Small business loan basics: 5 steps to success

Shop owner handing some bags to a customer

First time applying for an online loan? There are a lot of lenders out there, but they definitely aren’t all created equal. So how do you find the one that’s right for you? What do you need to do to qualify? Do you have to have a business plan and an amazing credit score? What’s a “good” rate for an online loan? What about hidden fees? Terms?

If it sounds complicated, don’t worry – it’s really not. Online lenders are actually known for making the process a lot easier than big banks. But it helps to have some knowledge under your belt before you apply, and to know what you need to do to get a good rate, avoid pitfalls – and set yourself up for success.

Step 1: Learn what kinds of financing are out there.

If you haven’t already done your research around the kinds of loans available to small businesses, definitely start there. There’s everything from traditional bank loans (great if you have good credit, have been in business for a while and aren’t in a rush), to SBA loans (good if a bank has turned you down, but since they come from the government, expect to jump through lots of hoops), to crowdfunding (a fun option, but really only for smaller amounts).

Not sure what’s out there? Read 10 ways to get cash for your small business.

Step 2: Get your financial ducks in a row.

If you’ve got all your documentation ready to go before you even apply, things will be faster and easier. Plus, it will show you’re organized – and a desirable candidate for a loan. Here are a few quick tips to help you get set up:

  • If you haven’t already, register your business name and Tax ID number and open a business checking account. Presenting yourself as a real business shows you’re serious about it. (Nothing strikes fear into the hearts of lenders like a business that doesn’t look like it knows what it’s doing.)

  • Get your books in order. A digital tool like QuickBooks, Xero or FreshBooks will help you manage your finances, no matter how simple or complicated they are. And when you’ve got a handle on your finances, it’s easier to prove you’re a good candidate for a loan.

  • Keep business and personal finances separate. Are you paying invoices with your personal credit card? Putting your profit into family savings? Stop doing that right away. Keep things clear by having a separate account and credit card under your business name. That way your business will have a credit history that’s separate from your personal one, which, when you’re applying for a business loan, is a very good thing.

Step 3: Do your homework on lenders

The world of online banking isn’t as regulated as the traditional banking industry, which has to follow FDIC regulations. Online lenders are mostly self-regulated, which is good in some ways – it leaves the door open to more innovation around products and terms – but can also mean running into some “borrower beware” situations. And while it’s not exactly the wild, wild west out there (it’s really in lenders’ best interests to treat customers well), online lending definitely has a greater range in terms of quality and options, with each lender weighing things differently. So doing your research when shopping around for a loan is always a good idea – look at reviews on sites like Trustpilot to weed out the duds.

Only apply to your top choices – not to every lender on the web. Applying everywhere in the hopes someone says yes can work against you. Each lender will check your credit score, and every time that happens, your rating takes a tiny hit, and a whole bunch of tiny hits will make your credit look worse than it really is.

Things to keep in mind as you look for a “right fit” lender:

  • Get a grip on fees, especially hidden ones! If you’re borrowing $150K, $150K should appear in your account – not a penny less. However, some online lenders charge origination and other not-so-obvious fees that can take a chunk out of your cash. (An origination fee is a charge to process the loan – typically up to 2.5%!) Plus, there may be underwriting fees, admin fees, processing fees and more. A number of lenders (like BFS) have moved to a no-hidden-fee model to make things easier and more transparent for customers. Look for a financing partner that promises no hidden costs. Always read the small print, and ask plenty of questions about fees, interest and anything else you’ll be paying for. Then do the math: the lowest interest rate may actually not be the best option if you’re paying big-time fees to get it.
  • Have a solid business plan. Even if your lender doesn’t ask you for one, it’s a good idea to have a plan anyway. It will help you organize your ideas, better understand your market and audience – and clarify your best strategies for growth and success. Plus, it will help you wrap your head around your expenses and cash flow, which will pinpoint how much you need to borrow, annd how you’ll be able to comfortably pay it back. But don’t panic if you don’t have a business plan. When you apply for a business loan from BFS Capital, we won’t ask for one!
  • Look for a lender that rewards loyalty. All businesses know it’s easier and cheaper to keep existing customers than to attract new ones. A lender who’s looking to build a long-term relationship with you will offer perks for coming back, including discounted rates and better terms. Even if it’s your first loan with them, it doesn’t hurt to ask what the next one will look like…and the one after that.
  • Ask ALL the questions. It’s important to understand what you’re applying for. Are you clear on terms, rates, fees, etc.? What’s the interest rate on the loan? Will it vary over time? Will your payments be daily? Weekly? Monthly? Will you be able to swing those payments? Can the lender call a default on the loan? Are there limits on how you can use the money? Can you pre-pay early without penalty? Do you need security or collateral? What’s the APR?
  • Figure out the right amount. Be clear with yourself about why you need the loan – what are you going to use it for and how much do you need? Smoothing out cash flow between busy seasons, buying equipment, or investing in marketing? Base your request on your specific needs, not a ballpark estimate: if you borrow too little, you won’t have enough to cover your expenses. Too much, and you’ll end up paying more interest than you need. Look at your sales and see how much you can pay back each day/week/month, and how long it will take overall, taking seasonal trends into account.

Step 4: Get your docs in order

Put together a list of the documents your lender is looking for and get them organized before you apply. If you’re applying online, scan everything so it’s ready to go. Here’s are some commonly requested items (specifics may vary for each lender):

  • The name of your business, including any DBAs (which stands for “Doing Business As” – if you’re operating under a name that’s different from your legal one, they’ll want to know)
  • Your Federal Tax ID
  • Your legal structure (are you an LLC? S Corp? C Corp?)
  • Your annual revenue

Step 5: Check your credit – business and personal

Lenders like to see a history of on-time payments on loans, credit cards and vendor contracts. If there’s anything wrong, contact your financial institution to have it updated. A great score doesn’t just help you qualify for a loan, but also opens you up to better rates and terms. And don’t forget, your personal score counts too.

Haven’t been in business long enough to establish a solid score? Use your business credit card to buy supplies at places like Staples and Home Depot. These retailers report to credit bureaus pretty regularly, so it’ll help you build your business credit history fast.  

But also keep in mind that your credit score isn’t everything – online lenders have other ways to figure out who’s eligible. Newer digital algorithms and underwriting methods factor in things like cash flow, yearly revenue, industry, how long you’ve been in business and financial forecasts. And also remember: if you’re new to the game or your credit score isn’t great, you may still be able to borrow. Your options will just probably be a bit more limited, and you may pay higher interest rates.

Getting a business loan takes a bit of work.

But once you’ve laid a solid foundation for success, the financing is sure to come – and so is the growth you want to see for your business.

Need capital for your small business? Apply today and you could have the money you need in as soon as two business days.*