How to get a Small Business Loan

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By nbkc bank
08/10/2021

Hey there, small business owner! If you’re reading this, you’re probably ready to take the next step in growing your business. But even if you’re (finally) turning a decent profit, expansion can feel out of reach. That’s where a small business loan comes in.

When does a small business loan make sense?

If the thought of any kind of new debt seems scary, that’s understandable. But the right loan, at the right time, can be transformative for your business — or even necessary for your growth.

  • Equipment purchases: Maybe you need a new delivery vehicle, or your commercial oven isn’t heating up like it used to. Equipment is a necessary investment to keep your operation running.
  • Building maintenance or improvement: A loan can help if you’ve just moved into a new space, need to customize the layout, or had an unexpected maintenance issue.
  • Real estate purchase: As your business grows, you’ll probably outgrow your space. Instead of leasing, maybe it’s time to buy a place of your own.
  • Working capital: There may be a gap of weeks, or months, between selling your product, and getting money from your client. In the meantime, you’ll need funds to cover your inventory and day-to-day costs.
  • General capital: Advertising, personnel, overhead — you name it.
  • Unexpected expenses: In owning a business, you’re bound to have a few hiccups (or more), which can require some outside cash to keep things running.

How big (or small) of a loan do I need?

You know you want a loan. But how much? In some cases, there’s an easy rule of thumb. For real estate, banks typically require at least 20% as a downpayment, while new equipment downpayments range from 0-20%. In accounts receivable and inventory, banks will advance 80% and 50% respectively.

But keep in mind, a good banker is your best friend. By working together, alongside a CPA, business consultant, or part-time CFO, you can sketch out exactly what your business needs. Come prepared with a cash flow forecast one to four quarters out and a financial projection for the longer-term.

Getting the right-sized loan is important. One that’s too small can create cash flow issues. Whereas requesting too much can send the bank the wrong signal — like, say, you don’t know what your business needs, or potentially, that you plan on using the money outside of what’s been agreed upon.

At nbkc, we offer online small business loans from $25K to $75K, which combine the speed and ease of online lending with the low rates and service of a bank. You can apply online, or visit our list of lenders if your loan needs exceed $75K.

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How to find the right bank for your loan

First up, reach out to a few banks. It may take several conversations to find one that provides what you want. Not all banks will lend to your kind of business — or provide the exact loan you want. And those that do offer loans will have a variety of interest rates, amortization periods, maturities dates, advance rates, and origination fees.

Remember, the interview is two-sided. Look for good communication from the bank first and foremost. They should be prompt, efficient and, of course, take an interest in your business. A good banker will try to learn your operations inside-out, while gaining an understanding of the challenges you face.

Like any good relationship, your banker should be willing to have hard conversations, giving direct feedback—even if the reality isn’t rosey. Watch out for any bank that makes promises or guarantees early in the process, especially if they haven’t done a full financial analysis. They may be trying to bait-and-switch you into a higher loan rate down the road.

Finally, look for a bank that’s well-reviewed (obviously) and the right size (maybe not so obvious). When it comes to size, a bank that’s too big could treat their smaller customers as disposable. Whereas a bank that’s too small may not match your growth needs a few years down the line.

What you’ll need to apply for a loan

Once you’ve picked a bank, they’ll review your financial standing, establish terms, and fully underwrite the loan. Compared to credit cards and most online lenders, the underwriting process from a bank will be more substantial. Documentation needs can vary, but get these ducks in a row for starters:

  • Three years of business bank statements and tax returns (*ahem* nbkc only requires two years for online loans under $75,000).
  • Three years of personal tax returns (again, nbkc requires just two years — just saying).
  • The borrower’s personal information, including credit score and ID.
  • A personal financial statement showing assets, liabilities, and net worth. (Guess what? This isn’t a requirement for nbkc’s online loan).
  • If applicable, an accounts receivable aging report, inventory report, list of equipment, and business debt schedule.
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How a bank accepts a loan

With documents in hand, your bank will put the loan opportunity through a full credit and approval process. Most banks require a credit officer to approve the loan — or it may go to a committee where bank executives and board members vote.

