This article addresses:
- Defining your goals
- Understanding the different types of online small business loans
- Making sure you qualify
- Preparing all of your documents
Getting a loan for business purposes can seem difficult for small business owners. For many, the first barrier to overcome is the idea that you need outside funding. For others, the challenging thing may be finding the right financing options that give you the loan amount your business needs.
Whatever the issue, the reality is that in todayâs world, you can get business financing online and all you have to do to get started is fill out a loan application and ensure that you meet eligibility requirements. And unlike traditional banks, where the application process can take weeks to get approved, online lenders can often approve a loan within a matter of hours. Another excellent perk is that many online lenders allow you to do a free pre-approval process to see if you qualify.
In this guide, weâll go through four steps to help you secure a small business loan online and ensure that you have the funding you need when you need it.
1. Defining your goals
When considering business financing, itâs important to have a clear purpose for the new capital. Not only because your lender is likely to ask, but also because you donât want to be paying interest on debt for something that isnât helping your company grow. Defining your goals upfront allows you to make a rational decision about the funding that you need, like this dentist who Biz2Credit helped expand his practice. Or maybe you just need some temporary help after the COVID-19 pandemicâthatâs also a valid reason for seeking financing!
Once you know why you need funding, youâll also be able to start narrowing down the type of funding you need. For example, do you need a short-term or long-term loan? What kind of interest rates can you afford (a loan calculator can be helpful here)? If you are expecting an increase in profits, you are likely in a better position to take on a larger loan or a loan with higher interest rates than if your business is struggling to survive. In general, a few factors to decide on before launching into research include:
- Term length you need
- How quickly you need a loan
- What size loan you need
- If you need an influx of capital all at once or need financing on an as-needed basis
Knowing the answer to these questions upfront will help you as you fill out your business loan application, and will also help you when you make your initial contact with lenders, who are likely to ask similar qualifying questions right off the bat.
2. Understanding the different types of online small business loans
To increase your chances of getting approved for a loan you select, itâs crucial that you do your research on different online loan options and find the one that best fits your needs (and make sure you meet the eligibility requirements).
Here are a few of the most common loan types:
Traditional term loans.
A term loan provides you with a lump sum upfront, and then you make payments over a predetermined length of time (usually 5 to 30 years) until the loan is paid off.
You can typically get a term loan from most traditional banks or credit unions, but an online small business lender is typically able to provide faster funding, and you can complete the entire process online.
SBA loans are like traditional bank loans, but they are backed by the Small Business Administration, and therefore have a lower interest rate. With a 5 to 25 year repayment term and a high borrowing limit, these are great loans for many business owners. However, they do require a lengthy application process that can pose a challenge for some.
For the popular SBA 7(a) loans, it is also important to note that there are prepayment fees, but these only apply when a borrower prepays 25% or more of a loanâs outstanding balance on a loan 15 years or longer, within 3 years after the initial loan disbursement. Also, be prepared to pay an origination fee to have your application processed.
Business lines of credit.
A business line of credit lets you access financing on an as-needed basis to cover expenses like payroll or unexpected repairs. Unlike a loan, where you receive a lump sum upfront, and pay it back, a business line of credit lets you draw on a predetermined amount, but you only pay interest on what you borrow. In this way, itâs similar to a credit card. Typically, once youâre approved for a line of credit, you can access it for multiple years as long as you remain current on your payments.
Of note, lines of credit can carry a higher interest rate than a business loan, but you can be approved for a line of credit in as little as one business day, making this a convenient option for business owners in need of fast cash.
Working Capital Loans
Working capital loans are used to finance everyday operations, as opposed to buying assets or investments. If you need cash to cover short-term operational needs, this might be the type of loan for you.
Since theyâre designed for everyday use, working capital loans are fairly easy to obtain, and allow you to cover gaps in your operating expenses. To ensure that your debt is paid, a lender may ask for collateral in the form of business assets or a personal guarantee. But if you have good credit, it is possible that you could qualify for a loan that doesnât require collateral.
