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There are many ways to finance a business. Some small business owners use their savings and credit cards to purchase initial assets. Others bring on business partners or borrow money from loved ones to meet their startup business needs. Another prevalent business financing option is a bank or credit union loan.
In 2021, the Small Business Administration (SBA) granted more than $44.8 billion in loans to American businesses. That’s not considering all the loans provided by banks, credit unions, or online lenders that the SBA doesn’t back. While a lot of money was being given out, receiving a working capital loan wasn’t easy.
The approval percentage for a business loan in the second quarter of 2021 was less than 25%. Alternative lenders led the way with an approval rating of 24.5%, which was higher than institutional (23.8%), credit unions (20.5%), small banks (18.9%), and big banks (13.6%). You should mentally prepare yourself for rejection as it’s more likely than acceptance.
What do you need to take out a business loan?
It’s notoriously challenging to have your business loan application get accepted. The approval rates listed above should be no surprise to anyone trying to take out a business loan. You will have to work hard to get approved for a business loan.
Personal loans are straightforward and rely primarily on your income and credit score. It’s a bit more complicated for a business loan as there are tons of reasons why your application might be rejected. There is a lot of money at stake for a loan lender, and they want to be 100% sure that you’ll be able to repay the loan.
Here is a list of everything that you’ll need for the business loan application process:
- Personal and business credit scores. The exact requirements will vary based on the lender. However, the higher your credit score, the more likely your loan will be granted. Higher scores can also help you receive a lower interest rate on your loan and save you money, whereas bad credit can bar you from eligibility entirely.
- Annual revenue. Most lenders won’t consider your application unless your business generates at most minuscule six yearly revenue figures. A lender might be willing to concede on that requirement if you’re making much more money than you’re borrowing.
- Years in business. Funding options are more limited for a start-up or first-year business. You’ll need to be in business for at least two years to apply for a business loan. Some lenders might accept a loan request from a younger company, but it’s likely to come with higher interest rates or more severe penalties.
- Business plan. Nearly all lenders will require a highly detailed business plan outlining the goals of your business, how you intend to attain them, and an anticipated time frame. A high-quality business plan can help you sell the idea of your business to a lender. A solid enough program can help overlook some of the other requirements.
- Collateral or personal guarantee. Offering business assets as collateral will secure your loan and increase the odds of being accepted. Alternatively, you can provide a personal guarantee where you’ll legally promise to repay the loan. Not all loans will require these guarantees, but they won’t hurt your acceptance chances.
- Various documents. You’ll need to provide many documents for your loan, including income tax returns, income statements, balance sheets, bank statements, identification, permits, licenses, and articles of incorporation. Each lender will have a different set of requirements for these documents.
Which business loans are best?
Not all business funding loans are the same. Everyone knows about traditional loans offered by banks, but their one-size-fits-all approach doesn’t always work best. More specific options are available to you, and you should look for a loan that fits your needs.
Here is a list of five different business loans that you should consider first:
Use a business loan to help expand your business
Approaching a lender with the intent of requesting a loan can be very intimidating. The lender has all of the leverage and holds the fate of your business in their hands. You’ll need to be prepared for anything when you make your initial request. Knowing the exact requirements for a loan will significantly increase your odds of having your application gets accepted.
It’s important to remember that rejection isn’t the end of the world. You still have plenty of other options at your disposal. Everyone would be doing it if owning and operating a business were easy. You might need to apply for several of the above loans before being accepted. But it will be worth it whenever you finally get funding and take your business to the next level.
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