In this article, we cover:
With preparation and readiness, acquiring capital can be a simple process for your business. To help simplify the process, we break down key steps of the loan acquisition process including what documents to gather, the application process, and qualifications. Not all loans are equal so we review common business loan options, SBA loan programs, and loan alternatives.
Is it Simpler to Acquire a Business Loan using an Online Lender vs a Traditional Financial Institution?
Generally speaking, acquiring a small business loan is simpler when going through an online lender vs a traditional financial institution like a bank or credit union. Because online lenders are not regulated the same way as traditional lenders, they can provide faster approval times and funding speeds. For certain financing options, some borrowers may receive approval and possibly the funding itself on the same day.
Loans from banks or credit unions are typically more highly regulated which translates to tougher eligibility, borrowing, and credit requirements. The process of getting a loan from a bank or credit union is more rigorous, can take longer, and sometimes requires an in-person visit to finalize the loan. However, in some cases, this means that to be competitive traditional bank loans might be offered at lower interest rates so it’s worth including them when researching small business lenders.
The entire business financing process using an online lender can be very simple relative to a traditional bank. Using an online lender, you can expect to encounter a fully online business loan application process that might look like this:
- Initial setup/profile: you will need to provide basic business information to help them understand your funding needs.
- Submit Your Application: The lender will likely have a general questionnaire that goes beyond your profile setup in step 1 and then will provide a mechanism for you to provide business documentation. A secure online portal will give you the ability to submit your documents as PDFs or connect your businessâs bank accounts.
- Review funding options: Once your documents have been securely submitted to the lender, they will process them to provide your funding options. You can review your options on screen – or some lenders will give you the option to connect with a funding specialist – to determine which loan options make sense for you.
- Underwriting to make final approval: The underwriting team will make the final approval determination. This might be a human, an automated software decision, or a combination of both.
- Receive funding: Depending on the lender, you might receive your funds via wire, ACH transfer, or physical check.
Reputable online lenders are just as safe as loans from large banks. However, itâs always a good idea for business owners to do their due diligence and research online lenders’ reputation by reading online reviews, consumer reports, etc.
Business loan options
The first step to simplifying the capital acquisition process for your business is to understand the loan options. Not all businesses qualify for all loan types. However, once you know what loans will work for your business, and how to qualify for them, acquiring them can be simple. Letâs review a range of business loan options, the types of businesses that are eligible, and high-level qualifications. Keep in mind that different lenders will have different requirements based on your situation. The numbers below are meant to give you a general sense of what to expect:
- Term Loans: Established businesses can use term loans for a wide range of business needs. Lenders will likely be looking for annual revenue greater than $250k, a 660 credit score or above, and at least 18 months in business. Funding amounts can be in the $25k – $500k range.
- Working Capital Loans: Businesses that are somewhat established can use working capital loans for business expenses like hiring staff, purchasing inventory, buying equipment, and more. Lenders will likely be looking for annual revenue greater than $250k, a 575 credit score or above, and at least 6 months in business. Funding amounts can be in the $25k – $2M+ range.
- CRE Loans: Established businesses with existing commercial real estate equity can tap CRE loans to acquire a new business, refinance an existing project, fund a renovation, refinance existing business loans, and more. Lenders will likely be looking for annual revenue greater than $250k, a 660 credit score or above, at least 18 months in business, and if you already own commercial property. Funding amounts can be in the $25k – $6M range.
- ERTC Loans: With an ERTC Loan, you can get the cash from your business’s IRS credit to use for a range of business needs. Lenders will likely be looking for if your business has a pending IRS credit of $100K or greater, a 660 credit score or above, and has been in operation since at least February 2020.
