As a small business owner, you might have several ideas about what you want to do with your business but not have enough money to bring those visions to life. You might also have times when you have gaps in your business’s cash flow because of cyclical patterns in your company’s operations. A business loan is a good way to help your business grow or simply help to cover day-to-day business expenses during slow periods so that your cash flow won’t be interrupted and your business can continue operating at an optimal level.

However, it can be intimidating for business owners who need funding because many don’t know how to get a small business loan. While the process might seem confusing at first, it is not as difficult as you might think. Here are six steps involved with getting the right small business loan in NJ.

1. Determine Exactly Why You Need to Get a Loan for Your Small Business in NJ

Before you think about applying for an NJ small business loan, you need to think about exactly why you need one. In addition to knowing exactly how you will use the funds for your small business, potential lenders might also want to know how the funds will be put to use and what they are for.

At the time you create your business plan, including details about the purposes of a loan is important. Many lenders want to see your business plan, so if you haven’t already created one, it’s a good time to do so. This process can also help you figure out which type of business loan you might need, and you might discover that alternative financing might be a better option than a traditional business loan.

Common Reasons Why Business Owners Might Seek an NJ Small Business Loan

Some of the common reasons that some small business owners might apply for funding for their businesses include the following:

• To obtain startup capital – Entrepreneurs who are looking for startup capital generally won’t qualify for traditional business loans from banks and other commercial lenders. Instead, you might consider looking for loans offered by online lenders or microloan options to start a new business.
• To manage expenses – If your business needs funds to manage expenses during a slow period because of its cyclical nature, you might want to consider a business line of credit rather than a traditional business loan. A line of credit lets you borrow only the amount you need with minimal restrictions and can help you bridge the gap in your cash flow.
• To grow your business – If you want to use funds to expand your business or allow your company to take on larger projects, a term loan might be a good choice.
• To be prepared for emergencies – Businesses can benefit from having an available cushion of extra cash in case of a financial emergency so that anything that might occur won’t sideline their businesses or cause disruptions in their operations. For this purpose, a business line of credit is a good choice because of the low cost of keeping it open and the accessibility of money when it is needed.
• To purchase equipment – If you need to purchase equipment for your company, an equipment term loan can help you pay for the needed items.

2. Determine Whether Your Business Might Be Eligible for a Loan

Once you have created your business plan and understand why you need a loan, the next step is figuring out whether your business will qualify for a loan and the amount of financing it can afford. Before your business will be approved for a loan, the lender will evaluate your business to determine whether it can afford to take additional capital and make the associated payments. Lenders evaluate several factors during the underwriting process, including the following:

Business and Personal Credit

During the underwriting process, lenders will consider your business and personal credit as one of the largest factors they consider when evaluating the degree of risk approving your loan would pose. Many online lenders only consider the small business owner’s personal credit, but some commercial lenders also want to see a business’s credit history. In most cases, lenders want to see credit scores of at least 600. If you have a lower score, it might make sense for you to work on improving your credit before applying for a small business loan.

To improve your personal credit, get copies of your credit reports from each of the three major credit reporting bureaus and look for any inaccuracies. Contest any inaccurate information. If the credit reporting agency can’t confirm the negative information on your credit report within 30 days, it will be removed. You should also make sure you make your payments on time, and try to reduce your debt-to-income ratio by paying down some of your credit card balances if possible.

To improve your business credit score, ask your vendors to report your payment history to each of the three credit reporting agencies. Make your payments on time or early, and make sure you make more than the minimum payment on your business credit cards each month and on time.

Business Cash Flow

When you apply for a business loan, the lender will look at your business’s cash flow during the underwriting process. The lender will want to see that your business has a positive cash flow because that indicates that your business is likelier to repay the loan. A positive cash flow also shows that your company generates enough money to pay your operating expenses and cover its debt obligations. It also can show whether your business’s cash flow has been increasing over time as an indicator of its likely future health and stability.

