How to Get a Small Business Loan in 7 Simple Steps

Business.org breaks down the seven essential steps in finding a lender and securing a bank loan for your small business.

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Sooner or later, many small-business owners consider taking out a loan to supplement their business's growth. But small-business loans can be tricky lines of capital to obtain, especially if you don't know much about the application process. And with the broader banking system still reeling from the collapse of Silicon Valley Bank and Signature Bank, you’ll need a rock-solid plan and squeaky-clean paperwork before you even approach a bank.

That preparation begins here with these seven crucial steps for nailing down a business loan.

Lendio partners with over 75 lenders, which improves your odds and efficiency to get the funding you need.

Qualifications:

6 mos. in business

560 credit score

1. Establish your reason for the loan

The lender is going to hand over a significant amount of money to your business, and they’re going to want to know how and why it’s being spent. It’s a valid concern: how you invest the loan will affect your business’s income and ability to pay it back. Stocking up inventory or covering payroll are valid reasons banks and other traditional lenders would consider your loan application. (Purchasing a recreational 3D printer for the breakroom . . . not so much.)

General rationales for small businesses seeking loans include managing daily expenses, expanding or purchasing equipment, building a cash buffer against possible future shortfalls, or just starting a business. Also, determine exactly how much money you’ll need to borrow—don’t ballpark it and end up with too much to pay back or too little to cover expenses. A loan calculator can help you determine how much you can afford to take out, interest rates and all.

2. Learn how lenders assess you

Banks and lenders have their own formulas to determine if a loan will likely be paid back. In the case of small businesses, the formula usually involves—but isn’t limited to—five factors for consideration. Since small businesses also tend to be newer operations, they’re probably not going to excel in every area, but if they’re strong in at least three of the five, that can help level the bank’s assessment. Factors to pay attention to include the following:

• Credit score and history. If you’ve repaid loans responsibly in the past, the potential lender will find out—and they’ll also find out if you haven’t. Banks can assess business and personal financial histories through a variety of avenues, but most loan processes begin with a credit review.
• Collateral. What do you own that could cover the loan in case of default? Most banks and lenders will require something of value to shield the lender. Typical business items that qualify as collateral include real estate, buildings, vehicles, equipment, inventory, and accounts receivable.
• Cash flow. The more money your business is currently making, the less of a loan risk it’ll be to the lender. Banks and lenders will not only look at the amount of profit you’re bringing in but also examine how you’re managing it.
• Time in business. If you’ve been functioning as a business for several years, you’re probably doing something right. Startups and newer businesses won’t have time on their side, but a solid, executable business plan for reaching milestones will go a long way toward evening the odds in the lenders’ eyes.
• Industry. What’s the forecast for your line of business? For instance, if you had a successful local brewery last year but six more are fermenting in the area this year, your competitors might start to cut into your business's profits. Lenders might take current industry trends into consideration when deciding whether or not to approval your loan request.

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3. Determine which type of loan you need

Most traditional small-business lenders have strict requirements about your business's time in business and revenue. If you’re just launching your business and haven't started earning revenue, you'll have an easier time qualifying for a personal loan over a traditional small-business loan.

But there are multiple types of loans beyond traditional personal and business loans. Here are some of the most popular options.

Common loan types overview

We've overviewed the main types of loans—now let's look at a few more details.

• Term loans. With term loans, business owners receive a lump sum of money from their lender, which they’ll repay over an agreed-upon time. Along with repaying the principal loan amount, borrowers will repay interest accrued on the loan. Term loans are best for established businesses with solid credit that need expansion cash quickly.
• SBA loans. The U.S. Small Business Administration backs bank loans that meet strict borrower guidelines. This backing instills the confidence in banks and lenders to take chances on applicants who’ve previously been turned down. SBA loan interest rates are typically low, but the approval process can take months.
• Business lines of credit. Less rigid than a bank loan, a business line of credit gives you access to as much capital as your credit limit will allow, but you pay interest only on the cash drawn. Business lines of credit work well for covering short-term expenses or annual downtime for seasonal businesses.
• Business credit cards. Like business lines of credit, business credit cards give business owners near-instant access to a revolving line of credit. Business credit cards often come with rewards and even sign-up bonuses, which you won't get with lines of credit, but the repayment terms are typically stricter and the APR much higher.
• Commercial real estate loans. As the name implies, commercial real estate loans are for the purchase, development, and construction of business structures—offices, storefronts, hotels, etc.—typically for lease or rent to other businesses. Terms for these loans range from less than five years up to twenty.
• Invoice factoring and financing. With invoice factoring, you sell your business’s as-yet unpaid invoices to a factoring company, which then becomes responsible for collection from your customers. Conversely, invoice financing uses those invoices as collateral for a loan. Both generate cash fast.
• Equipment financing. When you take out a loan to buy business-related equipment, the equipment itself becomes the collateral, and the terms of the loan are determined by the expected lifespan and value of the equipment. As long as it doesn’t become outdated, owning it is good for building equity.
• Microfinancing.Microloans, or short-term loans under $50,000, can help business owners build their credit score as well as their cash flow.
• Merchant cash advances. If your business makes considerable and consistent credit card sales, a merchant cash advance can be a quick source of capital. After the lump-sum loan is made, it’s paid back through a daily withholding of your credit and debit card sales or weekly bank account withdrawals. Merchant cash advances are quite risky, and the repayment terms and interest rates are brutal if you miss a payment. Typically, we recommend merchant cash advances only as a last resort, and only if you're sure you can pay them back immediately.

