Updated April 14, 2023
A small business loan agreement is a contract between a small business borrower and a money lender. Small business loans generally accrue interest. The lender commonly requests security to be included in the note in the event of the borrower’s default (such as equipment or other assets).
Commonly Used For
- Buying inventory;
- Hiring employees;
- Purchasing equipment;
- Real estate; and
- Renovations.
Minimum Requirements
- 680 credit score;
- Two (2) years in business;
- Minimum $50,000 annual revenue;
- Collateral (equal to the loan amount); and
- Owner’s personal guarantee.
How to Get a Small Business Loan (5 steps)
Step 1 – Gather Your Documents
Lenders will want to ensure they are not lending money to a failing business. Therefore, the borrower should gather the following items:
- Bank Statements (past 12 months)
- Tax Filings (past 2 years)
- Balance Sheet (profit and loss statement)
- List of Company Assets
Step 2 – Determine How Much to Borrow ($)
Some lenders will allow a borrower to obtain more cash than needed even if it becomes a debt trap. Therefore, it is advised that a borrower seeks no more than 1.25x its revenue to expenses ratio.
Example
If a business is generating $12,500/mo and its expenses are $6,000/mo. The business should not borrow more than the equivalent of $4,000/mo in loan repayments ($10,000/mo total).
$12,500/mo in revenue with $10,000/mo in expenses would be a 1.25 revenue to expenses ratio.
Step 3 – Apply to Lenders (5)
To obtain money as fast as possible, the best option is to go through a trusted online lender.
The top 5 online recommended services are:
Step 4 – Obtain Offers
After applying, loan offers should be received within 24 hours. There may be following up questions or additional information needed to complete the financial profile for the lender.
After deciding which lender has the best terms and lowest interest rate, it’s time to sign a small business loan agreement and take the necessary steps to get the funds.
Step 5 – Receive Funds
After all the paperwork is signed, the funds should be disbursed to the borrower’s bank account. Once received, the loan will start with the borrower required to repay the debt in accordance with the payment schedule.