Collateral

Some commercial lenders want businesses to put up assets as collateral in case they can’t make their loan payments. If you apply for a collateral loan for your business, the lender will want to see that you have sufficient assets to cover your loan obligations in case of default. The types of collateral lenders typically want to see include cash and negotiable securities. However, if you don’t have sufficient collateral, you might want to consider alternative financing through an online lender like New Bridge Merchant Capital for no-collateral small business loan options.

3. Figure Out Your Business’s Repayment Ability

To get financing for your small business, you will need to show that your business is already profitable or is on its way to becoming profitable. You will also need to show that you can afford to make the payments on your business loan. Lenders will calculate your repayment ability and profitability by determining your debt service coverage ratio (DSCR). This is the amount of debt your business has in proportion to its income and is calculated by dividing your business’s net income by its total interest and debt payments. In general, lenders look for a DSCR of at least 1.25.

4. Compare the Different Types of Business Loan Options

When you get ready to apply for funding for your small business, you need to understand the different types of loan options that are available. Here are the various types of financing small businesses might generally consider.

Business Term Loan

Business term loans are lump sums that are provided upfront and repaid in fixed installments over a set duration. The repayment period for a term loan might differ based on whether it is backed by collateral or is an unsecured term loan, but they generally might be available in durations of up to two years for unsecured loans or longer for secured loans. Term loans are good to use for expanding or growing your business, upgrading your business systems, or purchasing inventory in advance for the season.

However, a term loan is less flexible than a business line of credit. With a term loan, you will receive a fixed amount upfront and will begin repaying your loan once you accept the funds.

Term loans might be a good option if you need to expand your business, purchase new equipment, or have a new growth opportunity you want to take advantage of. It is a good choice for a business that needs to make lower payments that are spread out over a longer period. The interest rates and fees you might have to pay will vary based on the type of term loan you choose and the lender. At New Bridge Merchant Capital, our rates start as low as 15.99%.

New Jersey Small Business Administration Loan

The Small Business Administration (SBA) works with approved lenders to issue loans. The SBA guarantees a portion of the loan to make lenders more willing to approve borrowers. The most popular loan program for small businesses through the SBA is the 7(a) loan. The SBA serves as a guarantor to enhance the lender’s willingness to make the loan by decreasing the risk of default. Your business must meet the following requirements to get a 7(a) loan:

• Have 499 or fewer employees
• Generate under $7.5 million in annual sales
• Operate in an eligible industry
• Be a U.S.-based, for-profit company
• Uphold the SBA’s policies or create jobs
• Show a need for the loan
• Use a form of alternative financing

An SBA 7(a) loan is a type of loan that might be good for businesses that struggle with cash flow problems since the loan can be restructured for longer maturities or lower monthly payments. It might also be an option for a newer business without established credit.

Business Line of Credit

A business line of credit provides a maximum available amount from which you can access funds whenever you need them as long as you continue making your payments as agreed. This type of financing functions similarly to a credit card. It typically won’t cost anything to keep your business line of credit open, and you will only make payments on the amount you draw rather than the credit limit of your line of credit.

A business line of credit is a good choice for covering unexpected gaps in your business’s cash flow. It’s also a good option to have a cushion of available cash in the event of an emergency.

Equipment Financing

Equipment financing is designed to help businesses partially or fully finance the equipment they need. It is typically easier to qualify for equipment financing since the equipment serves as collateral for the loan. If you can’t make your payments, the lender can seize the equipment.

Invoice Factoring

Some types of businesses choose invoice factoring, which allows them to access funds that are tied up in unpaid invoices. Factoring companies buy unpaid invoices and give a percentage of the invoiced amount to the business. When your client pays the invoice to the factoring company, the factoring company will take its fee out of the invoiced amount and pay your business.

Not all lenders offer invoice factoring, but it can be a way to get working capital for some businesses without incurring debt. This option is best for businesses operating in the B2B space that have account receivables.

Microloans

If you only need a very small amount, a microloan might be a financing solution. Microloans are primarily offered by non-profit lenders in specific states or regions and can be difficult to qualify for. Since these non-profits also depend on donations and grants, they frequently are restricted in how many loans they can make. These loans can be as small as $500 up to a maximum of $50,000. They are best for businesses that have very low capital needs.

5. Compare Lenders and Loan Companies

The next step is to compare different types of lenders.