Merchant cash advances
A merchant cash advance is unique in that the cash you receive from your lender is based on your future sales. In exchange for a specific amount of funding, you promise to pay back the debt with interest using a set percentage of your revenue.
Merchant cash advances are typically structured in one of two ways:
- Percentage of debit/credit card sales. The lender automatically deducts a daily (or weekly) percentage of your debit and credit card sales until the advance is repaid in full.
- Fixed withdrawals from a bank account. The lender withdraws funds directly from your bank. Fixed repayments are made daily or weekly from your account regardless of how much you earn in sales, and the fixed repayment amount is determined based on an estimate of your monthly revenue.
Thereâs one last option that we should cover before moving on. If your business is new, you may not be able to get financing from a bank, as most lenders require you to have been in business for at least a year for some loan options. So if youâre launching a startup, it may be beneficial to open up a business credit card or take out a personal loan in order to access the necessary funding.
If youâve filed for your LLC, chances are, youâre already getting offers for a business credit card in the mail, but itâs worth doing your research before opening up an account, as some have better interest rates (as low as 0% APR for up to 15 months) and perks that will save you money in the long run.
And if you still need cash, you can always look into getting a personal loan to secure financing. While this may require you to put personal collateral on the line, the whole point of step #1 was to make sure youâve thought this through and that your need for financing is valid and has a strong likelihood of providing a positive return on investment.
3. Making sure you qualify
Now that youâve done your due diligence, you understand why you need funding, and you have a basic grasp of the types of business loans available to you, itâs important to make sure that you qualify for the financing you seek. Different lenders and loan programs have varying qualifying factors that will determine your eligibility, and before spending time filling out paperwork and having your credit checked, itâs best to make sure you understand what the qualifications are and know that you meet them. To do this, youâll need to have:
- Your personal credit scores, business credit scores, and credit history. Check your creditworthiness for free with one of the three major credit bureaus: Equifax, Experian, and TransUnion, or a personal finance website like NerdWallet.
- Records showing how long youâve been in business. You need to have been in business for at least one year to qualify for most online small-business loans.
- Proof of your annual revenue. Many lenders require a minimum annual revenue of $50,000 to $250,000. If your revenue isn’t high enough, consider looking into short-term loans, startup financing, or SBA microloans instead.
The loan approval process can vary a lot between lenders and types of loans, but going in knowing what to expect and if youâre likely to be approved will save everyoneâs time.
In general, having a good credit score, being in business longer, and having a higher revenue will always help you qualify for more types of loans. When in doubt, contact a few lenders and have some fact-gathering conversations.
4. Preparing all of your documents
Once youâve determined what type of loan you qualify for, you can begin preparing the materials you need for your actual application. Depending on the type of loan and lender youâve chosen, youâll need to prepare a combination of the following documents:
- Business and personal tax returns.
- Business and personal bank statements.
- Business financial statements.
- Business legal documents (like your articles of incorporation, for example)
- Business plan.
Having these documents prepared will help you avoid delaying the approval processes further. Weâve all been in situations where we start filling out a form, realize that we donât have all of the information that we need, and then forget to go back and finish for several days or more. Preparing ahead of time can ensure that you can submit your application in one sitting without any delay. If you anticipate any delays, your business accountant may be able to help you collect the necessary documents and apply.
Getting the financing you need doesnât have to be difficult. To recap, start by making sure that what you are doing is strategic, and that you can explain it to your lender in a way that makes good business sense. Then, check out the various loan types and find the ones that best fit your situation (and that donât have a crazy high annual percentage rate). Next, gather all your documents, check your credit report to make sure you donât have bad credit, and then get started on that application! When working with online lenders, thatâs really all there is to itâitâs not nearly as complicated as it is with some traditional lenders, and you still have plenty of freedom to check around for the best rates and the best loan options.