Despite careful planning, every business owner understands that there may come a time when they need to secure business financing. According to the 2023 Small Business Credit Survey by the Federal Reserve Banks, only 17% of business owners rated their financial condition as "very good" or "excellent."
Whether you require funds for equipment purchases, to manage cash flow issues, or to expand your workforce, knowing how to obtain a small business loan is crucial.
We've compiled four essential tips for securing a business loan so you can concentrate on running your business effectively.
How to Finance Your Small Business
When seeking business financing, gathering advice on small business financing can be invaluable. There are various avenues to explore for obtaining a business loan, including:
Traditional banks
Small Business Administration (SBA)
Online or alternative financing providers
Each option has different eligibility criteria to consider. Below are some tips to help you in your research journey.
Eligibility Criteria
Each source of financing has its own set of requirements. Let's start with traditional banks.
Traditional banks typically require:
Good personal credit (690+) or excellent business credit
Minimum annual revenue of at least $250,000 and profitability
Business operation for at least two years
Assets may be beneficial but are not mandatory
While traditional banks are a common choice, securing a loan from them requires a solid financial profile and can be a lengthy process, taking weeks or months for approval and funding.
The SBA offers three main types of loans: 7(a) loans, 504 loans, and microloans. Business owners apply for SBA loans through SBA-approved lenders rather than directly through the SBA.
While each lender may have slightly different requirements, for a 7(a) loan you generally need to:
Have an operating business in the U.S.
Qualify as a small business under SBA size standards
Demonstrate creditworthiness and ability to repay the loan
SBA loans have stringent requirements, but they offer competitive rates and terms. Planning well in advance is crucial due to the lengthy approval process, which can take 30-90 days plus additional time for funds to be disbursed.
Alternative financing providers offer another option with more flexible eligibility criteria:
Business operational for at least six months
Average monthly revenue of at least $15,000 for the last three months
FICO score of at least 500
Business bank account
If your business meets these criteria, approval for financing from alternative providers is typically straightforward.
Four Tips for Securing a Business Loan
Plan Ahead Financing can take time, so plan well in advance, especially for slow periods or seasonal fluctuations. Alternative providers offer faster approval and funding times compared to traditional banks or the SBA.
Prepare Your Documents Have all necessary business documents ready in advance to expedite the financing process.
Know Your Needs and Limits Determine exactly how much financing you need and ensure it aligns with your business plans to avoid unnecessary financial strain.
Ask Questions Clarify any uncertainties with your financing provider. They should act as a supportive partner, providing clear communication and guidance throughout the process.
By following these tips, you can navigate the business financing landscape more effectively and make informed decisions that benefit your business's financial health
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