4. Decide on a lender

After settling on which type of loan you need, it's time to choose a lender. Not all business financing venues, or even traditional lenders, are the same. If you're not sure where to start looking for lenders, here are a few of our favorites.

Recommended lenders

Data as of 2/8/23. Offers and availability may vary by location and are subject to change.
*Does not represent the typical rate for every borrower, and other fees may apply.

Main types of lenders

Banks are typically seen as the traditional place to get a loan—but as you can tell from the table above, you have quite a few options to get a loan apart from going directly to a bank. Here are some of the main types of lenders you can choose from as you consider loan applications.

Direct lenders usually include banks, wealthy investors, asset-management firms, credit unions, and other traditional lenders. These types of lenders deal one-to-one with borrowers—you don't go through a third party to acquire a direct loan.

At Business.org, we recommend direct lenders Kabbage, OnDeck, and Accion for small businesses in dealing with financial institutions.

A lending marketplace collects loan options from networks of business funders, including traditional banks. Online lenders typically have a fast turnaround but require decent credit scores. Business.org's favorite lending marketplace is Lendio, which partners with 75 or so lenders and matches you with the best loan offers after you submit your application.

Peer-to-peer lending is a form of direct lending that lives almost exclusively online. Investors browse borrower profiles and choose businesses they’d take a chance on. (You've probably funded a few small businesses, projects, or individuals on platforms like Kickstarter and GoFundMe.) A peer-to-peer loan can come from one or several investors.

If you're interested in finding a peer-to-peer loan, we recommend looking at Lending Club and Funding Circle.

5. Gather the right financial documents

Whichever type of lender you go with or type of loan you apply for, you’ll need to present financial documents that explain where your business stands financially.

Of course, lenders will typically look at your credit score (including your FICO score, if you're taking out a personal loan to fund your business). But your credit score isn't enough information for lenders to determine whether or not you're loan-worthy ("lendable"), which is why lenders typically require an assortment of the following documents:

• Financial statements, such as profit and loss statements, cash flow statements, and balance sheets
• Business and personal credit reports
• Business and personal tax returns for at least the last year
• Business plan
• Business forecast
• State registrations and licenses
• Legal documentation, such as articles of incorporation, commercial leases, franchise agreements, etc.

6. Apply for the loan

If you’re applying for a substantial amount of money, you’ll want to allow your business plan plenty of lead time. Depending on the loan and lender, the loan application process can take months. Using some avenues, like lending marketplaces, can speed up the application and approval course, but in most cases, actually getting the money isn’t an overnight proposition for startup business loans.

Beyond the loan amount itself, tacked-on fees can take you by surprise if you’re not paying attention. Keep an eye on loan application fees, SBA loan guarantee fees, early repayment fees, and late repayment fees, as they’ll eventually affect your annual percentage rate (APR). By the time you apply, you should have a reasonable level of comfort with your ability to repay the loan on time and with the payment schedule, the APR, and the included fees.

Remember, you want to know how much the loan will ultimately cost, interest and all. As you're getting your documents in order and starting the application process, use a loan calculator to ensure you're taking out the right amount of money.

7. Keep building your financial profile

Improving personal credit, establishing business credit, paying down existing debts, maximizing income, expanding assets—these are all ways to build up your financial profile for future growth. It may seem backward, but banks prefer lending to businesses that don’t desperately need the money. It’s in your best interest to negotiate from a position of capital power.

While running your own operation doesn’t necessarily get easier, your future small-business loan processes will become more painless going forward, now that you’ve begun building your financial profile. Establish and build your business credit, and then you’ll be able to rely upon yourself instead of playing the economic odds.

Alternatives to business loans

Personal loans

Newer businesses may not qualify for many small business loans — that’s where personal loans come in. Personal loans are authorized based primarily on your personal credit score .

Some personal lenders, like Upstart , will approve loans to individuals whose credit scores are as low as 300. But most personal loan providers require at least a 580 credit score.

Personal loans can range from $1,000 to $100,000 with an interest rate span of 5.99% to 35.95%. In order to qualify for higher amounts, you’ll likely need to secure the loan with some kind of collateral .

Your personal credit and assets are liable in the event of defaulting on a personal loan. With many business loans, only business assets will be at stake. But, as long as you’re comfortable with the risks, a personal loan can be another way to secure financing.

Personal credit cards

Personal credit cards are a great way to build credit in pursuit of a wider variety of lending options. Credit card APR ranges from 15.16% to 24%+ depending on your credit score.

If you have a credit score below 579, your lender may only offer a secured credit card where you make a cash deposit as collateral. You won’t have as much borrowing power because your credit limit will be a percentage of your collateral. Still, a secured credit card can help you build credit.

Your lender will decide your credit limit, but the average limit is around $13,000. The key to building credit — no matter your limit — is to consistently make your payments on time. Keep up with that and you’ll be able to apply for better lending products in no time.

The takeaway

Depending on if you have an established business or are just starting out, there are many attainable ways to get funding via small-business loans, including personal loans for first-time small-business owners.

Take a look at your financial wellbeing, documentation, and consider applying for a loan through your local bank, the SBA, or the multitude of online lenders—keeping in mind their specific fees and borrowing terms.

Wherever you’re at in your business journey, there are multiple options available for a first-time business loan.

Want to learn more about small business loans and financing? Check out our ultimate guide to small-business loans.

Related reading

• SBA Loan Rates Explained
• Best Small Business Loans
• How to Apply for a Business Credit Card
• How to Build Business Credit: 5 Steps for Improving Your Business Credit Score