A small business loan may be needed if you're looking to start a new company or grow your current one. Small business loans come in all shapes and sizes, with the median being between $130,000 and $140,000, according to the Small Business Administration. Small business loans can be used to pay for advertising, new office space, equipment, employees, start-up costs and more. It may be just what your business needs to jumpstart sales and bring in new business.
Unfortunately, many new businesses are denied a small business loan from their bank or credit union. While the reasons can vary, the main one is that the business owner wasn't prepared or didn't submit the correct paperwork. Here are the steps you need to take to increase your chances of being approved for a small business loan.
Determine Your Need for the Loan
Banks want to know exactly why you need a small business loan. Simply "I'm starting a new business" is not going to cut it. Provide them with a detailed business plan including earnings projections, estimated spending reports and estimated costs of running the business. You should also provide a statement showing exactly what the loan is going to cover and how you plan on paying it back.
Get Collateral and Funding
Small business loans are much more likely to be approved if the business owner puts up strong collateral to back up the loan. Examples of collateral include your home, cash, artwork, business inventory and other financial assets. Banks and other lending institutions also want to see that you, the business owner, have invested your own equity (most likely cash) into the business as well. While lack of collateral won't always prevent you from getting a loan, having it will greatly increase your chances of approval.
Gather Your Paperwork
The more information you can provide to the lender, the better. Documents you should provide include your personal background information, credit history (personal and business, if applicable), bank statements, your business plan (including profit projections), your business license, tax returns from the previous three years and any other information the lender may ask for.
Apply at Multiple Lenders
If you don't get approved with the first lender you reach out to, that doesn't mean you won't get approved by a different lender. First, try your local bank or credit union since you already have built a rapport with them. If you're denied, you can try other commercial banks, local banks in your area, crowd funding websites, private lenders or you could consider borrowing from friends or family members.
Once you've applied for your small business loan, a decision is made within ten business days after it's been received by the Small Business Administration. Add on bank processing time and you should hear back within two to three weeks from the time the application was submitted.
Have you recently been approved for a small business loan? Share your tips and stories in the comments below!