6 steps to apply for a small business loan

6 steps to apply for a small business loan

You have a great idea and a strong business plan, but do you have the funding you need to make your small business a success? In 2022, the Small Business Association (SBA) awarded more than $43 billion in funding to small businesses through its guaranteed loan programs. The SBA is not your only option for funding — you can also apply through alternative channels like private online lenders or microlenders.

If lack of capital is holding you back, it’s time to get the paperwork ready and apply for a small business loan by following these six steps.

1. Decide which type of business loan you need

Every small business is different, and there’s no one-size-fits-all loan. Before you apply for a small business loan, find the loan type that best fits your needs. You might start with a few basic questions:

  • How much money do I need?
  • How do I plan to use the funds? Possible uses include purchasing equipment or real estate, buying furniture or supplies, hiring more employees or consolidating or refinancing business debt.
  • What assets do I have to offer as collateral?
  • How often do I need funds? Is a lump-sum loan best, or would a line of credit better meet my needs?
  • How big is my company? Do I qualify as a small business?
  • How quickly do I need the funds?

The first question may determine the type of loan you need, according to Liz Magennis, president of lender ConnectOne Bank. Although the SBA guarantees loans up to $5 million, participating lenders offer loan programs of varying amounts within that coverage range.


2. Determine your loan eligibility

While eligibility requirements vary by lender, expect to verify the following information:

Credit score

Although you’re borrowing money for your business, you’ll need to provide your personal credit score in addition to your business score. Lenders look for a history of regular, on-time payments to reassure them that you’ll repay the funds.

To qualify, you’ll need good personal credit, typically 670 or higher. Established businesses will also need a business score from Dun & Bradstreet, Experian or Equifax — scores range from 0 to 100. Some lenders will consider your application even with less-than-stellar credit, though you’ll likely pay higher interest rates and fees.

Business plan

A successful business plan should include balance sheets, cash flow statements and marketing strategy and analysis. This will show your lender that you understand your market and have a thoughtful plan to use the funds responsibly.

Time in business

Most lenders require you to be in business for at least six months before you’re eligible for a loan, though traditional banks often require two years in business. If you’ve been operating for less than a year, consider providing monthly or quarterly financial forecasts as part of your business plan.

The length of time required varies by lender. 

Lenders will assess your cash flow and annual revenue to ensure you can repay the borrowed funds. Exact revenue requirements vary by lender and loan type, but minimums can range from $50,000 to $480,000 or higher. If your income isn’t high enough to qualify for a larger loan, consider a business credit card or an SBA microloan.

Collateral or personal guarantee

Real estate, equipment or cash balances can all serve as collateral for a small business loan. If you lack tangible collateral, some lenders will accept a personal guarantee. A personal guarantee is a clause written into your business loan contract that guarantees you will personally repay the loan, even if the business stops operating. If you offer a personal guarantee and fail to repay the debt, your personal credit score will take a hit and your lender may seize your personal assets.

3. Compare small business lenders

Although the SBA guarantees loans, they don’t administer the loans themselves. For that, they rely on lenders that comply with their standards and regulations, primarily banks.

Traditional banks and credit unions

Best for: A personalized experience

Traditional banks offer more than just in-person service. According to Magennis, a local bank may also have more specific knowledge about your local market.

Traditional banks and credit unions are the most likely sources of SBA loans; however, they also have the highest eligibility standards and require the most paperwork. While banks may offer lower interest rates than some other lenders, that’s because they thoroughly vet you and your business, which can mean slower loan approvals.


4. Gather the necessary documents

The documentation required for a small business loan varies by lender, but these are some of the most standard requests, according to Magennis.

Tip: Presenting all documents upfront can help speed the process along.

  • Business plan: Paint a picture of your business’s goals, how you plan to accomplish them and the research you’ve done on your market competitors. You should also outline how you plan to use the loan funds.
  • Business licenses: If your business requires licensure, ensure your documents are up-to-date before supplying them to your lender.
  • Business financial statements and tax returns: Most lenders require at least two years of business tax returns to confirm your annual revenue. You should also provide bank statements, balance sheets, profit and loss statements and cash flow projections.
  • Purchase agreements: If you’re using loan funds to buy real estate, a purchase agreement outlines the terms of the sale.
  • Debt schedule: Your new lender will want to know how much you owe on other business debts. This document should list any ongoing debt payments.
  • Personal financial statements and tax returns: Your personal financial information can help your lender assess your creditworthiness. You’ll need to provide this information for any business partners as well.


5. Submit a business loan application

Many lenders offer an online application process, though you may need to visit a branch if you’re applying with a small bank. Processing times can vary based on the complexity and size of the loan — some lenders disburse funds in one to two business days, while SBA loans may take up to 90 days to process.


6. Review your loan agreement

Before signing on the dotted line, review your entire loan agreement and look for errors or unforeseen clauses. Be sure you understand your obligations and that the contract aligns with your expectations. If you have questions, voice them. Once the contract is signed, it’s much more difficult and expensive to dispute errors.

Once you’re satisfied with the contract language, sign the agreement and wait for funding disbursement.


Source: cnn.com


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