Whether you’re looking for a loan that’ll help you secure a mortgage or to set aside for unexpected expenses, taking out a loan for your small business can feel like a big undertaking. Having insight into the process before starting out can make it a much simpler process.
As a business banking expert with U.S. Bank who specializes in lending, a central part of Jay Nelson’s job is to help small-business owners determine and then secure the best type of loan for their needs. Below, he shares five strategies for making the process as effective and seamless as possible.
Small businesses, even those that are quite new, have a variety of lending options available to them, Nelson says. This includes applying for a regular business loan, which operates like a consumer loan, but is used for business expenses. It can be a good fit for companies looking to purchase physical assets, such as equipment or office supplies.
For short-term borrowing needs—meaning you have a plan to repay the amount within 12 months or less—Nelson often recommends applying for a line of credit. A major benefit is that it’s open-ended, he says. You can open a line of credit for your business, pay the balance to down to zero, and then reuse the funds again, keeping the cycle going as long as the account remains in the draw period.
Applying for a business credit card can be a good option for making smaller purchases, such as travel and everyday expenses. “Credit cards do serve a purpose even though the interest rates may be higher than those for a loan or a line of credit,” Nelson says. If a business doesn’t have credit history yet, traditional bank financing may be out of reach. In certain cases, Nelson recommends owners apply for personal loans and transitioning to business loans once the company has established itself.
Choosing the right type of loan for your business depends largely on what you plan to spend the money on, when you anticipate you’ll be able to pay it back, and whether the expense is recurring or a one-time purchase.
Nelson often recommends taking out multiple forms of loans to meet specific needs, such as taking out a long-term real estate loan to rent office space and opening a line of credit to handle recurring expenses.
To approve a loan, your banker is going to need your business’s tax returns—potentially going a few years back, depending on the size of the request. Your banker will also want to see financial documents that ensure your finances match the returns.
Be prepared to share your personal financial documents, including personal tax returns and financial statements. “The bank will be on the lookout for any debts owners have that could have a bearing on the business loan itself,” Nelson says.
Despite popular belief, securing a loan does not require perfect credit. “There’s a big range,” Nelson says. Yes, good credit is preferable, but “there might be mitigating factors that a bank looks at and says, ‘we still want to get this business the money it needs to grow.’”
Nelson often hears from owners who haven’t considered taking out a loan because things are going well. However, it’s in a business’s best interest to apply for a loan proactively when momentum is trending upwards. Not only will the application process be easier, but it provides a financial buffer should your business hit unforeseen difficulties. Waiting to apply until those circumstances actually occur can make it more difficult to secure a loan when you need one the most. “When things are going well, that’s really the time to apply for a line of credit,” Nelson says.
Working closely with your banker ensures you have someone who understands your business and its financial situation well. “Think of your banker as a business partner or valued advisor,” Nelson says. “Let them know what is happening on a regular basis.” A good banker will ensure lines of communication remain open. “Make sure you stay in touch with your banker, so that when you are ready to start a loan application there isn’t a lot of catch-up that has to happen,” Nelson says.
At a minimum, Nelson’s clients will hear from him every three months. If they’re going through a transitional period and need more frequent contact, he urges them to let him know. He’s there to help. Bottom line: “Having a good relationship with your banker is going to make it a lot easier to go out there and acquire credit from the bank.”