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How to Get a Small Business Loan



Small business loans require significant documentation. You’ll need to fill out an application and provide supporting documents, which you should be ready to submit to the lender. Required documentation often includes:


Personal background: You’ll need to provide personal information on the application or a separate document, such as:


Previous addresses


Names used


Criminal record


Educational background


Resumes: Besides submitting your resume, you’ll need to submit professional resumes of each principal. Some lenders require applicants to have previous management or business experience, particularly for startup business loans.


Business plan: All loan programs require a sound, detailed business plan. The business plan should include a complete set of projected financial statements, including a profit and loss statement, an in-depth, five-year projected financial statement and a cash flow and balance sheet.


Income tax returns: Most lenders require applicants to submit personal and business income tax returns from the previous three years.


Loan application history: You’ll provide records of loans you’ve previously applied for.


Bank statements: Many lenders require one year of personal and business bank statements.


Collateral: Collateral requirements vary greatly. Some loan programs do not require collateral, but loans involving higher risk factors for default require substantial collateral. A strong business plan and financial statement can help you avoid collateral requirements. However, it’s still a good idea to prepare a collateral document that describes the cost and value of personal or business property that can be used to secure a loan.


Use of loan: This document outlines how you plan to use the loan.


Debt schedule: A debt schedule shows all your business’s outstanding loan and credit amounts, monthly payments, interest and payment dates.


Legal documents: Depending on your loan’s specific requirements, your lender may require you to submit one or more legal documents. Make sure you have the following items ready, if applicable:


Business licenses and registrations


Business lease (either a copy of your current business lease or proposed lease from landlord)


Business formation document, such as articles of incorporation or LLC filing


Copies of contracts you have with any third parties, such as subsidiaries and affiliates


Franchise agreements


Choosing a Small Business Loan


You should focus on eligibility requirements, loan options, costs and reputation when choosing a small business loan lender. Focusing on these factors will help you identify a lender that is most likely to approve your loan, offer acceptable terms and costs, and offer good service during approval, closing and repayment.


Eligibility Requirements:


Minimum credit score


Minimum years in business


Minimum annual revenue


Loan Options


Loan types: Find a lender that offers the type of loan you’re looking for. To save time and ensure you get enough capital to start or grow your small business, create a business plan and pinpoint the type of funding you need before you begin your search.


Loan limits: If the lender doesn’t offer loans in the amount you need to start or grow your business, you’ll need to find one who will. Settling for a lower amount could burden you with a loan that falls short of adequately addressing your capital needs.


Loan term: Your loan’s term is the time frame you have to repay the loan. Loans with shorter lengths have higher monthly payments, but you may pay less in total interest on the loan. If you take out a loan with a longer term, your monthly payments may be lower, but you may have to pay more in total interest over the life of the loan.


Costs


Keeping loan costs minimal allows you to invest profits back into your business and not back to the lender. Look for a lender with the lowest costs, including:


APR: Short for “annual percentage rate,” this is the interest charged on your loan every year, plus all loan fees and costs associated with the loan.


Down payment: In some cases, the down payment for your small business loan is covered by collateral. Other small business loans require an equity investment. Down payment requirements vary, but you should expect to invest at least 10 to 30 percent of your own capital when taking out a loan.


Factor rate: A factor rate is typically used for merchant cash advances and short-term loans to determine how much you will owe in interest.


Instead of a percentage, like with APRs, the interest rate for invoice factoring is expressed in decimal form. The average factor rate is 1.1 to 1.4, according to FitSmallBusiness. For example, if a small business takes out a $5,000 loan with a 1.2 factor rate, it will pay a total of $6,000 on the loan.


Your factor rate is determined by the industry your business is in, how long you’ve been in business, the stability of your business and your monthly credit card sales. With factor rates, you generally pay more in interest than with loans that use APRs.


Origination fee: This fee is for processing a new loan. Some lenders include the origination fee in their interest rate or total loan balance, and some do not charge an origination fee.


Underwriting fees: These fees are charged by underwriters to review and verify the provided documentation in your loan application and for preparing the loan.


Closing costs: These fees are any other costs tied to closing the loan, such as a business valuation, commercial real estate appraisal, filing and recording fees or loan-packaging fee.


SBA loan guarantee fee: The lender pays this fee and has the option to pass it along to you at closing.


This fee is not based on the total loan amount, but the maturity and dollar amount guaranteed. If the guaranteed amount of an SBA-backed loan is 85 percent, the fees are based on that 85 percent. For example, for a loan with a maturity of more than one year, the fee is 3 percent of the portion that is guaranteed by the SBA on loans of $150,000 to $750,000, and 3.5 percent on loans that are more than $750,000.


Note that lenders can’t charge a separate origination fee on an SBA-guaranteed loan.


Additional fees: Other fees associated with a small business loan include late payment fees, check processing fees and prepayment fees, which are charged if you make early payments.


Restrictions


It’s important to carefully read the fine print of loan agreements, says Sury. “In some situations, small businesses may be given loans, but these loans come with such restrictive terms on what it can be spent on, what ongoing reports must be made to the lender, and what activities can or cannot be done, that it makes the relationship untenable.” By carefully combing over the fine print, you won’t be blindsided by the terms and agreements of the loan.


