How Do I Get Small Business Funding?

The first step is figuring out which type of provider is right for your company. Here are a few options:

• Crowdfunding – Numerous crowdfunding websites have helped entrepreneurs and inventors support and build their startups. Kickstarter, Indiegogo, and Fundly have gained popularity over the last few years, to name a few. Each crowdfunding site has a unique platform through which business owners can choose how they want to fund their business. For example, Indiegogo allows owners to keep all the money they raise, despite not meeting their goal.
• Friends and family loans – Close relatives and friends can also lend a helping hand and invest in your business. However, it is best to sit down and discuss the benefits and potential disadvantages of small business financing, as money can affect relationships with those closest to you.
• Banks – Locally owned banks are a helpful resource for businesses as they are often interested in building the local economy. Even if you do not qualify for a loan, speaking with someone at a bank can help you understand how to become eligible for a loan in the future. 
• Online lenders – Small business loans online provide fast funding for those who are in immediate need of a loan and cannot qualify with a traditional bank. They are a good fit for companies without collateral. One factor to consider when taking out this type of loan is the interest rate lenders charge.
• Credit unions – Credit unions offer loans approved by the SBA (Small Business Administration). However, you will most likely have to be an active member of a credit union in order to qualify for a loan.
• Microlenders – These are nonprofit providers that offer smaller loans that are less than $35,000.

Note: You may lean toward whichever option offers the lowest small business loan interest rates. However, you should know that lower interest sometimes means more risk. Secured loans may have lower interest, but if you cannot pay back the loan, then you might have to give up your collateral. In extreme cases, that could mean that you lose your business. The best small business loans offer low risk and low interest.

When choosing between the options listed above, it is usually best to use a bank loan when it is available. Unfortunately, this is often not the most practical solution for business loans for small businesses, as smaller companies often have trouble qualifying for a bank loan. In these cases, a microlender may be a more realistic option. Companies that cannot borrow from a bank or a microlender may need to use an online lender. Online lenders can also be a good fit for businesses that need funding quickly.

After figuring out the type of lender that is right for your business, you will need to fill out a small business loan application.

What Does It Take to Get a Small Business Loan?

Most providers use the same basic model for determining eligibility. This model focuses on a few of your company's most important attributes. Here is what your provider will likely consider while reviewing your application:

• Credit score - Lenders will examine your credit score to see if you can take on a loan. If you are already in business, you may need to submit a credit report for your company as well. (Please read more about the importance of your credit score below.)
• Potential collateral - If you choose to apply for a secured business loan, you may need to use an asset to back your loan against default. Assets include equipment, inventory, or real estate.
• Annual revenue - Lenders often require that businesses bring in an annual revenue greater than $50,000.
• Net operating income - In order to make sure you can make your payments on time, you need to show a salary that is at least 1.25 times greater than your expenses.
• DSCR – You can determine your business capital eligibility using our Debt Service Coverage Ratio (DSCR) Calculator. Your DSCR compares the money you have available to the debt you owe. Lenders use this ratio to guess how likely it is that you can pay back a loan.
• Proof that you are a U.S. citizen at least 18 years of age, as well as other documents like your business and personal tax returns, bank statements, financial statements, and legal documents.

Note: Lenders often have additional requirements for getting a small business loan. For example, some lenders may require you to have an email address to apply.

Your Credit Score

There is a better chance that you will receive small business funding when you have a higher credit score. A provider will look at your personal score as well as your business score. If you have not built up your business credit, your personal credit score will need to be at least 600. Anything lower than 600 is considered "poor credit." Those with poor credit are usually denied outright.

Thanks to the Fair Credit Reporting Act, the three major credit bureaus (TransUnion, Experian, and Equifax) are required to provide you with a free annual credit report. Looking at these reports can give you a good idea of what loan providers will consider first when deciding whether to offer you a loan.

If your score is above 649, then you have at least "fair credit." If it is over 699, then it is considered "good credit," up until a score of 750 and above, which is known as "excellent credit." Those with excellent credit and no disqualifiers have a much easier time finding a loan.

Your Company's Age

While it is illegal for lenders to consider your age when making a loan decision, there is no law prohibiting a lender from looking at the age of your business. In fact, companies with less than six months of experience will find it very difficult to receive anything other than a small business loan for a new business. This is also known as startup funding.

When calculating your company's age, a provider will look at how long your business has been generating revenue.

Your Capital

The provider will need to examine your historical cash flow. Businesses that can show six months of healthy finances will have a better chance of receiving small business funding options.

You will not receive traditional funding if you do not have financial records that go back at least six months.

What if I Have Bad Business Credit?

If you have poor credit, you will likely end up paying more in interest and fees for your small business funding. You'll also probably have fewer loan options to choose from; however, it doesn't mean you have no options.

If you think your business credit will affect your chances of attaining a loan, see if you qualify for SBA loans geared toward struggling businesses. This type of loan may require you to take classes. It generally takes longer to apply for SBA loans than other types of loans. If you need money sooner rather than later, this type of loan isn't always a viable option. But if you have the time and think you can qualify, this is the route you should take.