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Requirements for Getting Business Cash Loans [7 Steps]

Business Cash Loans in 7 Steps 

Are you a business owner? Does your business need cash right now?

The choices can be overwhelming when considering small business funding. Sometimes circumstances get tough, and you don’t have the money to pay the bills. You know you need a financing solution. The result can be paralysis by over-analysis.

Is it a foregone conclusion?

Only one-half of all small businesses that attempt to secure a working capital loan, as suggested by the U.S. Federal Reserve Banks, receive a viable financing option?

According to an Entrepreneur Magazine article, nearly 25% of all small business owners surveyed suggested that it’s challenging at best to get a cash flow loan for unforeseen expenses in today’s business lending environment.

Is it much different in 2021?

In 2014 Harvard University study took a deep dive into the plight of small businesses and found: “The banking industry in the aggregate appears increasingly less focused on small business lending.

In 2020, according to the Credit Union Times, 869 credit unions funded at least 6 member business loans. Over the past 10 years, this number has remained virtually unchanged. At the end of 2020, business loan portfolios totaled $82 billion, up 15% from the previous year.

Small business loan approvals in the United States in the second quarter of 2021, by lender type.

 

Business Cash Loan Infographic

 

However, small business owners may find it challenging to navigate the lending process and stricter lending standards.

Make sure that you understand your financial situation, find a lender to work with, and figure out how to apply for financing.

Having an idea of how a lender will look at your loan application is essential before applying for a loan. Lenders make money by determining whether or not borrowers will pay on time.

As a result, your personal FICO score, business credit history, cash flow, length of time in business, collateral, industry, and loyalty are all taken into account when deciding on your loan.

Obtaining small business financing can be accomplished in 7 simple steps.

 

 

Obtaining business loan 7 simple steps

 

STEP 1. See if you’re eligible for a business loan.

To see if you meet the minimum requirements for business financing, answer the following questions if you own a small business:

Do you know your personal credit score?

When it comes to determining your creditworthiness, you should expect lenders to consider your credit score. Consequently, lenders are looking at your past behavior to see if you can keep up with the repayments you have agreed to today. 

Before applying for a small business loan, it is essential to know your credit history.

There are several places where people can check their credit reports. From any of the major credit agencies, you can see your score. Credit bureaus like Experian, TransUnion, and Equifax offer free or low-cost credit score monitoring. 

Experian, Equifax, and Dun & Bradstreet report business credit. Many credit card companies and personal finance websites can also provide you with your credit score for free.

Whether deciding or not to proceed with your loan application, many lenders will use your credit score as a go or no-go metric.

Even though banks and credit unions prefer scores in the 700s, they sometimes accept lower scores, around 680.

The typical SBA loan threshold is between 640 and 680, but this varies from lender to lender. Keep in mind that financial institutions may conduct a personal credit check on any owner holding a 20% or greater stake in the company.

Most online lenders require a personal credit score of at least 600, but some will work with you even if your score is lower. If you have bad credit with a credit score of 500 or less, you may be eligible for a Merchant Cash Advance (or business cash advance) or another alternative financing option.

If your credit is strong, you’ll have more options for getting a small business loan.

Credit Reports

 

Credit Resports for Business Loan Requirements

Your credit history and length matter greatly to most lenders, even though it’s reflected in your credit score. Everything from the length of time your accounts have been open to the total amount of utilized credit is in the information provided by credit bureaus and other suppliers.

Credit scores are a snapshot of this longer, more detailed explanation of how you’ve handled your credit, both for business and personal reasons.

Do you have a long history in the industry?

Financing some industries is more challenging than others. Most lenders use the SIC or NAICS code to identify a particular industry.

Some small business lenders have preferences that influence their financing decisions, but most lenders will provide a loan to any legal, qualified business.

Your options will be more limited if your business is in a niche like gambling, adult entertainment, or unproven technology.

Many lenders publish a list of industries that they do not lend money.

The majority of online small-business loans require at least one year of business experience, whereas most bank loans require at least two.

Financing new businesses may be challenging for many large financial institutions. As an entrepreneur, you weigh the pros and cons of a startup loan or personal loan.

A proven track record of successfully managing debt and running a business is what these lenders are looking for.

In contrast to traditional lenders, which typically require a few years of business experience, many online lenders only require a year of activity in your business. Getting a term loan or line of credit from these lenders is difficult for startups in their early stages, but a business credit card could be an alternative.

One of the most underutilized sources of business credit is trade credit from your suppliers.

Do you have enough money to live?

 

Do you. have enough money to live

 

Many lenders set a minimum monthly income requirement, ranging from $5,000 to $100,000 a month or more.

