How to Get a Business Loan Approved
Are you a small business owner, or self-employed, and want to know how to get a business loan approved? Read this article for the ultimate guide on small business loan approval.
Running a small business or being self-employed is a lot of work. One of the most challenging tasks is business growth. Every small business and self-employed individual would love more sales and customers. One of the fastest ways to grow a business is with money to spend on growth. This is why so many small business owners want business loans and want to learn how to get a business loan approved.
In this article, we break down everything you need to know to get approved for a small business loan. Therefore, your business growth will soar.
What is a business loan?
A business loan is a specific type of loan that is for business purposes. Large and small businesses use loans to finance and grow their business.
Is it hard to get a business loan?
Small business loans are not hard to get if you have a good personal credit score and your business has a good cash flow. However, getting a small business loan can be tough if you have low sales volumes and cash reserves. Keep reading this article to learn what you need to get approved for a business loan.
How to Get a Business Bank Loan
Are you wondering, how do you get a business loan?
Or rather, how to get a business loan from a bank?
Banks issue business loans. In addition, banks require you to apply to get a business loan.
Follow these steps on how to get a business bank loan:
1. Decide the type of business loan you need
2. Make sure you qualify for the loan you need
3. Determine what payments you can afford
4. Determine whether and how to collateralize the loan
5. Compare business lenders
6. Prepare and gather your documents
7. Apply for the business loan
What does collateralizing a loan mean?
Collateralizing a loan means you use a valuable asset to secure a loan. For example, your business assets, or your home (for a personal loan). In the event that the borrower defaults on their loan the lender seizes the assets to sell them and offset the risks of the loss.
What qualifies you for a business loan?
When a bank evaluates you and your business for a small business loan they take into consideration your credit score. In some cases, this includes both your personal credit score and your business credit score. Your credit score demonstrates your creditworthiness. The better your credit score, the more qualified you are for a small business loan.
What is creditworthiness?
Creditworthiness is how likely you are to pay back your loan based on your credit history.
Banks want to see that your business is earning enough money to pay off the loan. For self-employed, and independent contractors, such as delivery drivers, and gig workers, your annual revenue would be your earning for the year.
Updated Business Plan
Before a bank issues you a business loan they want to know how you are going to spend the money. The best way to show them this is with an updated business plan. For example, if you’re a delivery driver, you might want to use the business loan to purchase a new car.
Lenders want to know that in the event you default on your business loan they have a way to offset their losses. One of the ways banks do this is by requiring collateral in order to qualify for the loan. Collateral for a business loan can be the cash deposited in your business bank account, the value of business assets such as equipment, etc. Make sure you have something to collateralize your small business loan.
How to Get a Business Loan Approved in 6 Steps
1. Be in Business for at Least One Year
Most lenders want to see a history of a healthy business. This requires time to establish. Otherwise, how else is a bank supposed to know your business can pay off the loan they give you? Therefore, make sure you have been running your business a bit before you consider applying for a small business loan.
2. Have a Good Personal Credit Score
The majority of small business loan applications require your personal credit score. A business credit score is typically only required for an SBA loan or a term loan from a bank.
For example, if you’re self-employed or an independent contractor and you have not incorporated (i.e. formed an LLC, an S Corp, or C Corp), you are your business. What we mean by this is, your business and you are essentially the same legal entity. Therefore, your personal credit is the same as your business credit.
What is an SBA loan?
An SBA loan is also known as a Small Business Administration loan or SBA 7a loan. Small Business Administration loans are partially guaranteed by the U.S. Small Business Administration and issued by participating lenders. Participating lenders are usually banks.
SBA loans have tight lending standards. However, SBA 7a loans have flexible terms and low-interest rates, which makes them one of the best ways to finance your small business.
What is a term loan?
A term loan is a loan that is paid in regular payments over a period of time. Term loans last between one and ten years. Sometimes up to 30 years.
3. Have a Good Business Credit Score
A business credit score can only be built if you have incorporated, or you have a business bank account. You don’t need to be incorporated to have a business bank account. However, you need a business bank account to build business credit and to establish a good business credit score. There are many other benefits of having a business bank account. Also, there are many benefits of having a business bank account for self-employed and independent contractors.
Most self-employed, freelancers and gig workers don’t have a business bank account. Therefore, they don’t have a business credit score. However, for sole proprietors that do have a business bank account, it’s important to maintain a good relationship with your bank. Also, always keep some cash in your bank, demonstrate a healthy cash flow and keep the overdraft fees to a minimum.
4. Have a Business with a Solid Cash Flow
Poor or spotty cash flow can be a red flag to businesses. Businesses want to know that your business has the cash flow to pay your business loan back.
5. Keep Outstanding Debt Low
A business that already has a lot of debt is going to have a hard time getting approved for more debt (i.e. a business loan). Of course, there are always exceptions. businesses with large cash flows that can easily make the payments on large loans with a lot of cash leftover might have room to support more debt.
However, that’s not what we mean when we say keep outstanding debt low. When we say keep outstanding debt low, we mean to make sure you’re not already struggling to pay your current debt and you have enough cash flow each month to make your small business loan payments.
6. Have a Good Business Plan
The bank wants to know how you intend to spend the loan money before they approve you and your business for a business loan. This means you need to show the bank how you plan to spend the money.
Make sure you have a good plan, as the bank wants to see that your plan will generate enough business growth and revenue growth that you can make the loan payments. Ideally, you can make the loan payments and you still have money left over.
Can independent contractors get a business loan?
A business loan is a loan provided to a business, not an individual. Independent contractors typically work as a one-person operation. This means that independent contractors are often not incorporated.
What does incorporated mean?
Incorporated means that your company or organization has been formed into a legal entity. A business with only one owner and operator and no employees, a partnership, or a business with many owners and employees can incorporate.
There are different types of incorporations. For example, Limited Liability Corporations, S corps, C corps.
However, independent contractors can incorporate. For example, an independent contractor can form an LLC. An LLC will allow you to establish your independent contractor work as separate from their personal life. In addition, an LLC will enable the independent contractor to finance business opportunities with a business loan as opposed to a personal loan.
Can I get a business loan if I’m self-employed?
Yes. You can get a business loan if you’re self-employed. However, typically to get a business loan when you’re self-employed you have to be incorporated or have a business bank account. Further, in your business bank account, you need to keep your business finances separate from your personal finances.
A business bank account is required to get a business loan. A business loan will allow you to finance your self-employed business activity without having to use a personal loan.
What are alternative financing options to business loans?
A small business loan isn’t always the best option for financing a business. After all, it’s debt, and debt comes with a cost. Typically, the cost of a loan is measured by the loan interest rate. Ideally, you want a low-interest rate small business loan. However, there are other options for financing a business. For example, you could take on an equity investor and finance your business with equity as opposed to debt.
Getting a small business loan is exciting. Typically, small business owners, including self-employed, are interested in getting business loans when they are ready to expand their business.
Keep this article bookmarked as you might need to reference it when you are preparing to get approved for a small business loan.
And as always, don’t hesitate to connect us with any questions or article requests. We want to help. You can reach us at, email@example.com.
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