Have you dreamed of taking your side hustle to the next level? When it comes to expanding a business, cash is key. But coming up with the money yourself can be difficult in the first few years of your company’s life.
A small business loan could be the tool you need to build a strong company of your own. Although the process might seem overwhelming, this guide can help you figure out how to get a small business loan for your next endeavor.
Why you need a business loan
There are many ways to get funding for your business — one of the most common is a personal loan, where you borrow money in your own name. Though getting a business loan is more complex than applying for a credit card or a personal loan, it’s worth the time and effort.
If your company fails after you receive a business loan, your personal assets are safe — beyond what you put down as collateral — and you typically are not responsible for repaying the balance of your debt. Instead, the business is liquidated and the proceeds are used to pay the loan.
That approach can be a lifesaver if your business enters bankruptcy. It’s only your business that’s affected, not your personal credit.
That’s not the case with a personal loan. If you have a personal loan and your business goes under, you’re still responsible for paying that debt back. If you can’t afford the payment, you could ruin your credit.
How to get a business loan
Although the application process can be intensive, the more prepared you are, the easier it will be. Here’s how to get a business loan in five steps.
1. Develop a plan for the money
Too many business owners apply for a loan without a concrete plan for how they’ll spend it; they’d just feel more comfortable having the money available to them. Unfortunately, that’s why some banks deny applicants.
Instead, think about what the money can do for your business. You could use it to get more efficient equipment to speed up your workflow and increase your bandwidth, or you could use it to build a new shop. Some borrowers take out the loan if they’re preparing for big changes, such as acquiring a new partner or taking advantage of a manufacturing deal.
As you develop your strategy, write it down and include it as an addendum to your business plan. A good business plan will include a description of your business, market analysis and strategy, competitor analysis, and an operations and management plan for how you’ll handle day-to-day needs. Financial data, such as what money you have available, what you’ve invested to date, and how a loan will help you, should be included as well.
Though you might find some on-demand lenders do not require a business plan, they often charge higher interest rates and fees to compensate for the additional risk.
2. Figure out what loans you’re eligible for
If you’re launching a startup
If you’re thinking of starting a new business, getting a loan can be especially difficult. Most banks insist that borrowers be in business for at least a year before approving them for a loan. From their perspective, showing that the business is earning money minimizes their risk.
One way to get the money you need is to check out peer-to-peer lending, which offers higher approval rates. However, you’ll pay higher interest rates. Depending on your credit and the status of your business, you could pay up to 35% in interest. If you borrowed $10,000, over five years you’d pay back a staggering $21,294.
While you should try to avoid this option, it could be a useful last resort when you need to expand your business.
When your business is in the early stages
If you’re within the first year of operations, your options are still limited. You might be able to get a loan through lenders such as Kabbage, which boasts high approval rates and quick disbursals.
However, if you go this route, you’ll pay higher fees and interest rates. These loans might have shorter repayment terms, too.
For example, if you took out a $10,000 loan with a six-month term with Kabbage, you could pay as much as 10 percent in fees and added charges. In six months of payments, you could pay over $12,400.
Like peer-to-peer lending, taking out a high-interest loan should only be a last resort when you’ve exhausted your other options.
If you have a more established business, you have more options for business loans. One of the best ways is to apply for a Small Business Administration (SBA) loan. Administered through banks, you can borrow more through SBA and have a longer repayment term; many loans have terms of seven years or more.
The interest rates are much lower. Your actual rate is determined by the bank who distributes the loan, but rates can be as low as 3.96%. There are some additional fees that can add to the balance, as well.
The savings can be significant. If you borrowed $10,000 from the SBA and had a 3.96% interest rate over five years, you’d pay just over $11,000 plus additional fees — that’s around $10,000 in savings compared to a peer-to-peer loan.
3. Compare loans
When looking at loans from different lenders, compare the interest rates, fees, and repayment terms. But the following factors are important to research, too:
- Does the lender require collateral? Many traditional banks require collateral for business loans. If you default on a loan, the lender can take something of value from you to pay for it, such as your home.
- What is the minimum credit required? An SBA or bank loan typically requires you to have a high credit score; usually, it must be over 650. If your credit is lower than that, you might have to turn to peer-to-peer lending or a service such as Kabbage.
- How quickly do you need the cash? SBA loans and bank loans can take months to process, while online lenders can issue your loan in as little as a few days. You’ll pay a premium in interest, which can result in paying thousands more. Only use online lenders with high interest rates if you exhaust other borrowing options.
4. Collect the necessary documents to apply
Once you’ve selected a lender, collect the following documents, if applicable:
- Personal and business tax returns
- Personal and business bank statements
- Business annual report or financials
- Business plan
- Rationale for the use of the loan
For SBA and traditional bank loans, you typically will have to meet a representative at a local bank to fill out the application. For online lenders, you can often complete the application in just a few minutes, without meeting a representative.
5. Loan disbursal
Once your loan is approved, your lender will email or send you a letter with your loan closing information. That letter will include your loan disbursement date.
Online lenders work quickly, often giving you the requested funds in just a few days. Usually, the lender will deposit your loan to your bank account electronically. Working with a bank for a SBA loan might take longer, but once the process is complete, they will issue your loan via direct deposit or check.
For most loans, there is no grace period. You have to make monthly payments starting on the date shown in your loan agreement.
Launching a business
Starting your own business can be exhausting and expensive. Figuring out how to get a business loan is a time-consuming process, too. But when you need more money to make your business succeed, a business loan can be a smart way to get the capital you need.
If you’d like to be your own boss and don’t know where to start, check out the complete guide to launching your first side business.
Interested in a personal loan?Here are the top personal loan lenders of 2019!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.
†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com
**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|5.75% – 16.24%1||$5,000 - $100,000|
|7.69% – 35.99%||$1,000 - $50,000|
|7.99% – 35.89%*||$1,000 - $50,000|
|5.99% – 24.99%2||$5,000 - $35,000|
|5.99% – 29.99%3||$7,500 - $40,000|
|6.79% – 20.89%4||$5,000 - $50,000|
|9.99% – 35.99%5||$2,000 - $25,000|
|6.95% – 35.89%6||$1,000 - $40,000|
|6.99% – 18.24%7||$5,000 - $75,000|
|9.95% – 35.99%8||$2,000 - $35,000|