Starting and running a business is demanding but exciting. You’ve got a great idea and a rock-solid business plan, and you put in the hard work. There’s just one thing you can’t succeed without: money. Whether you’re starting a business or investing in the one you already have, it can be expensive, and that the necessary funding has to come from somewhere. For many business owners, that’s where financing comes in.
Applying for financing can be scary and stressful, but it doesn’t have to be. A big part of making this process smoother is showing up prepared, so here are five things to keep in mind when applying for financing.
Your personal credit score matters
Yes, your personal credit score can affect your chances of getting a loan for your business. You’ve probably heard about the importance of keeping your business and personal assets separate, but this is one case where mixing them can’t be avoided.
Not every business lender will place the same rate on your personal credit score, but many will. A better personal credit score can make it easier to get a business loan with good terms, like a lower interest rate.
Your personal credit score is even more important when your business is new. In this case, all the lender has to go on is your personal score since there are no business records available to review. What they’re looking for is a dependable borrower that can be counted on to repay a business loan on time, and a strong credit score reflects that. For small businesses, the company may be seen as a reflection of you, so showing responsibility in your personal life can actually benefit your business life as well.
Make sure you’re applying at the right place
Where you apply for your small business financing can have a large impact on how difficult it is to get approved, how long the process takes, and what sort of terms you get. There are two basic types to consider: traditional bank loans and peer-to-peer lending.
Bank loans are traditional financing from a bank. This arrangement is what most people think of when they consider financing options. Banks tend to offer more competitive interest rates, especially for those with good credit, as well as the reassurance that the loan is coming from a stable financial institution.
Peer-to-peer lending is a newer form of financing that typically comes from online services. With a peer-to-peer loan, rather than borrowing from a bank or other financial institution, you are essentially crowdsourcing your financing from a pool of individual lenders. The service plays matchmaker between businesses looking for lending and lenders looking to invest. Examples of peer-to-peer lenders are Funding Circle and StreetShares.
New businesses can have a harder time getting good terms
How long your business has existed also reflects financial responsibility. Only about half of small businesses survive the first five years, so if you’ve been around for a while, lenders will assume your business handles its finances well and can navigate the challenges and complexities of shifting markets. This stability is important to lenders because if your business goes under, they’re less likely to see a loan paid off.
Start-ups are tricky for lenders. You may have some great ideas for your new business, but there are a lot of growing pains ahead, and without a proven track record, business loan approvals may be harder to come by and interest rates may be higher. You can find lenders that specialize in funding start-ups, though, so don’t lose hope if traditional financing options don’t pan out!
There are multiple types of business loans
There are several different types of business loans available, so it’s important to know what you’re looking for before applying. Here are a few of the most common types:
- Term loans. These loans are what most people think of when they think of financing: you borrow a sum of money from an institution and pay it back with interest over a set period of time.
- SBA loans. SBA loans come from banks or other lenders but are guaranteed by the Small Business Administration (SBA). These loans often have very low interest rates and allow for larger loan amounts than other types, but they can be difficult to qualify and apply for.
- Line of credit. A business line of credit works a bit like a credit card: you use it only when you need it and pay interest only on what you’ve used. This setup makes them very flexible, but at the cost of being tough to get.
- Microloans. Microloans are small loans often offered by nonprofit organizations to new businesses or businesses in disadvantaged areas. They may come with additional services, like consulting.
- Personal loans. In a pinch, you can also use a personal loan to pay for business expenses. This decision can work when your personal credit is good but your business doesn’t otherwise qualify for the loan you want.
Basic term loans are the most common and generally useful type, unless your business has a specific need or circumstance that warrants one of the others.
You’ll need lots of documentation
Lenders don’t just hand out money to anyone (not reputable ones, anyway). To qualify for a small business loan, you’ll usually be asked to fill out an application. Part of that process is providing paperwork and documents that prove your business is legitimate and doing well.
These are some commonly requested documents:
- Business plan
- Business license
- Proof of ownership
- Bank statements
- Balance sheets or profit and loss statements
- Tax returns (business and personal)
These documents help a lender get an accurate picture of your business’s past and future so they can assess risk on the business loan you’re applying for. A personal résumé may seem like an odd request for a business loan, but if your business is new, it can give lenders a better idea of your experience in similar fields.
The application process for a business loan can vary from quick and painless to grueling, depending on the type of loan and where you’re applying. Peer-to-peer loans are often fairly easy to qualify for and don’t take much time for approval, whereas SBA loans are notoriously hard to get.
Whether you’re looking to fund a start-up or expand an existing business, financing is an important piece of the puzzle. Showing up prepared for what you’re up against can make the whole process easier.
Written By: Madison Crader
Madison specializes in content related to small businesses building brand awareness and gaining access to capital to grow their business. She has a passion for helping entrepreneurs understand their finance needs and set long-term goals by sharing tips and tricks.