Traditional Banks

Small businesses have the most difficulty qualifying for loans from traditional banks. It can take weeks or months to complete the application process, and banks typically require numerous documents. While a traditional bank might offer lower rates, it will likely require your business to have been operating for a minimum of two years with annual revenues in the hundreds of thousands of dollars each year. Banks also want to see personal credit scores of at least 700 and frequently require collateral.

New Jersey Small Business Administration

The SBA does not directly issue loans to businesses but instead is a government agency that guarantees portions of loans issued by lenders to small businesses. Its function as a guarantor makes lenders more willing to approve NJ SBA loan applications. There are a variety of different SBA-backed business financing options. However, since the SBA has strict requirements, it is just as hard to get an SBA-backed loan as it is to get a bank loan in most cases.

On average, to get an SBA 7(a) loan, you will need to meet the following minimum requirements:

• Be in business for at least four years
• Have annual revenues of at least $180,000
• Have a credit score of at least 640
• Non-Profit Lenders

Non-profit community lenders typically work with businesses in the local community. Typically, they only make micro-loans and are best for businesses that have very small capital needs. Since they are mission-driven, non-profit lenders generally don’t expect business owners to have perfect credit or high revenues.

On average, you will need to meet the following minimum requirement to get a loan from a non-profit lender:

• Be in business for at least one year
• No bankruptcy filings in the past 12 months
• Have a credit score of at least 575
• Need a very small amount of funding
• Online Lenders

Online lenders fill in the funding gap by offering alternative financing to businesses. They typically have faster and simpler application processes than other lenders and require less documentation. It is also much easier to qualify for financing through an online lender than it is through a traditional bank.

For example, at New Bridge Merchant Capital, we approve 83% of the applications we receive, and having poor credit is not a problem. Our application process is fast and simple, and small businesses can also receive funding within 24 hours.

6. Gather Your Documents and Apply

Once you have decided on your lender and have determined how much capital you need, it is time for you to gather your documents and apply. To make the process simpler, you should have the following documents available as you complete your application:

• Personal and business bank statements
• Income tax forms for the last one to three years
• Business incorporation documents
• Current balance sheet
• Current profit-and-loss statement

The prospective lender will need basic information about your business, including its name, tax identification number, and address. Depending on the lender, you might also need a business plan or a proposal that outlines how you will use the funds.

A prospective lender will want to see financial statements for both you and your business, including your tax returns, business, and personal bank account statements, and documentation of your annual revenue.

You will need to provide information about all of the business owners if you share ownership of your company, including your names, addresses, and Social Security numbers.

If you are applying for a loan that requires you to put up collateral, you will need to provide information about what you are offering and its value. To do this, you might need to have the collateral professionally valued by an independent auditor. You are less likely to need to put up collateral if you go through an online lender than if you choose to apply for a loan through a bank or one that is guaranteed by the SBA.

When you do apply for a loan, you will likely be required to sign a personal guarantee. This is an agreement that you will be responsible for repaying the loan if your business defaults. If there are other owners, they will also need to sign personal guarantees.

Make sure to check with your state’s Secretary of State’s office to check whether any liens have been placed on you or your business. If you discover invalid liens, get them removed. If you have tax or business liens that are valid, try to take care of them to improve your chances of being approved for a small business loan.

Make sure that your business is in good standing and is properly registered with the Secretary of State’s office. If you haven’t registered your business, you should consider completing the process before applying for business financing. In most cases, lenders consider businesses that have gone through the incorporation and registration process as more stable than those that have not.

Some lenders might also check your social media profiles, including LinkedIn and others, to gather more information about your business. They might also read online reviews about your business. If you find negative reviews online, respond to the comments to mitigate the impact they might have.

Contact New Bridge Merchant Capital

Getting a New Jersey business loan might be critical so that you can manage and grow your business. Make sure to know why you need financing and how much your business can afford to borrow. You can then decide the type of loan you want to apply for to meet your needs. New Bridge Capital offers great alternative financing options to meet the needs of businesses and offers a streamlined application process. To learn more about the options we offer, contact us today or start your application now.