If your revenue isn’t enough, look into short-term or unsecured business loans (like a cash advance), equipment financing, hard asset loans, or invoice factoring.

STEP 2. How much can you afford to pay each month?

To secure a loan, lenders will want to ensure that you can pay back the money you borrow on time. Consider your company’s cash flow to see if it is financially capable of repaying the loans it takes out.

Future reporting, as well as past sales and expenses, will be taken into account by lenders. Things like unpaid invoices or a forecast of your financial situation in two years are not unusual.

Many business lenders now require a three-month bank statement review for all kinds of loans, including lines of credit, term loans, and business credit cards.

Examine your company’s finances, particularly its cash flow, to see how much money you can put toward monthly repayments on a business term loan. Consider the fact that some alternative lenders demand daily repayments from their borrowers.

Make sure your total monthly income is enough to cover all of your monthly expenses, as well as the additional cost of the loan. Take into account how much you expect to pay back when calculating.

If your monthly income, for example, is $20,000 and your expenses are $14,000 (mortgage or rent, employee payroll, etc.), you can technically afford a loan payment of $2,000 per month.

STEP 3. Do you need collateral to secure the loan

To get the best interest rate and borrow more money from lenders, you’ll need to put up assets or collateral. These assets can include your car, home, investments, or cash.

The Small Business Administration, banks, credit unions all require some form of security for most small business loans.

The SBA loans can’t deny loans because the borrowers lack collateral. If you can show that you have real, tangible assets, such as business assets that can sell in the event of non-payment or personal property that you can put up as collateral, it will give your loan application more weight.

There is no such thing as an unsecured loan, but many online lenders will secure your loan with a general UCC lien and your guarantee, which is a form of collateralization.

If you default on a secured loan, the lender has the right to take possession of your business collateral, such as property or equipment. Borrowers who take out an unsecured loan don’t have anything to put up as security per se.

In reality, unsecured loans are a dime a dozen, and even then, only the most trustworthy borrowers can expect one.

You may need a personal guarantee for unsecured loans. You’ll be responsible for the loan if your company can’t repay it, and a lender may be able to foreclose on your posted collateral if you don’t pay.

STEP 4. Figure out what kind of loan you’ll need to keep your company afloat.

 

keep your company afloat

 

Small-business loan lenders will be curious to know why you’re applying. As a result of your answers, you’ll be able to determine the type of business loan that best suits your needs:

You’ve decided to start your own business. In the early stages of a company’s existence, it is unlikely that a lender will give it a loan. The reason is the lack of history demonstrating consistent cash flow.

Alternative sources of startup funding, such as business credit cards and personal loans, will be required.

You’d like to keep track of your daily expenditures. A business line of credit could be a benefit to your company. Flexible financing will allow you to access funds as needed to cover expenses such as payroll or unexpected repairs, giving you a valuable safety net.

You’d like to see the success of your company soar. Businesses can receive loans of $5.5 million under the SBA program, which is higher than traditional term loans.

Many lenders offer products tailored to the needs of a growing business, such as equipment or vehicle purchase loans.

STEP 5. Shop for small-business lenders.

The two primary sources of small-business loans are online or alternative lenders and banks and credit unions (although you can find P2P and crowdfunding, grants, and microlenders )

Each has a variety of products, but in some cases, one is better than the rest.

A loan may be more likely to be approved if you are already a customer at a major bank. First, many banks approved a PPP coronavirus loan to their current customers before considering a small business that they had never worked with. 

The best place to find a lender is with people who know you well and get a referral. Remember that credit unions exist solely for the benefit of their members.

When to use an online lender for a business loan:

 

  • You’re strapped for cash.
  • You’re in business for a short time.
  • You require immediate funding.

 

An online lender, sometimes called an alternative lender, offers small-business loans. Some online lenders also provide lines of credit ranging from one thousand dollars to $5M. On these loans, the average annual percentage rate is a combination of factors such as a borrower’s credit history, a borrower’s loan amount, and whether or not collateral is required.

Since online lenders can process loan applications quickly and offer large sums of money in a short period of time, many small businesses are turning to them.

Credit isn’t always the most critical factor in a company’s success. You’ll have to pay a higher APR and pay off your debt in less than five years to get a loan of up to $500,000. Many lenders can approve your loan and deposit your money into your bank account within twenty-four to 48 hours.

When should a business seek a bank loan?

 

when to get a business bank loan

  • You’re in business for at least 2 years.
  • You have an excellent credit rating.
  • You don’t need money right away.
  • Traditional bank options for purchasing or refinancing properties include term loans, lines of credit, and commercial mortgages. 

