Small BusinessOperationsFunding

How to apply for a small business loan in easy steps

As a small business owner, you may encounter situations where it's helpful to have additional cash on hand to manage the ups and downs of your operation.

A business loan may provide the cash flow you need to help:

  • Launch new products and services;
  • Open a new location;
  • Renovate an existing location;
  • Purchase equipment and inventory;
  • Hire, train, and pay staff;
  • Execute new marketing and advertising campaigns;
  • Help manage a cash flow crunch without laying off employees or closing locations

In this guide, we'll help you understand what questions to ask when evaluating a business loan, loan option considerations, and how to get the application process started.

Questions to consider before choosing a small business loan

Understanding small business loans starts with evaluating what you need. Before applying for a business loan, first assess your current financial situation and requirements so you can focus your effort on applying for the business loan that best fits your needs.

This process can help you create an understanding of what you need and what you'll use the financing for. This step may reveal that a loan isn't necessary, you need a smaller amount than originally anticipated, or that the money can be found in other ways, such as bootstrapping, grants, or fundraising.

Asking some of these questions may help you assess your financing needs:

  • What do you need funding for?
  • How much business financing do you need?
  • How fast do you need it?
  • How long do you want to be making payments?
  • How long will it take you to pay it back?
  • How long have you been in business?
  • What is the current financial shape of your business?
  • What is your credit score?
  • Do you have any other outstanding loans or financial obligations?
  • Are you looking for a short- or long-term loan?

What are some factors that business loan lenders look for in applicants?

Once you've determined your needs, you should understand some factors that small business lenders look for when evaluating applicants:

  • Creditworthiness: Lenders typically evaluate your past business credit performance, personal credit score, and business credit score. The more you can improve your credit score before you apply, typically the better the credit options.
  • Small business cash flow: Consider the ability of your business to generate the cash required to pay the business loan back. They will likely want to know details about how you manage earnings, whether you pay your bills on time, and how you spend your profits. Think about how you manage your cash flow to help your business become a more attractive applicant.
  • Business age: Many lenders want to know how long your business has been operating — with the assumption that a business that has been around the block knows what they are doing and is less likely at risk of default. If your business is less than one year, you may want to explore startup-specific loans.
  • Debt-to-income ratio: Before providing financing options, lenders often evaluate how much debt you have in addition to how much you plan to take on with the loan. They will then compare it to your operating income to see if you have enough cash coming in to pay back the loan while still operating your business. If your debt-to-income ratio is too low, you may need to borrow less, reduce your costs, or increase your income.
  • Collateral: Collateral can include equipment, vehicles, and real estate and may be used as a personal guarantee where assets may be liquidated to pay off the loan in the event of default.
  • Industry: Lenders may look beyond your business to evaluate your business industry's overall economic prospects.

Different types of small business loans

Make sure you understand the different types of small business financing options available and choose the one that makes the most sense for you. Some of the most common small business loans include:

  • Small Business Administration loans and programs: The SBA guarantees loans for small businesses, so lenders aren't at risk of default. Expand your business with SBA loan options such as the 7(a) loan program, which offers small businesses up to $5 million in funding, or a microloan program, which offers up to $50,000 in funding. While they traditionally have lower rates and down-payment requirements, SBA-backed loans will often have strict requirements such as business performance and the personal credit rate of the business owner.
  • Term loans: Provides a one-time lump sum of money, making it ideal for purchasing a specific item. This loan is repaid with a loan fee or interest over a predetermined period.
  • Small business lines of credit: Alternatively, a business line of credit allows you to borrow up to a certain limit. You then only have to pay back what you used plus interest. This type of loan is similar to a credit card but may have more favorable terms, helpful if you need to overcome a crash crunch or pay for ongoing expenses like inventory.
  • Equipment financing: Specifically for business equipment purchases, such as vehicles, computers, and machinery. Since you are borrowing for an asset, you may be at risk of losing the asset if you can't repay the loan.
  • Commercial real estate loans: This type of loan is similar to a mortgage you take for a home, but instead is used to finance the property purchase for your business, such as a factory, warehouse, or store.
  • Cash flow loans: These types of loans may include merchant cash advances, invoice financing, and short-term loans. They borrow against the money you are expected to earn in the future, which may make them useful for managing short-term cash flow needs.
  • Invoice factoring: This type of loan borrows against outstanding invoices, providing access to money faster than the 30 - 90 days of the typical invoice payment term. In exchange for selling your outstanding receivables, you pay a factoring fee that is a percentage of the invoice.

Types of business loans to choose from

There are many different types of small business loan you can choose from, each with its own advantages/disadvantages, depending on your needs. Options include:

  • Traditional: Traditional banks and credit unions with brick-and-mortar locations typically offer better rates and terms, along with higher loan amounts and credit limits than their online competitors. However, they may also require a higher credit score and may have stricter small business application criteria.
  • Online: An online lender may provide faster funding than traditional banks.
  • Lending marketplaces: Loan marketplaces help connect borrowers with a variety of different lenders, potentially making it easier to find funding.
  • Peer-to-peer: Similarly, P2P lenders can make it easier to borrow directly from other people or investors instead of a traditional bank.

Small business loan application checklist

No matter what type of financing you decide to pursue, small business financing solutions require some basic information to determine if your business is eligible. You can check your business loan eligibility using this tool.1 The SBA also has a checklist of items you'll need to be prepared to share during their small loan application process, including:

  • Information about your business, such as business name, address, and tax ID;
  • Financial statements that include annual revenue, profit and loss statements, tax returns, and bank account statements;
  • Personal information for all the owners of the business, including names, Social Security numbers, and addresses;
  • Information about the type of collateral you're offering or other personal guarantee information;
  • Business license (if applicable);
  • A copy of your business plan.

Compare business loan costs

Small business financing solutions can have a wide range of cost structures. Make sure you fully understand your business loan costs:

  • Total cost: What is the total amount you need to pay back, including the loan fee?
  • Fees: Are there origination fees? Late fees? Early repayment fees?

Submit your business loan application

Once you've collected your information and chosen a lender, it's time to fill out the application. Keep in mind that each lender will have their own application process. Each lender will have its own process for making a decision, along with its own timelines.

Don't let the process of applying for a business loan overwhelm you. The same persistence you used to start your business will help you navigate the business loan application process.

Explore more tools and insights for running and growing your business here.

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