Business loan

Your Action Plan: Applying for a Business Loan

Here’s a concrete checklist to prepare your application and choose the right lender.

Step 1: Sharpen Your Financial Profile

This is what lenders care about most. Get these in order before you apply.

1. Check Your Personal Credit Score:

· Use a free service like Credit Karma, Experian, or your bank's portal.

· Target: A FICO score above 700 is strong for banks; above 680 is often the minimum. 620-650 might be acceptable for some online lenders.

2. Know Your Business Financials:

· Annual Revenue: Calculate your total revenue from the last 12 months.

· Cash Flow: Lenders will calculate your Debt-Service Coverage Ratio (DSCR). A simple rule: Your annual net profit should be at least 1.25x the proposed annual loan repayment amount.

· Prepare Financial Documents: Have your recent profit & loss statement, balance sheet, and tax returns ready.

Step 2: Match Your Need to a Loan Type

If you need money for... Then strongly consider...

A specific asset (e.g., a vehicle, oven, machine) Equipment Financing

Smoothing cash flow gaps or unexpected costs Business Line of Credit

Long-term growth (expansion, hiring, large project) Term Loan or SBA Loan

Purchasing a building Commercial Mortgage or SBA 504 Loan

Fast cash (with less stringent credit requirements) Online Lender Term Loan (be cautious of high rates)

Step 3: Choose Your Lender Type

Lender Type Best For Time to Funding Key Requirement

Big Banks (e.g., Chase, BofA) Established businesses with strong credit & collateral. 2+ weeks Excellent credit, 2+ years in business.

SBA Lenders (Banks & CUs) Businesses wanting the best terms and longer repayment. 30 - 90 days Good credit (660+), solid financials.

Online Lenders (e.g., Funding Circle, OnDeck) Newer businesses (6+ mos) or those needing speed. 1 - 5 days 500+ credit score, steady monthly revenue.

Credit Unions Local businesses; often more personal service. 1 - 4 weeks Membership required, often community-focused.

Recommendation: Get pre-qualified (a soft credit check that doesn't affect your score) with 2-3 different lender types to compare real offers.

Step 4: Assemble Your Application Package

A complete package makes you look professional and increases your chances. Gather these:

· Business Plan: Especially crucial for startups. Show how the loan will help you grow and repay the debt.

· Business and Personal Tax Returns: Last 2-3 years.

· Financial Statements: Year-to-date P&L and balance sheet.

· Bank Statements: Last 3-6 months for all business accounts.

· Legal Documents: Business License, Articles of Incorporation/Organization, Franchise Agreement (if applicable).

Step 5: Compare Your Offers - The Devil's in the Details

When you get offers, don't just look at the loan amount. Create a simple table:

Lender Loan Amount APR Term Length Monthly Payment Total Cost Fees

Bank A $100,000 7.5% 5 years $2,004 $120,233 1% origination

Online B $100,000 15.0% 3 years $3,467 $124,803 2% origination

· Focus on the APR and Total Cost. This tells you the true price of the loan.

· Ensure the monthly payment is manageable within your business's cash flow.

Critical Warning: What to Avoid

· Merchant Cash Advances (MCAs): These are purchases of future revenue, not loans. They have factor rates instead of APR and can have effective APRs in the triple digits. They are extremely dangerous for your cash flow. Treat them as an absolute last resort.

· Prepayment Penalties: Some loans charge a fee if you pay off the loan early. Try to avoid these.

· Personal Guarantees: Most small business loans will require you to personally guarantee the loan. This means your personal assets (house, car, savings) are on the line if the business fails. Understand this risk completely.

What is the primary purpose of the loan, and how long have you been in business? This will instantly narrow down your best options.