How to get a bank loan for a small business

Startups and small businesses always require proper operational and strategic funding. The majority of banks in the US offer special types of loans for those who start a business and we are here to guide you through all the stages of getting a loan: from applying, to choosing the best terms of repayment. Anyway, choosing the right lender can be a challenging process, so here is the step-by-step instruction to follow.

Define your needs, commercial potential, and risks

First of all, you need to know your business needs, based on the business and marketing plan you (hopefully) have.

  1. How much money do you need and what are the primary purposes?
    Calculate the needed amount based on the “worst possible scenario”, so in a case of first temporary hardship, you will still have enough to keep your business alive.
  2. During what period of time, you are going to pay the loan back?
    Based on your business plan and an expected turnover, calculate how long it will take you to pay the loan back. Then, choose a loan’s term, adding to calculations a little “extra” time for any case.
  3. What assets do you have to use it as collateral for your loan?
    The more valuable collateral, the less risk for the bank (risk of you not paying the loan back if your business goes bust), and so the smaller rate you will have to pay for your loan.

Small business loan application

Answering those question helps determine the right type of a loan and the right type of the lender.

Choose the right type of loan

Banks offer several types of loans to fund your business. You have to understand pros and cons of each type to choose the one which matches your needs and goals.

  1. Conventional short-term and long-term business loans.
    Those are the loans which are granted based on the business plan you have provided the bank with. The shorter the term the higher the rate you are paying for the loan.
  2. Business Acquisition loan.
    This type of a loan is purposed for buying the existing business or starting the new business from scratch.
  3. Debt Financing.
    The upper limit of the loan for the business debt financing usually equals the value of the assets the owner has.
  4. Line of Credit.
    Line of Credit is provided by the bank in case the business runs out of money or has a shortage of funds to cover the operational expenses.
  5. Revolving check Credit.
    An open-end loan for a specific amount of money defined based on the average monthly funds’ usage.
  6. Secured Working Capital Loan.
    It is a serious, long-term, and secured by the assets loan. The amount of Capital Loan is equal to the cost of the assets used as collateral.

business loan

Choose the right type of a bank

Choosing the right lender is key element of your success, as you will need to cooperate with it and its customer service for quite a long time.

If you are running a small business – choose the local bank with the office in your state. It’s important to have an option to visit the bank and talk to real people in case you will have some issues with the loan’s repayment.

Building of bank

An average-sized bank with the good reputation and responsive customer service is preferable to a big national bank, even if latter offers lower rates. Average and small banks usually offer SBA loans – Small Business Administration loans. Banks who offer SBA have way softer requirements to credit history, while the terms of repayment are more flexible as well.

You will also need an online-banking system to track your operations, so choose the bank which provides a client with it.

Bank’s requirements

In order to get a small business loan you will have to match a certain set or requirements:

  1. Good to excellent personal and business credit score.
    It’s a basic requirement every lender wants you to match. If you don’t have a good score you will probably find a lender anyway, but the worse your credit history the higher the rates you’ll be offered.
  2. Solid professional business plan.
    This is a reason and a main “why” for the bank to lend you the money. Take making brilliant business plan seriously.
  3. Good asset base.
    Some of your assets will be used as collateral for the loan. Remember that unsecured loans have extremely high rates.
  4. Decent experience in the sphere of your business.
    Statistically, it’s almost impossible to get a bank loan for the business you are inexperienced in.

As a non-bank alternative for getting a business loan, there are credit unions and private lenders, who usually offer higher rates but their requirements to your credit score and your previous financial track are not so serious as the banks’ ones.