How to Get a Business Loan in 7 Simple Steps (2023)
Starting your own business is an exciting proposition.
What could be better than becoming your own boss, setting your working hours, and deciding how to best move the company forward?
However, many new business owners find themselves stuck in the beginning stages when they realize what’s needed to build business credit fast and eventually start seeing a return on their business efforts.
In the initial stages, startup business credit cards, or even a specially created LLC checking account, might be the way forward.
However, these types of credit cards or bank accounts are not always enough.
The truth is that many small businesses (up much as 82%) fail due to the bad management of cash flow, in which case one might need a business loan to keep a business moving forward.
A business loan might be the one thing that turns a failing business into a thriving one.
In this article, I will talk about how to get a business loan in a step-by-step format so that those interested can make the right decision for their company. Let’s get right into it.
Step By Step To Getting a Business Loan
Here are the steps you should take to decide whether getting a small business loan is the right choice for your company.
Step 1: Define The Reasons You Want To Take Out A Loan
Despite offering a much-needed cash injection, one should not take business loans lightly.
Before going to a bank or another type of lender, you should have a solid grasp of the underlying problems your company is facing and how a business loan will help you overcome them.
For example, if it’s just that new business credit cards aren’t carrying enough weight in the cash flow department, then there may be other loan options for getting more funds until profits can cover expenses.
However, if you need more cash to help continue operations from day to day, a business loan might make sense right away.
Only when you are sure that taking out a business loan is your best course of action should you move forward with the process of actually applying for one.
You might be repaying small business loans for a long time, so you’ll want to make sure that such a loan is the right decision moving forward.
Step 2: Deeply Understand What Banks Want To See
If you’ve taken personal loans before, you might find that a mindset shift is needed when comparing what’s required in both instances.
Whether you opt for online lenders or traditional banks, the process will differ from getting a personal loan.
Banks and other lenders want to see that your company is healthy and has a good chance of succeeding in the long term.
The below are some crucial factors to keep in mind:
How Long Has Your Business Been Operational?
If you are still in the early stages of a startup, lenders will want to see strong evidence that your business will likely succeed.
This may mean showing them any records of profits and losses or even giving them access to your personal credit reports.
Either way, if the company is brand new, it might be best to save up some money or figure out another way around your current issue.
Small business financing isn’t always easy. Make sure you are committed to taking out a loan before applying for one.
What Is Your Current Credit Score?
Your business credit score is often a great indicator of how much interest you’ll pay on a business loan.
Traditional banks use FICO scores from the 300-850 range, and online providers may use a system based on similar factors.
If your credit history isn’t ideal or your score is too low, you might not be able to qualify for a loan at all and/or will have to pay a higher annual percentage rate than someone with a higher score.
This doesn’t mean that you can’t get a business loan if you have bad credit or your credit score isn’t as high as it could be.
It just means that some lenders may require some extra work on your part before they’ll finalize the deal.
You can improve business credit scores with time and take good care of your personal credit score simultaneously, so it’s important not to give up too soon.
How Much Money Do You Make, And What Is Your Current Cash Flow Situation?
This will most likely be one of the first questions a lender asks when you initially apply for a loan.
Your income and cash flow projections will play a massive role in finding out whether or not you’ll qualify for specific lines of credit.
If your business isn’t making much right now, this might create problems if the bank wants to see consistent revenue before approving you for a small business loan.
Your business loan application will be much stronger if you show that your business is already making money and has room for growth, even if it’s slow.
Do You Have Potential Collateral?
If you have other financial backing lined up, this will influence your eligibility and the loan amount of financial support that a bank might provide.
Collateral doesn’t just mean having an expensive car as collateral on loan; it could be things like stocks or property titles as well.
The more collateral you have to offer up if necessary, the higher your chances of getting your desired line of credit and repaying it in time without experiencing any issues.
What Industry Are You Involved In?
Industry-specific lending is becoming more and more common for small business owners.
Many banks offer specialized lines of credit that are better suited for specific industries.
This means that the lender already knows what your business needs are in advance and is even more likely to approve you if you meet particular conditions.
It’s important to remember that when applying for a loan in an unfamiliar industry, you’ll need to provide information about your business operations alongside your financials.
For example, if you are applying for a commercial real estate loan, you’ll have to show the bank that you have plenty of experience in real estate.
If not, they might not want to take a chance with your business.
As another example, if you are applying for a business loan through a marine industry leader, the bank will want to see copies of invoices from boat repairs over the past few years, along with your other documents.
What Are Your Goals For This Loan?
Do you plan on expanding your business, purchasing equipment, etc.?
It’s essential to make your loan provider understand why you’re applying for a loan when applying for one.
