How to Apply For and Get a Business Loan in 7 Steps

In this guide, you'll learn how to apply for a business loan in 7 clear steps, from choosing the right loan type to submitting a strong application that improves your chances of getting approved.

Step 1: Choose the Right Type of Business Loan

Our best business loan lenders come with different terms, interest rates, and eligibility requirements. Common types include term loans, lines of credit, equipment financing, invoice financing, and U.S. Small Business Administration (SBA) loans. As you decide which type of loan you need, consider your business goals and financial situation to find a suitable match.

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Step 2: Decide How Much You Need to Borrow

Knowing exactly how much you need to start your business is essential because different loans have different limits. For instance, SBA microloans cap at $50,000, while regular SBA loans can go up to $5.5 million. Be realistic and conservative in your estimates, considering both immediate expenses and future growth.

Step 3: Understand Your Timeline for Funding

Understanding the timeline for receiving funds is crucial, especially if you have urgent financial needs. Different lenders have varying processing times. Fast approval loans, such as those from online lenders, might be suitable for immediate needs, whereas traditional bank loans might take longer but often offer more favorable terms. Plan accordingly to ensure your business gets the funds when needed.

Step 4: Check Your Business Loan Eligibility

Before applying for a loan, assess your eligibility based on the lender's requirements to save time and effort. Here are key factors lenders consider:

• Credit score: Many loans have a minimum requirement. A higher credit score indicates a lower risk of default and can result in better loan terms.
• Time in business: Some lenders require a minimum duration in business. Many lenders prefer businesses that have been operational for at least one to two years, though some go as low as six months.
• Annual Revenue: Lenders assess a business’s annual revenue to ensure it generates sufficient income to repay the loan. Higher revenue increases the likelihood of loan approval and better terms.
• Debt-to-Income Ratio: This ratio helps lenders understand the balance between the borrower’s income and their debt obligations. A lower debt-to-income ratio suggests better financial health and the ability to repay the loan.
• Collateral: Some loans require collateral, such as equipment, real estate, or other assets, to secure the loan. This reduces the lender’s risk and can improve the chances of loan approval. If you’re exploring financing options but don’t have assets to secure your loan, learn more about how to get a small business loan without collateral.
• Business Plan and Purpose of Loan: Lenders often review the business plan for the intended use of the loan funds. A straightforward and practical plan is crucial.
• Cash Flow: Consistent and positive cash flow demonstrates the business’s ability to manage its finances and make payments. Lenders look for strong cash flow as an indicator of financial health.

Step 5: Compare Business Lenders and Loan Offers

When it comes to securing funding for your small business, understanding the various lending options is important. The primary business lending options are:

Online Lenders

These lenders often offer a range of loan products, including term loans, lines of credit, and merchant cash advances. Online lenders often offer a streamlined application process with minimal paperwork and quick funding. However, rates can be higher than traditional banks, and while eligibility may be more flexible, terms can be less favorable, so compare total cost carefully.

Traditional Banks

Traditional banks typically offer lower interest rates and longer repayment terms but require extensive documentation, stricter eligibility criteria, and a rigorous application process. Approval can take weeks or even months. Traditional bank loans are optimal for established businesses with strong credit histories and the ability to wait for funding.

SBA Lenders

The SBA partners with banks and other lenders to offer loans that are partially guaranteed by the government. This guarantee reduces lender risk, allowing them to offer lower interest rates and longer repayment terms. SBA loans are versatile and can be used for various business needs, from working capital to equipment purchases. The application process can be lengthy and requires detailed financial documentation.

Microlenders

Microlenders specialize in providing small loans — typically up to $50,000 — to startups and small businesses with limited credit history. These lenders often focus on helping underserved communities and in many cases provide additional support such as business training and mentoring. Interest rates for microloans can be higher than those of traditional banks.

Government Lenders

Government agencies, such as state or local economic development organizations, may offer loans or grants to support small business growth and, by extension, economic growth. The application process for government loans can be competitive and time-consuming, but favorable terms and potential for non-repayable grants make them attractive.

Step 6: Gather All Required Financial Documents

Before applying for a business loan, gather the necessary documentation to support your application. Common documents include:

• Business financial statements such as profit and loss statements, balance sheets, and cash flow statements
• Credit reports, including both personal and business
• Tax returns going back usually two to three years
• Business plan and personal financial statements (e.g., SBA Form 413)
• Legal documents such as business licenses, articles of incorporation, and leases
• Collateral documentation like real estate deeds, inventory lists, and equipment valuations
• Accounts receivable and payable aging reports, which help lenders understand short-term cash flow management

Organizing these documents in advance can expedite the process.

Step 7: Submit Your Application and Follow Up

Once you've selected a lender and determined your eligibility, it's time to complete a loan application. Depending on the lender, this can be done in person, by phone, or online.

Best practices for a successful application include gathering necessary documents, clearly outlining your business plan, and maintaining a good credit score. Provide accurate and complete information to improve your chances of approval. Be prepared to answer questions about your business, financial history, and intended use of funds.

Before you submit, consider having a financial advisor review your loan application to ensure all information is accurate and complete. This step can significantly improve your chances of approval.

How To Choose the Right Business Loan

When selecting the optimal business loan for you, consider more than the interest rate. Assess the overall cost of borrowing, including fees, repayment terms, and interest rates, and how those details fit with your cash flow.

Also, consulting with a financial advisor is important to gain insights and ensure an informed decision. By carefully evaluating your options, preparing thoroughly, and seeking expert advice, you can choose the most suitable business loan for you.

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