How to Get a Small Business Loan

Getting a small business loan is done by applying with a business lender, typically your bank or another lending institution, with the right documentation and your business plan.

A business loan can help to resolve cash flow problems, leverage growth opportunities, and even increase the value of a business. Making sure to plan for a loan ahead of time is extremely important, as is knowing the documentation needed by your lender when you do apply.

We cover this information and more in our small business loan guide:

Recommended: Get approved and funded in the same day with a Business Loan from Uplyft Capital.

Understand How Small Business Loans Work

It’s important to conduct research to fully learn and understand how business loans work, so you’re not caught off-guard by any part of the process, any additional fees, etc.

Essentially, small business loans work as followed:

• There are companies, called lenders, that specialize in lending money to businesses,
• Lenders make money by charging interest and fees to businesses that borrow money from them.
• There are several types of business loans, and different lenders have different requirements.
• There are also different loan repayment types.

Understand the Different Types of Business Loans

There are many different types of small business loans and for a whole host of reasons. For example, you can get a new business loan for equipment. You can get one specifically to start a business. You can even get one to purchase real estate.

These are some of the more common business loans:

• Small Business Association (SBA) 7(a) small business loans
• Working Capital Loans
• Business Term Loans
• Business Factoring Loans
• Microloans
• Merchant Cash Advance Loans

SBA 7(a) Small Business Loans

An SBA 7(a) small business loan is a loan guaranteed by the Small Business Administration.

Getting an SBA 7(a) loan involves working with eligible lenders who lend money to businesses that meet the strict requirements of the SBA. These loans are great for startup businesses and small businesses with less established business credit that need capital to grow.

Here are the requirements for qualifying for an SBA 7(a) small business loan:

• Operate for-profit (nonprofits are not eligible for SBA 7(a) loans).
• Be a small business, as defined by the SBA.
• Do business within the US or its territories.
• Have a fair amount of invested equity.
• Utilize alternative financial resources, such as personal assets, before seeking financial assistance through the SBA.
• Demonstrate the need for a loan.
• Use the lent funds judiciously (i.e., for sound business purposes).
• Not be in default on previous loans owed to the US government.

Working Capital Loans

A working capital loan is a revolving credit line usually extended through a bank. The funds are made available to a business for practically any business purpose. The borrower (business) only pays interest on the money used, not the total borrowed amount.

Working capital loans have several advantages:

• Handle a cash flow crisis. Access to capital is important as cash flow is the lifeblood of any business. Without adequate capital, businesses can quickly go extinct.
• Borrow and repay quickly. The nice thing about working capital loans is that a business owner can quickly access the funds whenever necessary, say for a short period of time, and then quickly repay the money when cash flow is better.
• Avoid collateral. A lot of business owners fear getting a traditional bank loan where they’re asked to put up collateral value, personal assets they don’t want to risk. With most working capital loans, a business owner doesn’t have to gamble their personal assets, like their retirement accounts or house they live in.
• Keep full ownership of the business. Working capital loans don’t require a business owner to sell a stake (share) of their company in exchange for capital. The business owner maintains full ownership and control of the company.
• Spend the money how you like. Another great advantage is you can spend working capital on whatever you deem necessary for your business. This gives you control over how the money is spent.

Note: A working capital loan is sometimes referred to as a business line of credit.

Business Term Loans

A business term loan is the quintessential traditional loan type. It’s where a business borrows money, usually from a bank. The money is handed over as a lump sum to be repaid over set intervals over a designated period of time. There are several advantages to business term loans.

Here are some advantages of business term loans:

• Flexible usage. A traditional business loan gives the borrower access to capital to do with whatever the business owner likes. If you need a new computer, you can buy it from the loan money.
• Predictable payments. You’ll know after being approved for the loan exactly what your monthly payments will be. This gives a business owner an opportunity to plan around the loan, perhaps letting them leverage the funds as they develop a growth strategy.
• Builds business credit. A business term loan is a great loan for building business credit so you can borrow even more money in the future.

Business Factoring Loans

A business factoring loan is not as cut and dry as a traditional bank loan. The main difference is you’re selling a valuable asset, namely your unpaid accounts receivables. You basically decide which unpaid receivables you want to sell to a factoring company, they put forward some paperwork, and pretty soon you have your money. The factoring company charges a fee for this, plus takes the difference between the amount they agree to pay you and the amount of debt owed you from the company, and this is how they make their money.

