How To Get a Business Loan: Step-by-Step Guide

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Business owners often consider small business loans as a way to finance growth or expansion. However, understanding how to get a business loan — and what lenders look for — is essential to improving your chances of approval.

Here’s what you need to know to get the loan you want for your business.

How To Get a Business Loan: 7 Step Guide

It can be difficult to qualify for small business loans because of the documentation that’s required. Investing the time to prepare your application could improve your chances of getting one. Here’s how to get a business loan in seven steps:

1. Determine How Much Funding You Need

Picking the right loan size is the first step. Keep these points in mind:

• Although it makes sense to add a cushion for unexpected expenses or cash-flow issues, excessive borrowing increases loan costs, and the payments could leave you short on cash.
• American Express recommends projecting revenue and expenses over 12 to 36 months to make sure you borrow enough, without overleveraging.
• Expenses might include staffing, inventory, equipment and infrastructure investments in addition to cash reserves.

2. Check Your Credit Score and Financials

Lenders look at both your personal credit and your business credit when you apply for a business loan. Don’t wait to be caught off guard by your lender, or you might ruin your chances of getting the loan you want.

Good To Know

Lenders typically check both your personal and business credit when reviewing your loan application.

Get ahead by pulling your credit reports early — from Experian, TransUnion, Equifax and Dun & Bradstreet — and correct any errors to improve your chances of approval.

Gather all the financial statements related to your business. Include the income statement, balance sheet and cash flow for the previous three years.

Review those statements for any variances that the bank might want explained, such as a decrease in revenues for several consecutive months. When considering applicants for a business loan, lenders prefer to see a pattern of consistent growth.

3. Choose the Right Type of Loan

There are several types of small business loans available, so it’s important to narrow down your options based on your needs.

• If you want a loan backed by the Small Business Administration, you might consider the popular 7(a) loan, which may have more flexible credit requirements than non-SBA loans — but keep in mind, you’ll still need to meet other eligibility criteria beyond credit.
• If you’re looking to cover seasonal dips in sales, a business line of credit might make more sense than a traditional term loan.
• Other financing options include accounts receivable financing, purchase order financing, trade credit and small business credit cards.

4. Find the Best Lender

The lender you choose plays an important role in determining the types of loans available to you as well as the rates and fees you’ll pay.

Your choices might include:

• SBA-approved lenders:
  • SBA-approved lenders work with the Small Business Administration to offer loans with competitive rates.
  • Because the SBA guarantees these loans, lenders are often more willing to approve borrowers who may not qualify for traditional financing.
• Credit unions:
  • As member-owned nonprofit financial institutions, credit unions offer competitive rates and flexible repayment terms.
• Online lenders:
  • Online lenders are known for quick approvals thanks to automated processes.
  • Their lower overhead costs often allow them to offer competitive rates.
  • Plus, their qualification requirements are typically more relaxed than traditional banks.
• Banks:
  • Banks cater to established businesses with solid credit.
  • While their requirements may be stricter, they often offer higher loan limits and a full suite of financial services, making it convenient to handle all your banking and borrowing in one place.

5. Gather the Documentation You’ll Need

In addition to your financial statements, you’ll need to gather other relevant documentation. This could include:

• Business plan
• Cash flow statements
• Bank statements
• Federal tax ID number
• State registrations
• Articles of incorporation
• State filings
• Financial statements of the business owners

6. Apply for the Loan

Consider submitting applications to a few backup lenders in addition to your preferred lender so you can compare rates and loan features.

Pro Tip

When applying to multiple lenders, submit all your applications within 14 days of each other so they count as a single inquiry on your credit report.

After you submit the applications, be ready to provide more details for the lender you choose, because the bank might require additional documentation or a personal interview to grant the loan.

7. Review Loan Terms Before Signing

Before accepting a loan, carefully review all the costs — not just the interest rate. Pay attention to additional fees that may apply, such as:

• Credit report fees
• Application fees
• Packaging fees
• Origination fees
• SBA guaranty fees — for government-backed loans

The interest rate and fees you receive will vary depending on:

• The type of loan
• Creditworthiness of the business
• What the loan will be used for
• Whether you provide collateral
• Personal guarantee of the business owner

Finally, review the repayment terms and check for prepayment penalties that could add unexpected costs if you pay off the loan early.

If you have multiple loan offers, compare them closely — you may be able to negotiate better terms.

Understanding Business Loans

Business loans provide companies with the capital they need to support, grow or expand their businesses.

Here are some key points to know:

• Business loans can be used to purchase equipment, inventory or commercial real estate, or to cover operating expenses like staffing and marketing.
• Loan terms vary — short-term loans are available, but terms of three to 10 years are most common. Some loans let you stretch payments out over as many as 30 years.
• Depending on the lender, loan type and creditworthiness, loans may be:
  • Secured: Backed by business or personal assets as collateral.
  • Unsecured: No collateral required.
• Business loans are available through banks, credit unions and online lenders.

6 Types of Business Loans

Whatever your funding needs, there’s likely a business loan that can meet it.

1. Term loans
   • Provide a lump sum, repayable over a fixed number of payments.
   • A term loan is a good choice for large expenses like equipment, real estate and debt consolidation.
2. SBA Loans
   • SBA loans are backed by the Small Business Administration.
   • The main type is the 7(a) loan available through SBA-approved lenders.
   • Other SBA-backed loans, such as 504 loans and Microloans, are also available.
   • Loan uses, limits and eligibility requirements vary by program.
3. Business Lines of Credit
   • Lines of credit are a type of revolving credit, like a credit card.
   • You can borrow up to your limit, pay down your balance and reuse the credit line.
   • Lines of credit are best for ongoing expenses because you can borrow only what you need at any given time and pay interest only on the amount you’ve borrowed.
4. Equipment Financing
   • This is a secured loan that provides funds to purchase equipment.
   • The purchased equipment serves as collateral, similar to a car loan.
   • If the equipment loan only covers a percentage of the equipment’s value, you’ll need to make a down payment to cover the rest.
5. Invoice Financing
   • Your customer invoices are an asset, and you can borrow against them with invoice financing.
   • Businesses that have to wait a long time for payment can use this type of financing to protect cash flow.
6. Merchant Cash Advances
   • These are cash advances against future credit card sales.
   • The provider collects a percentage of daily credit card transactions as repayment for the advance.
   • The repayment method makes this kind of loan easier to qualify for, so it’s worth considering if you’re a new business owner, need cash quickly or have credit issues preventing you from getting a traditional loan.

Pros and Cons of Getting a Business Loan

A business loan can mean the difference between a thriving business and a failing one. But borrowing money also has drawbacks you should consider.

Tips for Improving Your Business Loan Approval Chances

The way you prepare for a loan can have a positive impact on the lender’s credit decision. Use these tips to give yourself the best chance at being approved.

• Improve your credit score: Pay bills on time, pay down existing debt and avoid taking out new credit until you’re ready to apply for a business loan.
• Increase revenue: Look for ways to boost profits and maintain healthy cash flow.
• Create a detailed business plan: Show how you’ll use the funds, how those activities will increase revenue and how you’ll repay the loan.
• Have collateral ready: You’ll need it if you’re applying for a secured loan.

Final Take

Preparation is key to securing the best business loan for your new or established company.

• First, define your needs — know how much you need and exactly what you need it for.
• Investigate loan options and lenders, and get quotes from multiple lenders to find the lowest rates combined with the best terms and features for your needs.
• Finally, make sure you’ve got your business plan and all of your personal and business financial documents ready to present to lenders.

Brian Hill contributed to the reporting for this article.

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