US Small Business Administration Loans
Individual lenders determine credit, revenue, and time in business requirements for SBA loans. Your lender will help you figure out which type of SBA loan is best suited for your needs. The SBA has small business financing options for both new and established businesses but having a good credit report is key. The SBA recommends all businesses establish and maintain a good business credit score because existing businesses can have an advantage with an established credit history. Because loan eligibility for new businesses is typically based on its ownerâs personal credit score, establishing and maintaining a good personal credit score is important too. Bad credit history is one of the main reasons why SBA loan applications for small businesses get declined. In an article written by the business credit bureau Dun & Bradstreet, they offer tips and best practices for businesses on how to establish and build business credit. Letâs review the different types of business loans the SBA offers:
- SBA 7 (a) Loans: Commonly used for working capital, refinancing business debt, and purchasing furniture, fixtures, and supplies. The maximum loan amount for a 7(a) loan is $5 million. Key eligibility factors are based on what the business does to receive its income, its credit history, and where the business operates. Most businesses will be eligible for an SBA 7(a) loan if they: are for-profit, operate in the U.S. or its territories, have owner equity to invest, and use alternative financial resources, including personal assets, before seeking financial assistance. For more information, visit the SBAâs website on 7(a) loans.
- SBA 504 Loans: provide long-term, fixed-rate financing that promotes business growth and job creation. The maximum loan amount is $5 million but certain energy projects can receive up to $5.5 million. To be eligible for a 504 loan, your business must: operate for-profit in the United States or its possessions, have a net worth of less than $15 million, average net income of less than $5 million after federal income taxes for the two years preceding your application, meet the SBA size guidelines, have qualified management expertise, a business plan, good character, the ability to repay the loan, businesses cannot be engaged in passive or speculative activities. For more information on eligibility criteria, and loan application requirements, visit the SBAâs website on 504 loans.
- SBA Microloans: Smaller-size loans of up to $50,000 are provided through SBA funding intermediaries. Microloans can be used for a variety of business purposes that help small businesses expand, provide working capital, re-open, repair, enhance, make general business improvements, purchase equipment or furniture, and more. Proceeds from an SBA microloan cannot be used to pay existing debts or to purchase real estate. For more information, visit the SBAâs website on Microloans.
- SBA Disaster Assistance Loans: The only case where the SBA can issue direct loans. When a business is impacted by a disaster in a declared disaster zone, the SBA provides low-interest disaster loans to help them recover. Disasters can include civil unrest and natural disasters such as hurricanes, flooding, and wildfires.
Business loan alternatives
In addition to business loans, there are other capital options for your business that can be simple to acquire. The main benefit of these options is that they can be established before your business needs capital. Once the need for capital arises, you can simply tap into them. Letâs review two options and discuss how they can be simple ways to acquire capital:
- Business Credit Card: while not a business loan, business credit cards can be an alternative or supplemental to a business loan. Some startups might struggle to obtain a business loan in the early days and a business credit card is a viable alternative. Once the business credit card is opened, it can be one of the simplest ways to get capital for your business because you simply just need to use it when needed.
- Business Line of Credit: A business line of credit can be easier to get approved for than a business loan and provide higher credit limits than a business credit card. Similar to a business credit card, once it is established, you simply tap into it to acquire capital when you need it.
Additionally, a merchant cash advance can be a viable loan alternative for businesses with strong cash flow. A merchant cash advance is not a loan and it gives you access to funds based on your future sales or accounts receivables.
How to simplify the capital acquisition process
You can make the business loan acquisition process simple by having your documentation updated and ready to go. Even if there is no pressing need for a loan, having the documentation easily accessible will make it simple to acquire a business loan when you need one. Banks or credit unions typically require more documentation and have stricter eligibility requirements than an online lender. Depending on who you use to fund your loan, you might need these documents:
- Bank statements
- Credit statements
- Tax returns
- Financial statements
- Balance sheets
- Business licenses
- Commercial leases
- Articles of incorporation
- Business plan
- Financial forecasts
For new businesses, lenders will likely want to look into personal finances to determine creditworthiness and repayment terms. Additionally, a new business owner might need to collateralize the loan with a personal guarantee by using assets such as personal property, cash, stocks, car, boat, bonds, insurance policies, and equipment as collateral for the loan.
Business Loan Consultants
For entrepreneurs whose most precious resource is time, or first-time borrowers overwhelmed with the application process, a business loan consultant can be worth the investment. Business loan consultants are a fee-based service that can help a small business owner navigate the entire process and help determine the best small business loan for your needs. Business loan consultants can identify the right loan product based on your business and streamline the loan process. They will help gather the correct documents, prepare applications, submit paperwork, and work directly with the lender on any follow-up questions to help prepare a business plan. For more information, read our article How to Find Business Loan Consultants Near Me.