Here are some advantages of a business factoring loan:

• Protects your business credit.
• Doesn’t add debt to your balance sheet.
• Get paid on debt you might not otherwise collect on.
• No in-depth credit requirements — the risk lies with the debtor, not your business.
• Get funded quickly, in some cases, the same day.
• Use the money for whatever you like.

Microloans

Business microloans are smaller loans, typically ranging between $5,000 to $50,000. Since most banks don’t like to lend such small quantities of capital, a business owner isn’t faced with the same strict requirements outlined by banks. Instead, a small business owner can partner with a nonprofit or government agency to get access to these loans.

Here’s what you need to know about microloans:

• The SBA offers microloans. The main requirement is that you do not use the money to buy real estate or refinance existing debt.
• Most microloans are term loans that layout payments over a set period of time. The business owner can plan around the loan as they continue making business decisions.
• Some microloans are granted through a platform where multiple investors lend money to individuals and businesses in need. You’ll need a compelling business story to persuade investors to lend their money to your business. You then make a payment to the platform, which pays back the investors.

Merchant Cash Advance Loans

Merchant cash advance loans are much different than traditional loans. These loans are set up through a merchant cash advance lender, who extends a loan to a business in exchange for a percentage of future credit card sales transactions. The repayment term is a daily percentage of credit card transactions, so the amount will vary daily depending on the number of transactions and how much those transactions equaled.

Here are some things to know about merchant cash advance loans:

• These loans generally have high interest rates. Most businesses who take out these loans do so to solve short terms cash shortages.
• It can take a long time to repay these loans. The amount of sales your business has coming in through credit card transactions determines the amount of time it will take you to repay these loans. The longer it takes, the more interest you can expect to pay. However, these loans are great for businesses that operate in the restaurant or retail space, as they tend to receive a lot of credit card transactions.
• Credit checks aren’t necessary. Because these loans are judged based on previous credit card transactions and sales, it’s not common that a merchant cash lender would require a business credit report or need to know your business credit score. For this reason, these are great loans for businesses with not-so-great credit profiles.

Learn to Spot and Avoid Predatory Business Loans

Stay away from blanket liens and other predatory practices. A blanket lien is essentially you agreeing that a lender can come after any and all business and personal assets under your control should you default on the business loan. 

It is important to do your due diligence and find out which loan will serve your business best. Keep in mind that not all business loans are created equal. Like with personal loans, even with business loans, there are predatory lenders out there just waiting to take advantage of a small business owner who hasn’t done their homework.

Know Why and When You Need a Business Loan

Business planning is important, especially when it comes to getting a business loan. Ideally, understanding if you should get a business loan, and when and why to apply for a business loan should happen during the business planning phase.

While writing your business plan, you will also craft your business’s finance strategy. For most businesses, this means planning to borrow money at a specified time period. For some businesses, taking out a small business loan is the best path for growing a business.

Here are some tips to consider when deciding to take out a business loan:

• Plan years in advance. When writing a business plan, your plan should forecast sales and where your business will be financially in five to ten years. Then, use this knowledge to decide when will be the best time to take out a business loan.
• Know why you need a business loan. Will you need it for an expansion? Will you need a business loan to purchase new equipment? Will you need a business loan for hiring staff? Will you need a business loan for some other reason? Just know the reason and make sure it is in your business plan.
• Learn how to build business credit. When applying for a business loan, be ready for your business credit profile and personal credit profile to be pulled. Lenders evaluate your business credit score and personal credit history to determine how likely you are to repay the business loan. Hint: Lenders hate risk. Don’t be a risk to them. Show that you have a proven track record of always paying your business debts on time—better yet early—and they are far more likely to extend a business loan to your business.
• Have a contingency plan. Don’t bet the future of your business on having to have a business loan. Like in chess, you have to think moves ahead, consider every possible scenario, and be prepared for the worst-case scenario. This means knowing your other finance options and having a Plan B in place, just in case the original plan should fall through.
• Finally, learn how business loans work. So you’re not caught off-guard by any part of the process, any additional fees, etc.

