How to get a small business loan.

Nov 08 2021 | PayPal editorial staff

As a small business owner, you most likely encounter situations where it’s helpful to have additional cash on hand to manage the ups and downs of your business. However, to get the funding your business needs, you’ll need to understand how to get a business loan. This guide walks you through the five phases of how to apply for a small business loan so you know what to expect.

Phase One: Prepare.

Start assessing your small business financing needs by answering the questions below.

Your answers will help you to have a sense of which types of small business loans make the most sense for your situation.

What do you need funding for?
How much business funding do you need?
How fast do you need it?
How long do you want to be making payments?
How quickly do you anticipate seeing a return on your investment?

Know what your business can afford.

It’s important to estimate the additional revenue you think will result from your planned investment. Or, if you need funding to cover a cash flow gap, estimate when you expect to receive payment on delayed receivables or when your business revenue will return to previous levels. Don’t forget to consider seasonal ups and downs, as well as other expenses that might come up during your payment term. From your cash flow projections, you should get a sense for how much you can afford for repayment. As you move forward, keep this amount as a touchpoint. Beware of financing more capital than you can ultimately afford.

Tip: Beware of brokers who work on commission and act as an intermediary between borrowers and lenders. Because they’re paid based on the amount of funding they can secure, they have an incentive to get you the most funding possible – even if you can’t afford it.

Prepare basic business information.

No matter what type of small business financing you decide to pursue, all require some basic business and personal information in order to determine if your business is eligible and for what amount. You should be prepared to provide your contact information, answer basic questions about your business structure and revenue, as well as provide your Social Security number.

Many small business loan providers require recent bank statements and other relevant financial documents. It can’t hurt to have your recent business account bank statements on hand. Often, the more money you’re looking to finance, the more documentation you’ll need to provide. Also, if you’re considering applying for a traditional business loan, many require extensive documentation as part of the application process. Be prepared that gathering and submitting the paperwork required can take a significant amount of time and effort.

Phase Two: Research.

Get to know your financing options.

Make sure you have a basic understanding of the different types of small business financing options available and know which ones make the most sense for your specific situation.
If you’re not sure what’s available beyond credit cards and traditional business loans, start with this overview. It covers popular financing options from fixed term loans to crowdfunding, and the pros and cons of each.

Tip: For fast, simple, and competitively priced business loans, explore PayPal Business Loan and PayPal Working Capital.¹

Determine if your business meets basic eligibility requirements.

Loan eligibility requirements differ across providers, but most consider business revenue, years in business, location, and the industry your business is in to start to determine your business’s eligibility. You can usually find minimum eligibility criteria on a provider’s website.

FAQ: What is a soft pull?
- Many financing companies will use what they call a “soft pull” on your personal credit score to help determine your eligibility. A soft pull allows a business lender to look at your credit score without hitting it with a “hard inquiry.” A hard inquiry is the type of inquiry that may impact your credit score or show up on your personal credit report. While most loan providers are interested in your personal credit score, there are other options. Because PayPal Working Capital is based on your PayPal account history, it doesn’t require a personal credit check. You need to have a free PayPal Business account and a 90-day sales history meeting certain revenue thresholds to apply.²

Phase Three: Submit your application for review.

Know what lenders are evaluating.

Once you’ve submitted all of the requested paperwork and documentation, your loan application will be reviewed. Depending on the type of business loan, this could take hours, days, weeks, or even months. Regardless of how long the review process takes, small business lenders typically use the same basic set of fundamental metrics to evaluate an application for business funding commonly referred to as “The 5 C’s of Credit.” They include: Capacity, Character, Conditions, Capital, and Collateral. This long-standing approach allows lenders to consider the factors likely to influence a small business’s ability to pay back its financing.

Capacity: a measure of your business’s ability to continue operations and support cash flow while paying down its debts.
Character: a measure of both business and consumer credit indicating whether you’ve been a responsible borrower in the past and how likely you are to be responsible in the future.
Conditions: a measure of your industry, geographic location, time in business, and the economy at large.
Capital: a business’s ability to support the amount of financing it applies for presented as a total dollar amount of cash over time
Collateral: the tangible assets that can be liquidated in the event of default. Some lenders don’t require borrowers to offer assets as secured collateral (which is called “unsecured financing”).

FAQ: Why are they asking for my Social Security number for a business loan?
While business credit reports do exist, many providers of small business loans rely on your personal credit score as an indicator of credit worthiness, and they use your Social Security number to access your personal credit history. Look for small business loans that also take other factors like revenue and business history into account when determining your financing offer.

Phase Four: Understand how the loan works.

Review the structure of the loan.

Once you receive a loan offer, make sure that you understand the basic structure of the loan.

How and when will I receive funds?
How long will I be making payments for?
How and when do I make payments? Can I choose the day of the week?
Will the loan help my business credit?

Compare costs.

Small business financing solutions have a wide range of cost structures. A good rule of thumb is you should be able to calculate the cost of your loan with simple math. Make sure you fully understand your business funding costs:

Total cost: What is the total amount I need to pay back?
Fees: Are there origination fees? Late fees? Early repayment fees?

Tip: Both the PayPal Business Loan and PayPal Working Capital have one, fixed fee that’s easy to calculate. No hidden fees, no surprises.³

Phase Five: Choose the best loan option for your business.

Choosing a business loan is an important decision that you shouldn’t make solely on cost. Also consider the reputation of the loan provider, the complexity of the application process, the time it takes to get funded, and the ability to customize the loan to meet your business’s priorities and goals.

Don’t let the process of getting a business loan overwhelm you. The same persistence you use to pursue your business every day is useful when navigating how to get a small business loan.

The content of this article is provided for informational purposes only. You should always obtain independent business, tax, financial, and legal advice before making any business decision.

¹The lender for PayPal Business Loan and PayPal Working Capital is WebBank, Member FDIC.
²To apply for PayPal Working Capital, your business must have a PayPal Business or Premier account for at least 90 days and process a minimum of $15,000 (or for Premier accounts $20,000) within those 90 days or within any time period less than or equal to 12 months. PayPal sales include processing on PayPal Express Checkout, PayPal Payments Standard, PayPal Payments Pro, PayPal Here, and invoices paid online with PayPal online invoicing.
³In addition to the fixed fee (Total Interest Charge) for the PayPal Business Loan, the only other cost is a $20 Returned Item Fee that is only assessed if a payment is returned.

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