Small business owners face a critical challenge to bring their ideas to reality. Before positive cash flow and profits come about, securing a business loan is often required. For existing entrepreneurs who own established ventures, tough economic periods sometimes require financing assistance. The process for getting a business loan is intricate, but with a carefully constructed plan and an understanding of the factors involved, you can significantly increase your chance of acquiring a loan. This guide will describe the steps so that you can hit the ground running.

Getting Started

Before you initiate the loan application process, consider your business’s needs and what your short- and long-term goals are. Outline the purpose of the loan: Do you need assistance with expansion? A boost in working capital? Or perhaps a large capital expenditure? Maybe you are just beginning your entrepreneurial journey. Whatever the reason, answering these questions can help both you and prospective lenders find the right fit.

During the process, be prepared to unveil your credit history. Lenders want to have confidence that your financial health is sufficient before doling out capital. Before you apply for a loan, identify and address any potential issues that may affect your eligibility in the application process. A sound balance sheet and positive credit profile can go a long way toward securing a loan.

Choosing the Right Loan

Knowing how to begin the application process can be daunting, but PNC is here to help you along the way. Let’s describe three types of financing options offered by the Small Business Administration (SBA).

  1. 7(a) Loans: Designed to assist small businesses in acquiring short-term and long-term working capital, purchase an existing business, refinance current debt, or purchase supplies to run your operations. According to the SBA, the minimum loan size is $125,000 and often comes with a variable rate, though there are fixed-rate options. 
  2. 504 Loans: Designed for longer-term small business investments such as real estate or heavy equipment. 504 Loans often have competitive fixed interest rates and long repayment terms, making them a potentially attractive option for businesses seeking stability. They consist of two separate loans - one retained by the lender and one refinanced and retained by the Certified Development Company (CDC).[1]
  3. SBA Express Line of Credit: Designed for short-term and medium-term working capital and general business needs. It offers simplified application processing, SBA guarantee assistance, and flexibility with a five-year revolving line of credit followed by a five-year term loan period.

You can also explore unconventional financing options, including invoice funding, peer-to-peer lending, and merchant cash advances.

Term Loans and Lines of Credit

Big picture, you will want to familiarize yourself with both term loans and lines of credit. The former is used mainly for longer-term financing needs and provides upfront liquidity while the loan is repaid over a set term. The latter features a variable interest rate, allowing the borrower to access a pre-determined amount of capital, and is more commonly used to help small business owners manage short-term cash flow fluctuations.

Navigating the Application Process

Once you have assessed your options, the application process can be straightforward if you have your documents in order. Traditional financial institutions, like banks and credit unions, may require you to apply in person or over the phone while other lenders are strictly online.

Expand your search to see what makes the most sense for your situation, but no matter your path, consider clearly articulating your business goals and financial projections to potential lenders. Furthermore, don’t overlook the fine print within the application documents – you want to know what you’re getting into before approval. You may also want to consider secured loans – those backed by collateral – as they can be seen as less risky in the lenders’ eyes.

Understanding and Managing Repayment Terms

Before you become officially contracted into a loan, design a plan to ensure you have ample business cash flow to meet periodic repayment obligations. It may require that you regularly monitor your firm’s income, expenses, and changes in working capital. Be proactive about possible seasonal ebbs in cash flow while budgeting for loan repayments. Furthermore, maintaining an emergency fund can act as your own money lifeline during unexpected lean times.

In case of financial distress, work with your lender for options. Refinancing and renegotiating are common practices in such situations, and keeping an open dialogue with the lender is critical. Assuming there are no major problems after approval, establishing automatic repayments may be useful. Finally, conduct periodic loan reviews to stay abreast of changes in your interest rate if it is variable.

Setting Your Business on the Path to Success

Applying for a small business loan includes many steps. Shoring up your firm’s finances is a solid first step before you shop around. Then, once you have a plan for how to use the potential proceeds from a small business loan, lenders can better understand your business needs. You can explore PNC’s solutions for your small business’s borrowing needs today.