There are many reasons a small business might need to get a business loan. Some of these include funding startup costs, buying equipment and inventory, expanding operations and buying another business.
If your business needs fall into one of these categories, you might be wondering about how to get a business loan. The following are a few steps you can take, along with some of the most common small business loan requirements, to help you get the business financing you need.
Why Do You Need to Borrow Money?
One of the first things you should do is identify the exact reason why you need a business loan and how much you need to borrow. This is important because your bank will try to match your borrowing need with a specific type of small business loan.
A common type of small business loan is a revolving line of credit. With this loan, you can borrow up to your credit limit whenever you want without having to reapply when you need funds. Lines of credit are typically used for short-term purposes like plugging cash flow gaps, funding accounts receivable and buying inventory.
Another common small business loan is a term loan. This is an amortizing loan that’s usually used to buy fixed assets such as vehicles, computers and business equipment. The loan term should match the useful life of the asset being purchased.
A commercial mortgage is used to buy existing property for your business — this might include retail or office space, manufacturing facilities or warehouses. Commercial mortgage maturities generally range from 10 to 15 years.
Small Business Loan Requirements
There are a few small business loan requirements that most lenders look closely at when analyzing loan requests. One of these is debt capacity — or in other words, how much debt can your business comfortably assume? One common benchmark is that businesses should have $1.25 in income to support every $1 of debt assumed.
Another common requirement is capital. Most banks want to see that the owners have invested some of their own capital into the business so they have some “skin in the game.” Collateral is another requirement: The bank will probably require you to pledge assets as collateral to secure the loan. This can be cash, equipment, accounts receivable, inventory or real estate.
When reviewing your loan request, the bank will want to see various forms of documentation such as the following:
• Bank statements
• Business tax returns
• CPA-prepared financial statements
• Accounts payable and credit policies
• A personal financial statement
• Organizational documents such as articles of incorporation and partnership agreements
• In-force insurance policies
What About a Business Plan?
In addition, the bank may also request to see a business plan. Your business plan should provide a comprehensive overview of your business (especially your finances) to help the bank better gauge your borrowing qualifications.
Your business plan doesn’t have to be dozens of pages long. Instead, keep it short and concise and make sure it includes the following sections:
• Description of your business
• Mission statement
• Company history
• Competitive analysis
• Financial plan
• Marketing plan
• Management team overview
Start Preparing Now
Take the time now to start thinking about the process of obtaining a small business loan. This way, you’ll be better prepared when it’s time to borrow money for your business.