Recommended: Use TRUiC’s Business Planning Guide and Free Business Plan Generator to get your planning started.

Know How Much Money You Need to Borrow

It is important to know how much money you need to borrow when applying for a small business loan. Borrow too much, and you run the risk of defaulting on the loan. Borrow too little, and you may not accomplish the goal you set out to achieve for borrowing the money.

Deciding how much money to borrow depends on your business plan and overall business strategy. Here are some tips to help you:

• Know your costs. Costs happen on both sides of the equation: On one side, you have the cost of taking out the business loan (i.e., principal and interest to repay), which could affect your cash flow, which in turn could take your business backward instead of forwards. On the other side, you have to know how much money to borrow to pay for whatever it is you’re planning.
• Borrow money to make more money. This is called leverage. Leverage borrowed money in the best way possible. Capitalize the most you can from these leveraged funds. Think about your business and what you can do to make it as profitable as possible.

Determine if You Qualify for a Business Loan

The next step in getting a small business loan is determining if you qualify for one. Continue reading to find out how you can do so. 

Get Started with Lendio

Answer a few questions to see what kind of loan you qualify for.

Find out Business Loan Lender Guidelines

Every lender has different business loan requirements. It is important to know these guidelines to know if you qualify to apply for a specific loan.

Here are some tips and practical advice to help you navigate lender guidelines:

• Check into SBA 7(a) loans. The most common business loan is the SBA 7(a) loan. The SBA has certain pre-qualification requirements that must be met before you can apply for a loan with them. There are also a lot of additional paperwork requirements that make getting these loans a fair bit more challenging and time-consuming.
• Reach out to lenders well in advance. The sooner you contact business loan lenders about a business loan, the sooner you can start digging in and learning more about their requirements. They will appreciate your reaching out early, as navigating the procedure can be a process.
• Keep your paperwork organized. When you have piles of business loan documents sitting in a pile, it is easy to confuse what goes with what. Having a good filing system will help you save time and frustration.
• Maintain good business credit. Maintaining business credit will help you qualify for better, non-predatory loans. Following this one bit of advice will help get the best rates and terms.
• Understand all banks are different. Larger banks may be extra focused on doing business with larger companies. Smaller banks may be extra focused on the relationship side of small business lending. How you communicate and work with banks is just as important as filing the paperwork out correctly.

Recommended: Get help when planning your business finance strategy with Obsidian Bear Funding’s Course.

Check and Build Your Business Credit Score

Building business credit means establishing an identification number with companies like Dun & Bradstreet and deliberately taking action to increase your company’s score. This score will help you secure lenders when applying for a loan because it acts as a good indicator of your business’s history in paying off debts and otherwise being fiscally responsible.

Good business credit scores take time to build, so here are some tips to help you monitor and grow your business credit profiles:

• Know how to access the three main business credit bureaus. These aren’t the only business credit bureaus; however, they are the most important because they directly affect your business FICO score.
• Make sure to set up business credit profiles so that your credit gets reported. You’ll need a Dun & Bradstreet, Experian Business, and Equifax Small Business credit profile established.
• Go through your business credit profiles regularly. You’d be surprised how often creditors incorrectly report or misrepresent information. Most of the time, it isn’t in your best interest. It is important to take your time and go through the entire business credit report to make sure you have everything accurate.
• Read our free guide on how to build business credit. Learn about how to establish and grow your score through things like net-30 vendors, business credit cards, the importance of paying your bills on time, and more.

Recommended: We suggest pulling your business credit reports once a month to make sure all credit tradelines are reported accurately and that all your business information is current.

Gather Needed Business Loan Documentation

Business loan documentation is all the things generally required to have when applying for most small business loans. You need to have these items collected ahead of time to make the process of applying for a small business loan much easier.

Here are some items you may need to gather together before applying for a business loan:

• Loan application form
• Resume
• Business plan
• Business credit reports
• Financial statements
  
  • Balance sheet
  • Income statement
  • Cash flow statement
• Accounts receivable and accounts payable
• Collateral
• Legal documents
  
  • Business licenses and registrations required for conducting business
  • Articles of Incorporation
  • Copies of contracts you have with any third parties
  • Franchise agreements
  • Commercial Leases
  • Business bank statements
  • Identification (passport / driver’s license)

Decide on Collateral and Know Its Worth

Many lenders will require you to put forward some collateral value for a business loan to extend a loan for your business. It is important to decide what collateral (things of value) you are willing to part with, should you default on repayment of the loan and the bank or lending institution takes your property.