A common mistake that people make is using their businesses’ funds as collateral without being entirely sure how they will use them.
Creating smart goals can help you avoid this mistake and maintain better financial control over your business.
Once you know what you need the money for specifically, balancing annual revenue generation alongside providing different services or products will become much more manageable.
Where Are You Located, And Is There Anything Unique About Your Location?
Depending on the type of industry, businesses found in a strategic location tend to have a more favorable chance of achieving their goals.
However, if your business is based out of a small town or out in the middle of nowhere, this doesn’t automatically disqualify it from getting financial assistance.
Many banks are willing to work with geographically isolated businesses if they can see potential value in doing so.
For example, if you’re the only retail store within an hour’s drive, then some banks might be more willing to approve your loan because of increased exposure opportunities.
Step 3: Do The Initial Research
Seeking out the correct information is only the beginning of getting approved for a loan.
Once you have a basic idea of what type of lending opportunities would be most appropriate for your business, it’s time to figure out which types of bank loans you should be applying for.
The first step is to research various types of loans and their requirements.
The American Bankers Association (ABA) provides excellent resources that can help you narrow down lending options according to your needs.
Choosing the right type of loan to apply for will place you in a better position possible by highlighting what exactly it is that you want from the loan.
Let’s look at the various types of loans you might want to go for.
Traditional Bank Loans
Financial institutions such as banks and credit unions offer loans with various terms, but they all generally share the exact requirements.
One commonality among traditional bank loans is that interest rates can vary depending on how risky your business appears to be.
The more stable and secure it seems to be, the better your chances of securing a favorable rate.
Other reasons for seeing higher interest rates include:
- Low down payment (or none at all)
- Exercise of caution or distrust towards lenders
- Short history as a business owner
Traditional bank loan applicants must meet specific qualifications according to their local banking union to qualify for financing.
Applicants should ensure they have sufficient details about what types of funds are available and what kinds of businesses they are typically used for.
Medium-Term Loans (Over 1 Year)
Medium-term loans can be an excellent choice for small business owners who plan on using the money to purchase long-term assets like real estate or equipment.
These types of loans typically come with lower interest rates than others, but there will usually be other conditions that must be met to receive one.
Applicants should remember that medium-term borrowing should only be used for purchases that will generate income over a set period rather than as quick short-term cash injections.
The financial institution will want to ensure that the investment is sound and generate enough interest payments and principal repayment.
While these loans are considered less risky, it’s important to remember that your credibility with a bank or credit union may be permanently affected if you don’t make timely repayments during the agreed-upon schedule.
The U.S. Small Business Administration (SBA) can provide financial assistance in different forms depending on what type of business you’re running.
Generally speaking, they offer three types of business loans designed to help small companies succeed at various stages in their life cycle: startup, growing, or established.
If you’re starting an entirely new company from scratch, then the 7(a) Loan Program, which provides financing up to $5 million, might be the right choice for you.
As your company begins to grow, you can take advantage of other financial assistance options such as 7(m) Loans, designed to provide up to $50,000 in capital for short-term loans, providing for working capital needs.
SBA loans typically have more restrictive requirements than other types of financing.
However, they do tend to carry lower interest rates and can help build and improve your business credit score over time.
One potential downside is that there may be a limit on how much money you can borrow or qualify for, depending on how successful your overall business is.
At the opposite end of the spectrum from traditional bank loans is microfinancing, a growing trend among small business owners who need smaller sums of capital for their businesses.
Any financing that falls under the $100,000 mark might be considered as a microloan and can come from various sources such as non-profit organizations, corporations, or government agencies.
In some cases, it may even be possible to get a microloan from your local bank branch if they have successfully lent out funds in this manner before.
With a microloan, you will likely have more flexible requirements than other forms of traditional bank loans.
For instance, owners don’t always have to provide collateral on small business funding options.
Also, repayment periods tend to be shorter, which can be especially helpful during periods of slower business.
Advantages of micro-financing compared to other small business funding options:
- Interest rates are often lower than other financing options.
- As fewer restrictions on what types of businesses can receive funding are in place, it is more accessible for small companies.
Disadvantages of micro-financing compared to other small business funding options:
- Many microloans have higher interest rates than traditional bank loans.
- The challenging part about getting a microloan is finding the right non-profit or organization that can provide you with one.
Business lines of credit
If you need more flexibility when approaching your financing, a business line of credit is probably the most beneficial small business funding solution available.
A line of credit allows you to borrow money from a bank or other financial institution at any time during its term.
This can be anywhere from one month to five years – and essentially pay it back as needed.
