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The lending process can be confusing. If your small business needs a loan and you are feeling overwhelmed, use our guide to walk through how to get a loan from start to finish.
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A small business loan can be beneficial to growing your business or continuing operations. However, taking on debt without knowing the facts can be dangerous, with irresponsible borrowing leading to unpaid debt, collections, or even bankruptcy. That’s why it is important to understand small business loans before applying.
This guide will help you learn how to get a small business loan and determine if this is the right financial decision for your business. Once you’re ready to apply, get started with our list of the best loans for small businesses.
Table of Contents
Before even filling out a loan application, you should determine how the business loan proceeds will be used. A small business loan should only be used to benefit the business over the long term. You may need a small business loan for:
The next step is to figure out the amount you need to borrow. In addition to avoiding excessive interest and fees by overborrowing, knowing how much you need to borrow (and why) is information you need to provide to the lender during the application process.
Run through calculations of your potential expenditures, and consider all scenarios. Compiling a list or spreadsheet of all related costs is helpful for your calculations.
Understanding the lending process and whether you can afford a business loan is a critical step to take before applying for a loan.
There are various formulas used by banks and other lenders to determine how much you can borrow, including DSCR, DTI, and ROI.
Before applying for a loan, pull your free credit report and score online. A credit score in the high 600s is generally recommended to qualify for a business loan. Options may be available for borrowers with fair or poor credit, but these are often short-term loans with higher interest rates and lower borrowing limits.
We recommend raising your credit score to secure the best rates and terms. You can do this by:
The next step is to determine the type of loan that best fits your needs. Here’s a brief overview of the types of loans available to businesses.
| Funding Type | What It Is | Best For |
|---|---|---|
| Term Loans | Provides a lump sum with a fixed or variable interest rate for a set period | Large purchases, business expansion |
| Short-Term Loans | Loans that are repaid in two years or less with monthly or weekly payments | Cashflow issues, seasonal expenses, emergencies |
| Lines Of Credit | A credit line that borrowers can draw from as needed up to their approved credit limit | Emergencies, seasonal inventory, cashflow shortages |
| Startup Loans | Loans for businesses that have been in operation for less than two years | New projects, research and development, purchasing new facilities |
| Equipment Loans | Loans used to purchase fixed assets and equipment | Commercial vehicles, machinery, and other equipment |
| Invoice Financing | Funds are received by selling unpaid invoices or using them as collateral | Cashflow issues, emergencies, and other immediate funding needs |
Requirements vary by loan type and lender. Generally, established businesses with high revenue and good credit scores will qualify for longer repayment terms, higher borrowing limits, and the lowest interest rates.
Since interest rates, repayment terms, and requirements vary by lender, it’s important to take the time to research your options to find the most affordable loan for your business. Here’s an overview of common small business lenders.
| Lender | When To Use | Good Credit Required | Average Time To Funding |
|---|---|---|---|
| Banks & Credit Unions | You want long-term, low-cost funding options | Weeks to months | |
| SBA | You want long-term, low-cost loans but don’t qualify for bank funding | For most programs | Can take several months |
| Online Lenders | You want fast funding | As quickly as the same day | |
| Nonprofit Lenders | You need a smaller loan with a low-interest rate | Weeks to months | |
| Microlenders | You need a loan of $50,000 or less | A few days to several months |
Here’s a further breakdown of lender types to help you make the right decision for your business.
Depending on the type of loan you’re applying for, paperwork requirements vary. At the bare minimum, you will be required to show the lender that you have the means to pay back the loan. Some loans, such as term loans from the bank or SBA loans, require additional documentation, such as:
Startup businesses may be required to submit other paperwork, including a business plan, resumes for all owners to prove industry experience, and financial projections.
Larger loans and some types of business loans often require collateral, typically in the form of business assets. Some lenders will also use personal real estate or assets as collateral for a loan.
If you’re still interested in receiving a small business loan, you’ll need to submit a loan application. Depending on the lender and the type of loan you’ve selected, you may have to visit a financial institution, call the lender, or apply online.
During the application process, you will need to provide some information to your lender. This includes:
During the application process, personal and business credit reports will be evaluated by the lender. All documentation will be evaluated to determine whether you qualify for the loan, including creditworthiness and ability to pay back the borrowed amount.
If you’ve applied for multiple loans, such as through an online loan marketplace, compare the offers you’ve received to determine which has the most favorable rates and terms.
After documentation has been submitted and the application completed, the approval process begins. Once approved, the loan will need to go through underwriting, closing, and funding. Funds will be sent to your designated bank account.
For some online loans, the entire process may be completed in just a day or two. For long-term or SBA loans, the process may take several weeks or months from start to finish.
Once your loan has been funded, it’s time to use the money for your intended business purpose. With careful planning, these funds have the potential to take your business to the next level.
After receiving your loan, remember to always make your payments as agreed like any responsible borrower. This proves that you are a trustworthy business and opens up more lending opportunities for the future.
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