Here are some action steps to take to figure out your collateral and know its worth:

• Take stock of tangible personal and business assets. A good way to do this is to take out a piece of paper and start writing down all the things you own and all the things owned by your business.
• Take stock of intangible assets. Intangible assets are things like brand value, contracts, patents and trademarks, secret recipes, etc. These can sometimes be used as selling points to negotiate loans.
• Get estimates from more than one source. Just like when your car insurance company gets more than one quote on your year, make, and model of vehicle before determining what to pay you for your total loss, you should similarly get several estimates of what your real estate, vehicles, and other assets are worth to help you better negotiate a business loan.
• Determine the total value of your collateral. Whether you are putting up your brand new truck or paid off home or both, it is important to know the total value of your collateral. This way you can estimate the loan amount you may qualify for before actually applying for a loan.
• List collateral inside your business plan. Having your collateral listed inside your business plan with your value estimates added to the back addendum section will make it easier on you when applying for a business loan. Lending institutions can quickly look at your collateral value and instantly get a bird’s eye view of how much they may be willing to offer you. Having this information readily available also shows lenders you have planned for getting a loan well in advance and are outstanding at managing assets.

Shop Around for the Best Business Loan Terms

Taking time to shop around for the best business loan terms is vital if you want to get the best deal possible.

You want the best terms and conditions that will help your business in the best way possible.

For example, just paying .25% less in interest can amount to thousands of dollars in savings at the maturity of a loan — money that can be used elsewhere to grow your business.

There are several steps to take to ensure your business finds the best loan terms possible:

1. Decide how long you need to pay off the debt. It is better to estimate on the high side so you don’t find yourself cash strapped when trying to pay off the loan. After all you may incur other unexpected expenses down the line. Give yourself some leeway.
2. Convert interest rate into annual percentage rate (APR). APR is the true measurement of how expensive borrowing will be. It takes into account fees and what your costs will be broken down year by year. You may get a better interest rate one place, but it could still end up costing you more in the long term.
3. Check around with different lending institutions. Some banks and lending institutions may offer better terms than others.
4. Know your lender inside and out. Research the financial institution you are applying for a business loan with because they may engage in unscrupulous practices that you want no part of. It is wise to know in advance what a lender is likely to do in the event you have to miss a payment or simply cannot repay the loan as originally agreed. Some lenders may cut you a break; some may prey on you like a vulture.
5. Make an informed decision. The final step is to take all that you’ve learned doing your due diligence and to make a decision. Remember, you’re interviewing potential lenders just like they’re interviewing you. At the end of the day, you have to do what’s in your business’s best interest.

Apply for a Business Loan

Learning how to apply for a business loan is the easiest step to getting a business loan. If you’ve done the hard work of planning your business, getting the right documentation in order, building your credit, and everything else, now you’ll simply fill out some paperwork, make a phone call, give a presentation, or fax something over to your lender, and then it’s just a waiting game until you get approved.

Here are some things to keep in mind when applying for a small business loan:

• Traditional lenders tend to take longer to approve a business loan. These are lenders like banks and credit unions. They have stricter standards and generally require more paperwork to be filled out. They often require you to meet in person to fill out an application.
• Some lenders take applications over the phone or online. You simply upload your documents, in some cases even sign the loan agreement online, and again just wait on them to approve the loan.
• Be ready with all your documents. When applying, you don’t want the stress of having to gather up all your documents, so do this in advance. It will make applying a lot easier and less stressful.
• Ask questions. Don’t be afraid to ask how long it typically takes to get approved(?) or how long before monies are disbursed. You may know this already from having done your due diligence, but it never hurts to ask again to be sure.
• Read the fine print. If something doesn’t make sense, get answers. You want to make sure you are both financially and mentally ready to take out a loan.

Alternatives to Small Business Loans

Getting a business loan is not a guarantee; learn what to do if denied a business loan. Additionally, you can explore the following funding options:

• Business Credit Cards
• Small Business Grants
• Personal Savings
• Investors

Business Formation Resources