For example, if you qualify for a two-year loan with a bank, and at the end of that period, your account balance has never gone into negative territory (i.e., below zero), then there would be no further payments owed.
Moreover, if you’re finishing up paying off your car after two years and that timing is perfect for purchasing a new one, you can use your line of credit to help fund the purchase – without having to take out another loan.
With overdraft protection more easily managed when it comes from a bank or lender than other sources, you typically have more freedom in how much money you withdraw month-to-month.
Lines of credit are usually relatively inexpensive compared to traditional loans.
If you need more capital to upgrade your equipment or technology, you may consider an equipment financing solution.
This type of small business funding can help owners acquire the tools they need at a competitive interest rate and flexible repayment terms.
Ensure that competitive interest rates are part of the equipment financing solution you choose.
If you find yourself in a pinch, try securing merchant cash advances on your credit cards.
It may be possible for small business owners to secure an advance against their credit card account.
Businesses can do this by contacting the customer service department on their credit card company’s website.
Cash advances are usually offered at higher interest rates than traditional loans; however, they can be perfect for businesses that need money fast.
There are some downsides to consider with cash advances: interest fees accumulate quickly if not paid back on time.
Additionally, many businesses will have difficulty getting approved for a cash advance since they typically require good to excellent credit scores and healthy accounts receivables records.
Another excellent strategy for finding small business funding is to take advantage of peer-to-peer lending platforms.
The most significant difference between peer-to-peer lending and other types of financing is that you have the opportunity to get funded by an extensive network instead of just one financial institution.
Borrowing money through a peer-to-peer lender also has some extra advantages over more traditional forms of borrowing:
- The process is quick.
- There’s no collateral required.
- Accounts receivables can help bolster your case for securing a loan.
- Costs are generally lower than those associated with conventional loans.
There are some, however, downsides to keep in mind: borrowers must have strong credit scores and a proven business track record.
Additionally, interest rates can be high if you do not qualify for standard origination discounts or if the lender views your company as a higher risk due to your financial situation.
Business Development Companies (BDCs)
Another potential source for small business funding is through a BDC. A BDC is a publicly-traded investment firm that operates like private equity or venture capital fund.
In other words, it makes investments in privately-owned companies which typically have been unable to secure financing from more traditional lenders such as banks and credit unions.
Leveraged buyouts, venture capital, mezzanine financing, and other types of funding may be available.
BDCs can be an excellent option for businesses with a strong track record who need funding to buy or grow small businesses.
Keep in mind that this type of financing is not cheap – the cost of borrowing from a BDC tends to have higher interest rates than conventional loans.
Step 4: Pick The Lender That Offers The Best Terms For Your Business.
One of the best strategies to consider if you want to secure a small business loan is to research and compare different lenders before deciding which one is the best option for you.
Lenders will have different policies, procedures, and eligibility requirements – do not assume that they will be willing or able to offer you financing.
You can typically find out more about their lending practices by looking at websites and reading reviews from other small business owners who have been in a similar position.
It’s also worth checking with alternative funding sources as circumstances may change over time.
For example, rates could increase or decrease depending on what interest rates are doing overall.
Compare and contrast small-business lenders to find the best loan type, terms, and rate for your business.
Also, ensure that you get personalized quotes from different providers when comparing rates and loans.
Sometimes, having an online business bank account with a specific lending institution could mean you get a lower monthly rate when taking out a loan.
Step 5: Ensure You Have All Your Documents In Order.
Now that you’ve chosen a lender, you’ll have to finalize the details of your loan before it can be approved and disbursed.
This typically includes having a conversation with a representative from the company to conduct a verification process – this might consist of verifying information such as your legal business name and address.
You’ll also need to ensure you have all your documents and paperwork in order.
According to financial experts, you typically need the following documents on hand when applying for a business loan.
Business And Personal Tax Returns.
This is required because lenders want to make sure you will repay the loan as promised.
Just like when you’re applying for a personal bank loan, your application must be accurate and complete.
This includes providing all the information that the lender needs to process your request.
If there are any errors or omissions, it could mean the application might not be approved at all.
Be sure to keep copies of everything you send in case questions arise later on down the road.
This way, you won’t have any problems if something needs to be changed later in your application.
Business And Personal Bank Statements.
Lenders also want to make sure that you have a stable source of income and enough money in your bank account to repay the loan.
This is why they will likely ask for any available bank statements from your business and personal accounts.
In addition, if you own a brick-and-mortar location or other kind of property, lenders may also ask for proof of ownership, such as a title deed or a statement from the county clerk’s office.
They might also want tax assessment records from the current year.
Business Financial Statements.