If you’ve been in business less than a couple years, or your personal credit score is below 670, then you may have trouble getting approved. They’ll also want to make sure your cash flow can cover payments on the loan and that your business leverage ratios aren’t too high.

Through a traditional bank, approval decisions can be made in a few weeks — assuming things go smoothly. But that timeline can extend into a few months if extensive information is requested from the bank, or there are delays in responding to underwriting questions.

At nbkc, we combine the flexibility of a bank with the speed of an internet lender. And for many online loan applications, you can expect approval and funding in as little as five days.

Specialized small business loans

A small business loan from a bank offers flexibility, and lower rates. But depending on your needs, banks can offer more specialized small business loans too.

  • Working capital revolving lines of credit: Long name, but very similar to a credit card. This short-term loan bridges the gap between paying for inventory and receiving payment from a customer with interest only being accrued on what you use.
    • Term: revolving, renewed annually
    • Down payment: n/a
    • Rate: floats with Wall Street Journal prime rate (WSJPR).
  • Equipment loans: If you’re ready to upgrade your facilities or replace an existing asset, this loan can be used to refinance or buy new equipment.
    • Term: 3-10 years
    • Down payment: 0-25%
    • Rate: fixed
  • Buyout or acquisition financing: When buying out a company, partner, or business owner, you may need a loan to cover the transaction. In this case, collateral can include existing equity in business assets or even be underwritten based on cash flow.
    • Term: 3-7 years
    • Down payment: varies
    • Rate: fixed
  • FF&E loans: A loan specifically designed for furniture, fixtures, and equipment purchasing related to real estate. Hotels and tenant properties often rely on these loans to upgrade their rooms on a regular basis.
    • Term: 1-5 years
    • Down payment: As low as 0%
    • Rate: fixed
  • Commercial real estate loans: If you need to buy a new office space, warehouse, or other property, these loans are big enough to cover the cost. Like a residential mortgage, it requires an appraisal, title, and other items.
    • Term: 15-25 year amortization period with balloon payment, maturing after 5-10 years.
    • Down payment: 15-35%
    • Rate: fixed
  • Real estate construction loan: Similar to residential construction loans, these typically involve a 9-18 month draw process with interest-only payments. Once the building is completed, the loan can convert to a traditional commercial real estate loan.
  • SBA 504 and SBA 7a loans: Government-subsidized loans that can fit within other specialized business loans. Restrictions and qualifications apply, and the loan still must originate from a bank.

Other types of financing

But, hold on. Financing comes in many forms, right? While it’s worth exploring your options, a small business loan from a bank will almost always be the least expensive kind of capital. Other options include:

  • Outside Investors: Unpredictable, take a percentage of your ownership, and often want to weigh in on the company’s direction.
  • Personal loans: Often requires no collateral, but rates are typically higher.
  • Friends and family: The terms are good (and probably flexible too) — but there are obvious risks in mixing your business’s finances with close personal relationships.
  • Credit cards: Easily accessible, few limits, but with far higher interest rates.
  • Online lenders: With a notable exception (we’ll get to that next), most online lenders are more expensive than bank loans.

Online Small Business Loans from nbkc

Traditional banks have a lot to offer. But traditional lending demands long approval times and mountains of documentation.

At nbkc, we’ve created a small business loan that combines the benefits of online lending and bank-backed loans. Our Online Small Business Loan starts with rates as low as 5.95%, and approval in as little as five business days for funds between $25K-$75K.

If you’re running a profitable Kansas City-area business, and have been in operation for at least two years, then nbkc could be perfect for you. We offer quick access to affordable business capital — without the pain and hassle of a traditional bank loan. Apply online today or get in touch with us if you have any questions.