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What is required to obtain a small business loan? Well, there are a number of things to consider: is this a start-up loan, or has your business been established for a while? How good is your credit score? Will you be operating as a business or a sole proprietorship?
The last question is probably the most fundamental. If you are going to apply for a business loan, you definitely will want to separate your business credit profile from your personal credit. This is a multi-step process: you will have to first register with the IRS for a federal EIN (similar to a social security number for tax purposes, except it’s used for businesses), go through the various hoops and obstacles to be in compliance with state requirements, set up a bank account and a phone line in the business’ name, and start an account with one of the four credit reporting bureaus (Dun & Bradstreet, Experian, Equifax, Business Credit USA). This will not only allow you to protect your personal credit from the damages that may be incurred from operating as a sole proprietorship, it is also very essential (and depending on the lender, what is required) to obtain a small business loan.
If your business is well-established and you are in good credit standing, then you probably already know that you will have no difficulty getting a small business loan. However if you are just starting out, you will want to start building some business credit first. Business credit is a little different than personal credit; you will need a small business credit card or two and some merchant trade lines in the business’ name in order to generate credit. This is very helpful and a necessary first step, however it is only useful up to a certain point. Lenders want to see that their prospective borrowing businesses have been around for a while and are showing reliable profit margins; this matters a little more than whether the business simply pays its bills or not.
If you are just starting out, it helps to know where to shop for your startup business loan. Big banks are probably not the best place to go, as they often don’t want to take on the risk of a start up business and will not be open to anything that falls outside of their regulations. Small banks and credit unions are much more flexible and competitive. You may also want to consider a Small Business Administration (SBA) loan. The SBA is a branch of the division of commerce that provides funding to start up businesses, as well as minority-, women-, and veteran-owned businesses. Check with the division of commerce so that you know what is required to obtain a small business loan through the SBA. Their programs are usually available through one of your local banks.