After looking at your past two years’ worth of tax returns, an underwriter will determine whether or not to approve your loan request based on your income and other necessary documents.
In addition to tax returns, lenders will also want you to provide a business financial statement for your business, which is a statement that shows all the money coming in and going out of the company over a certain period.
This should include revenue from sales, expenses, assets, and liabilities.
These can be prepared by accountants or other professionals specializing in this field, so they’ll have accurate numbers based on your current year’s performance.
Business Legal Documents
Lenders might require such articles as incorporation, commercial lease, franchise agreement, etc.
All of these might be required by lenders to verify your legal business structure.
In addition, they might ask for a copy of the commercial lease so they can see where you’re operating from.
You should note that these documents may vary depending on the type of loan you’re applying for (e.g., SBA loans typically require additional documentation).
You’ll sometimes also need to provide a complete and detailed business plan as part of your bank loan application package.
This is an overview of what you intend to do with the money and includes how much money you need, why you need it, and your projected repayment schedule.
Using the right business plan software allows you to help lenders assess your current situation and see how well you’re doing in terms of your business goals, plans, and forecasts.
Lenders will also want to know if you’ve been turned down by other sources or what your credit score is like before they take the time to review your application.
In general, when looking at your loan request, underwriters will consider whether or not there’s enough data from all these documents to make a decision.
If everything checks out and it looks like you’ll be able to afford the monthly payments on the loan, then your application has a chance of being approved just fine.
Step 6: Apply For A Business Loan.
After you’ve gathered all the necessary documents and information, it’s time to apply for your business loan.
If you’re applying with an intermediary lender such as a bank or credit union, then you’ll need to contact them directly and fill out their online or paper application.
Other lenders, such as factoring companies, might prefer that you submit everything through email so they can print out the materials and forward them to their underwriting department for review.
It should take anywhere from 4-8 weeks for them to go over your application package before making a final decision about whether or not to approve your request.
Step 7: Get The Funds.
After approval is complete, the intermediary lender will send your loan check to you to start running your business.
However, there’s a catch: in addition to repayment fees, be ready for additional costs such as origination fees or administrative service fees, which may be required during the application process.
In any case, once everything is complete, you’ll have money that will enable your company to grow and flourish.
Bonus Tip: Don’t Stop Building Your Financial Profile After Your Loan Is Approved.
It goes without saying that the better your business profile looks and performs, the more likely you’ll be able to acquire additional funding in the future.
Even after you’ve received the loan, continue building your financial profile by consistently paying back your debt on time and building up a good credit score.
This way, when you approach lenders for new financing options such as line-of-credit or invoice factoring, they’ll see how well you’re doing and be more likely to help finance your next big idea.
Moreover, getting a business loan is just one step of the equation.
For your startup company to have the most excellent chance of success, you’ll need to manage your cash effectively and maintain a healthy financial status at all times.
Keep track of everything of essential items such as:
- Cash flow projections.
- Monthly projections.
- Track any pending payments using invoice software.
- Monitor payment schedules and debt-repayment milestones to stay on track.
All of this can help you keep tabs on how your company is doing every step of the way.
In addition, if something unexpected comes up or if you’re not sure whether or not your project will be profitable enough in the future, then you may want to consider other financing options down the line.
How To Get A Business Loan – FAQ
What Are Unsecured Business Loans?
Unsecured business loans are also known as signature loans.
They don’t require assets or collateral to be used for down payments. This means that you’re not required to use any items as a means of repaying what you owe.
What Is A Personal Guarantee?
A personal guarantee is an agreement where the signers personally promise to repay the borrowed amount if the business can’t.
Suppose you’re applying for an unsecured business loan.
In that case, chances are they’ll ask for this guarantee as a way of protecting their investment should unforeseen events happen and your business ceases to exist.
Thus, it is highly advised that you avoid personal guarantees if possible.
What Does Refinance Mean?
When you refinance, you’re taking out a new loan to pay off existing debt or finance additional expenses for your company.
This means it’s possible to receive more than one unsecured business loan or take out an unsecured business loan refinance.
By leveraging your financial profile and history, you’ll be able to acquire all the funds you need for success.
Getting a business loan isn’t easy – especially when you’re just starting.
By following the steps above, you’ll be able to get a business loan that will help you scale your company into something bigger and more profitable.
Looking forward and knowing what comes next in the process ensures that you stay on track and are always ready to proceed when the time comes.
Have you ever gotten a business loan before? What method did you use to apply? Was the pleasant straightforward? Let me know in the comments section below.
Further reading on AdamEnfroy.com: Want to find a successful business for sale, rather than start from scratch? Here’s a post that discusses the top platforms that offer online businesses for sale.