Need a loan to grow your small business but spooked by borrowing rates? Bonsai compiled this list of ways leaders can seek loan approval.
Few people are capable of dreaming up the next big billion-dollar business, and even fewer have the money on hand to start realizing that dream. That's where small business lending comes in.
Bonsai analyzed resources from the Small Business Administration, the Federal Trade Commission, and qualified lending institutions to compile this list of ways any business owner can prepare for loan approval.
The SBA advertises that it can approve loans in less than 36 hours for standard loans, but financial institutions may require longer to actually get you the cash. Conventional loans may be more difficult to access but they move quicker, as do online lending options. Today's small businesses find themselves facing an economic environment that's bewildered even experienced executives and business leaders.
Compared to before the pandemic, far fewer small businesses have taken out loans to help them expand their business in recent years, according to survey data from the Federal Deposit Insurance Corp. The same is true of SBA-backed loans for which fewer applicants have been approved in the last three years compared to pre-pandemic. At the same time, billions of dollars in federal aid has flowed through the regional SBA offices around the country to business owners who have kept employees on payroll in recent years.
Most small businesses, however, now report they're trying to hire more workers as they concurrently raise prices, according to a February 2023 survey from the National Federation of Independent Business.
And if small business owners aren't hiring more workers, they're trying to retain the ones they have as workers continue to feel the pressure of inflation. Nearly 1 in 2 small businesses reported raising pay in February, according to the NFIB.
Loans are one tool businesses may take advantage of to cover costs in uncertain times or expand. Even if today's high-interest rate environment might spook would-be borrowers, there are options if business leaders shop around and study up.
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Determine the type of loan best suited to your business needs
Businesses can choose among conventional, online, and government-backed SBA loans. All come with their own advantages and drawbacks that a business owner needs to consider.
The SBA mainly backs three types of loans, under programs named 7(a), 504, and a "microloan" program. Each loan can legally be used only for certain business activities. The 7(a) loan is the most common and can be used for land, real estate for a new storefront or restaurant, increasing inventory, or covering general operating expenses and recurring seasonal costs. These loans are generally easier to qualify for but may not offer the most competitive terms. Only some 1 in 10 banks offer SBA-backed loans, which, even if less risky, include an approval process and may not be as profitable as conventional loans because of their fixed terms.
A conventional bank loan may come with more stringent qualifications such as higher credit score requirements or debt-to-income ratios, but they also tend to offer the most competitive rates. Online lenders have lower requirements for qualification of all the options as well as speedy approval and disbursement of cash, but business owners need to do their homework to make sure they are aware of any hidden fees, less favorable or competitive terms, and higher interest rates.
Clean up your credit score and debt-to-income ratio
Lending is based on trust, and trust is garnered through a strong history of repayment. Before tapping that next loan, it's good practice to check up on your financial well-being.
How much debt are you already carrying? SBA loans come with the added benefit of requiring less collateral. Carrying unpaid debts, however, could still affect your ability to take on another loan regardless of the type.
A line of credit through a bank that offers a business credit card product is another option for small businesses seeking to cover expenses while also building their credit history. You can check your business' FICO credit score for free online.
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Size can matter when it comes to your banking experience
It's important to note that entrepreneurs report differing satisfaction rates with loans from various-sized banks. Small businesses that bank with and receive loans through small banks reported higher satisfaction rates than those that did business with larger banks, according to a Federal Reserve survey of 11,000 small businesses in 2021. Small businesses that work with online lenders reported a 34% satisfaction rate.
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Know what predatory lending terms look like
The SBA recommends borrowers shop around to ensure the lender they're working with is providing competitive interest rates and fees. The agency warns that fees from any bank on a loan should not exceed 5% of the loan's total value. It also recommends speaking with your attorney before signing any loan agreements, even at SBA-approved institutions.
Remember that under the Equal Credit Opportunity Act, lenders cannot deny you a loan based on race, faith, nationality, sex, marital status, or the demographics of your clients and customers.
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Prepare your documentation
If you're looking to fund a startup idea, make sure you also have a business proposal prepared. If you're looking to fund a currently operating business, you should prepare recent balance sheets and financial forecasts to share with lenders. Bank officials will want to know what you plan to do with the money lent to you and how you will repay it.
SBA loans require a specific form called a Form 1919 along with the other forms a lender may request of you. The form requires businesses to enter information about all general and limited partners as well as owners of more than 20% of the company.
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Give your business ample time
A small business loan can take anywhere from hours to months to be approved depending on what kind of institution you're borrowing from and the type of loan.
If your company is in need of cash immediately, leaders may want to consider the SBA's "Express" loan options as well as conventional and online lending options—and be aware that some online lenders might prefer shorter repayment terms.
If your mind is set on SBA-backed funding, be prepared to wait. While the SBA may say it can clear your loan in days, it can take longer for the actual lender to get the money to you. Citizens Bank, which operates in 14 states, estimates that a typical SBA-backed loan can take a month and a half to close.
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