’re approved for a business loan, the money is provided in accordance with the loan agreement. Lump sums may get sent directly to an associated business bank account, making it available for use. With a line of credit, companies may need to use a connected card or check, or they might be able to transfer funds from the line of credit to a checking or savings account.
After receiving access to the money, companies can use the funds for any purpose that’s allowed based on the business loan terms. Some business loans are more restrictive than others, but it’s essential to follow the rules. Otherwise, there are potential penalties for misuse, so it’s best to avoid missteps along the way.
