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

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How to Apply for and Get a Business Loan
Zina Kumok
Zina Kumok
Jul. 15, 20246 min read
Starting or expanding your small business often requires extra financial support.

Small business loans are a popular solution, providing the capital needed for growth, covering operational expenses, or investing in new ventures. 

Before applying, it's crucial to understand the different types of loans available and how each suits your needs. Whether you’re launching a new business, expanding operations, purchasing inventory, hiring employees, or covering cash flow gaps, knowing your goals will help you choose the right loan type and amount for your situation.

In this guide, I'll walk you through the steps of applying for a small business loan, from identifying your financing needs to selecting the right lender. 

1. Decide What Type of Business Loan You Need

Business loans come in various forms, each 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 the best match. 

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2. Establish 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. 

3. Understand How Much Funding Turnaround Time You Need

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.

4. Check Your Eligibility for a Business Loan

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 its debt obligations. A lower debt-to-income ratio suggests better financial health and 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.
  • 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.

5. Compare Business Lending Options

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, interest rates may be higher compared to traditional banks, and eligibility requirements can be more stringent.

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 best 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.

6. Gather Required 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
  • 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.

7. Submit Your Application

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 Best Business Loan

When selecting the best business loan, 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 best business loan for you.

How To Get a Business Loan from Banks

To secure a business loan from a bank, demonstrate your creditworthiness and the viability of your business. Prepare a comprehensive business plan, highlight your financial projections and collateral, and be prepared to negotiate terms with the bank. 

Types of Business Loans

Each type of business loan offers distinct advantages and is suited to different business needs. Five of the most common types of business loans include:

  • Term loans provide a lump sum of money upfront that you repay over a set period with regular payments. They are perfect for large investments like buying equipment or funding expansion projects. With predictable payments and fixed interest rates, term loans offer financial stability and clear repayment terms.
  • Lines of credit offer a revolving credit limit that can be used as needed. They're flexible for covering short-term expenses, managing cash flow fluctuations, or taking advantage of growth opportunities. You only pay interest on the amount you borrow.
  • Equipment financing allows businesses to purchase equipment or machinery without paying the full cost upfront. The equipment itself serves as collateral, making it easier to qualify for the loan.
  • Invoice financing, or accounts receivable financing, lets businesses borrow against outstanding invoices. Instead of waiting for customers to pay, businesses can get immediate cash by selling their invoices to a lender at a discount. 
  • SBA loans are government-guaranteed loans offered by approved lenders, usually banks or credit unions. The SBA guarantees a portion of the loan, reducing the lender's risk and making it easier for small businesses to qualify. There are various SBA loans: 7(a) loans for general business needs, CDC/504 loans for fixed assets like real estate or equipment, and microloans up to $50,000. These loans are ideal for businesses that may not qualify for traditional financing.

Tips to Help You Get Approved for a Business Loan

To improve your chances of securing a business loan, consider these key strategies:

  • Maintain a strong credit profile: Keep both your personal and business credit in good standing by paying bills on time and managing debt responsibly. 
  • Prepare a detailed business plan: Create a comprehensive plan outlining your business goals, market analysis, financial projections, and growth strategies. A well-prepared business plan reassures lenders of your ability to repay the loan.
  • Demonstrate positive cash flow and revenue growth: Show consistent cash flow and revenue growth to indicate financial stability and repayment capacity. Providing evidence of healthy financial performance strengthens your loan application.
  • Offer collateral to secure the loan: Use valuable assets, like real estate, equipment, or inventory, as collateral to secure the loan. Collateral reduces the lender's risk and increases your chances of approval and more favorable loan terms.
  • Build relationships with lenders and seek referrals: Establish connections with lenders and industry professionals to gain insights and recommendations. Network and seek referrals from trusted sources to improve your access to financing options and increase your chances of loan approval.

Alternatives to Small Business Loans

If traditional business loans are not feasible, consider these alternative financing options:

  • Crowdfunding: Via small contributions from many individuals, usually through platforms like Kickstarter or Indiegogo. “This can be an excellent option if you have a solid network and backers excited about your business,” says credit expert Gerri Detweiler, author of "Finance Your Own Business."
  • Angel investors: High-net-worth individuals who invest capital in startups or early-stage businesses in exchange for equity ownership or convertible debt.
  • Venture capital: Investment funds that provide capital to high-growth startups or emerging companies in exchange for equity ownership, typically targeting businesses with significant growth potential.
  • Grants: Non-repayable funds provided by government agencies, foundations, or organizations to support specific projects, research initiatives, or businesses that meet certain criteria.
  • Business credit cards: Revolving lines of credit offer convenience, flexibility, and rewards programs for purchases made by the business. “Some business credit cards offer 0% financing for up to a year or more, but after that, the rate will likely go up dramatically,” Detweiler notes.

Conclusion

Securing a business loan can be a pivotal step in launching or expanding your small business. Understanding the types of loans available, determining your financing needs, and carefully selecting the right lender are essential to finding the best fit for your business. 

By preparing a comprehensive business plan, maintaining a strong credit profile, and demonstrating financial stability, you increase your chances of approval. Remember, alternatives like crowdfunding, angel investors, and grants can also provide valuable funding. 

With thorough preparation and informed decision-making, you can confidently navigate the loan application process and secure the financial support your business needs to thrive.

Zina Kumok
Written byZina Kumok

Zina Kumok is an experienced personal finance writer now contributing to BestMoney. A former reporter, she has covered murder trials, the Final Four and everything in between. She has been featured in U.S. News & World Report, Forbes Advisor and Bankrate. Read about how she paid off $28,000 worth of student loans in three years at Conscious Coins.

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