Reputation


A lender’s reputation can tell you what you should expect from it. You can research a lender’s reputation by finding information on current and past customer experiences. The J.D. Power U.S. Small Business Banking Satisfaction Study is a good place to start. The annual study surveys banking customers and measures factors including overall satisfaction, fees and problem resolution.


Not every lender is included in the J.D. Power study, particularly alternative lenders. For lending companies that aren’t included, look at reviews in comparable categories from Trustpilot, which rates companies based on an aggregate of customer reviews, and the Better Business Bureau.


Best Small Business Loans of 2018


U.S. News conducted an in-depth review of the top small business loan companies to recommend the best traditional and alternative lenders. By looking at the top 25 most active small business banks and the top 25 most active alternative lenders based on eligibility, loan options, costs, reputation and other key factors, U.S. News found the five best lenders.


These lenders are a good starting point for most businesses. But there is no one-size-fits-all loan that is perfect for every business, so you should carefully research each option yourself.


Best for very small businesses: Kabbage


Best for borrowers with low credit scores: OnDeck


Best for new businesses: Accion


Best for low APR: LendingClub


Best for invoice financing: Fundbox


Top Lender for Very Small Businesses 


Kabbage


Overview: 
Based in Atlanta, Kabbage has extended more than $4 billion in financing to small businesses around the world since 2008. Using an automated lending platform, there’s a quick application process.

Best Features: 
While Kabbage lends to small businesses of any size, very small businesses that would typically be denied by other lenders will benefit from Kabbage's small business lines of credit, which range from $2,000 to $250,000.

Drawbacks: 
Kabbage has high interest rates relative to the other lenders recommended by U.S. News. For every month you carry a balance, there’s an additional 1.5 to 10 percent monthly fee based on a number of performance factors. 

Best for Businesses That:

Want a shorter repayment period


Have less-than-stellar credit


Need cash immediately


Highlights:

Loan types: Line of credit


Minimum years in business: One


Minimum annual revenue: $50,000


Origination fee: None


Customer satisfaction rating:

BBB rating: A+


TrustPilot score: 9.3


Top Lender for Borrowers With Low Credit Scores 


OnDeck


Overview: 
Founded in 2007, OnDeck offers two types of financing to small businesses: term loans of up to $500,000 and lines of credit of up to $100,000. To date, OnDeck has extended more than $7 billion in products and services to small businesses. 

Best Features: 
OnDeck has some of the lowest minimum credit scores available. You need a minimum FICO score of 500 for term loans, or 600 for lines of credit. Loan terms are available for up to 36 months. OnDeck also boasts an A+ rating from the Better Business Bureau. 

Drawbacks: 
While OnDeck doesn’t require personal assets as collateral, it does take a blanket lien on all business assets. You’ll be required to commit to either a fixed daily or weekly payment schedule. There’s also a 2.5 percent origination fee, and your business needs to have been operating for at least one year and generate $100,000 minimum in revenue. 

Best for Businesses That:

Have fluctuations in cash flow


Want a longer term length


Don’t want to use personal assets as collateral


Highlights:

Loan types: Term loans, lines of credit


Minimum years in business: One


Minimum annual revenue: $100,000


Origination fee: 2.5 percent


Customer satisfaction rating:

BBB rating: A+


TrustPilot score: 9.4


Top Lender for New Businesses 


Accion


Overview: 
A nonprofit with a mission of providing financial tools to help improve people’s lives, Accion typically offers small business loans of $300 to $1 million. Accion lends to a variety of different businesses, such as women-owned businesses, minority-owned businesses, startups and those starting a green business. 

Best Features: 
Accion specializes in startup loans for businesses that have been established for less than six months. There are no business revenue requirements. Term lengths can be up to 60 months. Accion also has an A+ rating from the Better Business Bureau. 

Drawbacks: 
This lender requires personal guarantees and may require collateral for higher loan amounts. There are loan limits of $100,000 in six U.S. states, $20,000 in two states and only $10,000 in the remaining states. There’s a closing cost of 3 percent on the total loan amount and a $165 processing fee. 

Best for Businesses That:

Are startups


Generate little revenue


Are ethnic minority- or women-owned


Highlights:

Loan types: Term loans


Minimum years in business: Zero


Minimum annual revenue: Zero


Origination fee: None


Customer satisfaction rating:

BBB rating: A+


Top Lender for Low APR 


LendingClub


Overview: 
Headquartered in San Francisco and founded in 2007, LendingClub is a peer-to-peer lender. More than $20 billion in loans has been originated from its lending platform. 

Best Features: 
Besides extending loans with a low APR, LendingClub also offers flexible payment terms, a quick application process and disperses funding anywhere from two days to two weeks. 

Drawbacks: 
If you are taking out a loan or line of credit that is more than $100,000, a UCC-1 lien is required, which means you’re putting up your business’s liquid assets as collateral. And while small business owners with strong credit most likely will be qualified for a loan with a low APR, those with poor credit and a low annual revenue will be subject to much higher rates.

Best for Businesses That:

Want quick access to cash


Generate little revenue


Prefer not to use personal assets as collateral


Highlights:

Loan types: Term loans


Minimum years in business: Two


Minimum annual revenue: $75,000


Origination fee: 1.99 to 6.99 percent


Customer satisfaction rating:

TrustPilot score: 8.1

Source: loans.usnews.com

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