How to Apply for a Small Business Loan in 5 Steps

You’re a small business owner, and you know the time has come to explore funding options. And while you’re sure there are resources available, learning how to apply for a small business loan can be equally challenging.
Don’t worry — we’ve got you covered. Not only are there a wide range of options available for small business loans, but there are also only a handful of simple steps you need to take to get moving with your business funding.
Small businesses are an essential part of the economy and continue to grow amid economic uncertainty. In 2020, there were over 4.3 million applications for new businesses, which was up almost one million compared to 2019, according to the Census Bureau’s Business Formation Statistics.
But not all businesses can hit the ground running without any financial backing or push. And sometimes, the most established business needs a little flexibility with finances. Whether you’re a startup or seasoned entrepreneur, you need to know how to grab hold of a financial lifeline.
This is where a small business loan steps in. The funding is provided for a variety of business needs. From commercial real estate space to equipment, there are loan programs for almost every type of financial need a small business could experience.
The only question is — how do you get started?

Steps needed to apply for a business loan

Some business loans, such as those from the Small Business Administration, can take weeks or months to complete from start to finish. Some options may only take a couple of days. This is why you need to plan and research ahead of time to understand the timing and documents required for a complete application.

1. Understand your creditworthiness

Lenders for small business loans consider various factors when determining if they will loan your business money. While you may need funding to fuel many of your business dreams, the lenders will be looking at how risky it is to lend you money.
  • Credit score: Naturally, the credit score plays a significant role in determining loan approval. Your personal credit score and business credit score are both necessary and will be reviewed. You can review your credit score with the three major credit bureaus - Experian, Equifax, and TransUnion. If you have a business profile established for business credit, you can also check the scores with Equifax and Experian. You can also review business profiles with Dun & Bradstreet.
  • Credit history: Like a personal loan or mortgage, credit history is also factored into the equation for creditworthiness. The length of history and the details behind the credit usage will be reviewed. This applies to both business and personal credit.
  • Cash flow: Cash flow is vital to a lender. The lender will want to see bank statements, past sales, expenses, outstanding invoices, and possibly more to understand how much revenue is coming in or going out. This helps assure a lender your business can meet repayment requirements.
  • Collateral: Collateral is typically required when securing a loan from a traditional bank or credit union, and in some cases with an SBA loan. Collateral usually comes in the form of allowing your business assets to be liquidated or your personal property to cover non-payments.
  • Current customer: Do you have an existing relationship with the lender? If so, this may be factored into the loan application. This is key not only for the lender but also for your business. You may find the loan application process more manageable with an institution you already do business with.
Other factors reviewed for approval include the industry of the business. Some industries may be harder to secure financing for versus others, such as gambling. Overall, understanding your creditworthiness and appeal before starting the application process will shine a light on areas you may need to improve or consider before moving forward with a small business loan.

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2. Determine the type of loan and financing you need

Business loans are so overwhelming because of the sheer number of options available to owners. Before starting a small business loan application, you should know the difference between the various available loan options. A few of the popular ones include:
  • Business line of credit: If you’re interested in a revolving line of credit where you can borrow money as needed, then a business line of credit may be the best option. You do not need collateral to secure funding, but you do need strong credit - both with your personal credit score and business.
  • Term loans: These loans offer a lump sum payment upfront so you can turn around and use the money towards business expenses. The repayment plan will be defined by a certain number of months or years and an interest rate. You do need collateral, and sometimes a down payment is also required.
  • Working capital loans: As the name suggests, these loans are specifically funded for working capital expenses and covering a company’s everyday operational costs.
  • Invoice factoring: This is a process where you can borrow against the outstanding invoice payments you are owed from other companies.
  • Small Business Administration (SBA) loans: These loans are available through traditional banks and online lenders and are partially backed by the federal government. There are several loan options under the SBA umbrella, ranging from short-term loans to disaster relief. The SBA also handles the applications submitted by lenders for the Paycheck Protection Program, or PPP loans. Although this program ended on May 31, 2021, there are still funding options available for certain small business owners.

3. Research and decide which lender to choose

Not only is the type of loan a significant variable, but so is the lender. Once you’ve decided which path you want to go down, it helps you focus on which lenders to consider.
As you’re narrowing down your choices for lenders, ask yourself the following questions:
  • What is the minimum FICO score required?
  • Which lender do I already have a relationship with?
  • How much is the loan amount I need?
  • What are the repayment terms and interest rates?
  • What do I need for collateral?
  • When would funds be available if approved?

Direct lenders

Using a direct lender means applying with a company that provides the funds and does not rely on a third party. Examples include traditional banks, credit unions, or investors. Each one will have an assortment of small business loan products, as well as their requirements for eligibility.
Online lenders are another example of direct lending options. OnDeck, Funding Circle, and BlueVine are a few examples of online lenders. When reviewing these options (and there are plenty of choices out there), be sure the online lender is offering the type of loan you’re interested in — many of them only specialize in a few types of loans.

Marketplace

Another option for funding is to submit one application to a lending marketplace, such as Lendio and Biz2Credit, and allow lenders to compete for your business. You will receive responses from qualifying lenders who may be a better fit for your business needs or are willing to work with your credit profile.

Peer-to-peer lending

This is a growing option of basically crowdfunding your small business financing. Kiva is one example of this for both crowdsourcing and microloans. The decision to support your loan is often based on a personal appeal rather than a minimum FICO score or other factors used by traditional lenders.

4. Gather your application materials

If you’ve ever applied for a mortgage or vehicle loan, you know a long list of documentation needed to complete the application process. However, if you know what is required beforehand, you can gather the materials over time instead of doing everything simultaneously.
Each lender is different. However, there are a specific set of documents almost all will require. This includes:
  • Basic information about the business: This includes all the mundane information regarding the location and tax ID. But could also have more in-depth requests such as the business plan.
  • Financial statements: This includes financial statements for both personal and business. For the business owners, there may be requests to see bank account information and bank statements. Any financial documentation related to the company, such as profit and loss statements, balance statements, annual revenue, and tax returns, will be needed to evaluate the business.
  • Business owner information: This includes knowing the percentage of each business owner’s stake, social security numbers, and addresses of each owner.
The SBA has put together a helpful checklist of items needed for an application. Even if you are not applying for an SBA loan, this is an excellent resource for reviewing required materials.

5. Review your loan application and follow instructions before submitting

Once you’ve gathered all the necessary information, taking time to review your application may save you time down the road. This is particularly true if you’re going through an SBA loan process where the application is quite lengthy.
It’s also a wise idea to have someone else review your business information and application before you submit it. A Small Business Development Center is a great place to start. These are local chapters of the SBA and help with a range of topics, including business financing.
The critical part of this step is ensuring you fill out the lender’s application the exact way it is asked. The less you leave open for interpretation and the more facts you provide, the quicker the loan process.
Once you’re confident you have all the materials requested and the most accurate information regarding your business, then it’s time to submit your application. This can be the most nerve-wracking part, waiting for the answer to find out if you’ve been approved. But by taking the time to understand steps one through five, you’ve already increased your chances.

The bottom line

Understanding how to apply for a small business loan is not always a straightforward task. It takes time, effort, and quite a bit of research. The last thing you want to do is jump into a financial obligation without understanding your business and credit impact. When the time is right for you to seek additional financing, following these five steps will get you prepared, so you can get back to running the business you’ve worked so hard to build.

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