 

A bank with a current relationship may grant you a business line of credit or a term loan if you meet the strict requirements (or a new one). Depending on the amount of the loan, repayment terms can range from one to twenty years. Accredited personal or business credit is necessary to receive a response within four months.

Through its 7(a) loan program, the US Small Business Administration offers banks a variety of small-business loans, including disaster loans.

Loans of up to $5.5 million are available through the SBA, with 7(a) loans averaging just over half a million dollars in 2020. This data is from the CONGRESSIONAL RESEARCH SERVICE.

An SBA microloan typically averages $13,000.

The Small Business Administration also has a 504 loan program that aids community economic development by providing long-term, fixed-rate financing for fixed asset purchases, such as land, buildings, or equipment.

Obtaining a small-business loan from a bank can be difficult due to lower revenue and cash reserves. Many owners are left holding the bag when they have bad personal credit or lack collateral.

The Bank is considered a traditional lender and typically has the lowest APR, even though funding takes longer than other financing options.

ACCORDING TO THE CONGRESSIONAL RESEARCH SERVICE, the SBA offers loans up to $5.5 million, with 7(a) loans averaging $533,075 in the fiscal year 2020. 

The average cost of an SBA microloan is $13,000.

The Small Business Administration also has a 504 loan program that aids community economic development by providing long-term, fixed-rate financing for fixed asset purchases, such as land, buildings, or equipment.

Obtaining a small-business loan from a bank can be difficult due to lower revenue and cash reserves. Many owners are left holding the bag when they have bad personal credit or lack collateral.

The Bank is considered a traditional lender and typically has the lowest APR, even though funding takes longer than other financing options.

 

When should you seek a business loan from a P2P or Crowdfund?

 

There are two popular alternative financing channels: crowdfunding and peer-to-peer lending. “Social lending” is the practice of connecting people who want to lend money with those willing to lend money back, or “peer-to-peer lending.” The most common types of crowdfunding are equity, reward, and donation.

There is a caveat here. Someone can see your business idea on a crowdfunding site and steal it if you haven’t protected it with a patent or copyright. Getting the rewards or returns wrong can mean handing over too much of the business to investors.

 

When should you seek a business loan from a microlender?

 

 If you have a poor credit history or no credit history at all.

  • You’re a brand-new organization.
  • A traditional loan will not be available to you.

 

Microlenders are nonprofit organizations that specialize in lending small amounts of money, typically less than $50,000.

The annual percentage rate (APR) of these loans is typically higher than that of bank loans. The application process can be lengthy if you need to provide a detailed business plan, current financials, and a description of how the company intends to use the loan.

Furthermore, by definition, the loans are “micro.” On the other hand, these loans could be a good fit for small businesses or startups that cannot secure a traditional bank loan due to a lack of collateral, operating history, or personal credit.

STEP 6. Get your paperwork together.

business loan paperwork

 

Be sure you have all of the necessary documents before applying. Obtaining a small-business loan will be streamlined if these files can be located and made easily accessible.

Consider making a checklist so that you have everything in order before applying.

Here is what you will typically need:

  1. Provide proof of steady or increasing revenue. The proof is usually in the form of recent bank statements. 
  2. A valid ID – usually a driver’s license 
  3. Social security number 
  4. EIN 
  5. Active business checking account 
  6. Current on lease and rent 
  7. Active with the Secretary of (your) State. 

You may be required to provide one or more of the following documents, depending on the lender:

  1. Tax returns for both businesses and individuals.
  2. Bank statements, both business and personal.
  3. Financial statements for a business.
  4. Business documents (e.g., articles of incorporation, commercial lease, franchise agreement).
  5. Business plan.

STEP 7. Fill out a business loan application.

complete business loan paperwork at Sunwise Capital

It would be best to choose a loan type and a lender before applying for a loan.

Begin by comparing two or three loan options similar in loan terms, annual percentage rate, or APR. Using the annual percentage rate (APR) is the best way to compare small business lenders because it includes all fees and the interest rate for the year.

Choose the loan with the lowest annual percentage rate (assuming you can afford the payments) and submit your application along with the necessary paperwork you’ve gathered.

Keep in mind that credit bureaus don’t distinguish between inquiries for business and personal credit.

Ask whether the lender is conducting a hard or soft inquiry. Multiple hard questions negatively impact your score. So it’s essential to make the right choice.

Call us today at 888.456.9223 or Apply Online.

Mark J. Kane is a successful entrepreneur and small business owner. He spent 17 years in the investment banking industry. As CEO of Sunwise Capital, he understands the challenges of building a business through equity, debt, and off-balance sheet financing.

Take Your Business Further With A Loan From Sunwise Capital