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7 Step Guide to Getting a Small Business Loan

Applying for a Small Business Loan in 6 Steps
Lantern
LanternUpdated October 27, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Small business loans can be used to help grow your business, during tough economic times, or to get your business through a slow season. Knowing how to apply for a business loan is crucial in order to increase your chances of approval and speed up your funding time.Our step-by-step guide on how to apply for a business loan looks at reasons you may need a business loan, the different types of loans and lenders, standard application requirements, tips for getting a small business loan, and more.

1. Determine Why You Need a Small Business Loan

Small business owners may need funding for a variety of reasons, many of them depending on which stage you’re in. These needs include:
  • Upfront costs
  • Expanding a business
  • Managing cash flow 
  • Purchasing property 
  • Buying equipment or inventory
Let’s dive deeper into these reasons. 

Upfront Business Costs

As much as you may want to jump in and get your business off the ground, doing some research and planning to estimate how much funding you need can potentially help you avoid a headache in the long run.When you’re just starting, you must think about startup costs, including:
  • Rent, utilities, and property repairs
  • Inventory
  • Equipment
  • Marketing
  • Insurance
  • Payroll
  • Permits
  • Legal fees

Expanding Your Business

Expanding a business is no small feat, and even profitable businesses may benefit from getting a small business loan. By using a loan to fund expansion, you can secure capital without jeopardizing your business’s current cash flow, helping ensure your transition from a small to midsize business is a smooth one.

Managing Cash Flow

Many businesses deal with fluctuations in cash flow due to seasonality, the economy, world events, and other factors.Because it can be difficult to predict and financially prepare for such fluctuations, certain types of small business loans may help offset the gaps in cash flow. 

Purchasing Property

Purchasing property typically requires significant financing in the form of a long-term business loan, like a commercial real estate loan.

Buying Equipment and Inventory

All businesses have equipment and inventory needs. Whether it’s buying, replacing, or repairing materials, you need to know how to apply for business loans. Typical loans include equipment financing and inventory financing. 

2. Review the Business Loan Requirements

While there isn’t a one-size-fits-all formula for business loan requirements, lenders typically base their decisions regarding approval, rates, and terms on how risky it would be to lend to your business.Lenders usually assess risk using a variety of factors, including:
  • Credit scores
  • Business age
  • Revenue history
  • Debt-to-income ratio
  • Cash flow
Remember that individual lenders may have their own business loan requirements, so compare carefully.

Lenders Want to Know Your Credit History and Score

When you apply for a small business loan, lenders often want to look at your personal and business credit scores. If your business is new, lenders may primarily rely on your personal credit score to determine eligibility. When you have a high credit rating, lenders may see you as a trustworthy borrower and worth the risk of lending to at more favorable rates. Generally, traditional lenders like banks and credit unions want to see credit scores over 650 to be considered for a small business loan. But, several lenders do offer loans to businesses with challenged credit.

Building Business Credit

A well-established business credit history can potentially help you get better business loan rates and terms. To establish or build business credit:
  • Separate your business from your personal finances by getting an Employer Identification Number (EIN) and maintaining a business bank account that is separate from your personal account.
  • Open a business credit card or business line of credit and make payments on time.
  • Work with vendors and suppliers who report to business credit bureaus.
  • Check your personal and business credit reports.

Is Your Business Established?

Frequently, lenders see new businesses as riskier, so it may be challenging to secure a first-time business loan. If you have other sources of startup funding, consider them before applying for a small business loan.Small business lenders typically prefer businesses that have been established for at least two years. While there are small business loans for startups, your options may be relatively limited. 

Revenue History Matters

Lenders want to know how much revenue your business brings in to gauge whether you’ll be able to repay your loan. They may even have a minimum revenue requirement for small business loan applicants. Knowing your minimum annual revenue can help determine if a lender is a good fit for your business. 

Knowing Your Debt-to-Income Ratio (DTI)

Lenders may assess your debt-to-income ratio (DTI) to make sure you can pay back the loan as part of your small business loan application. To calculate your business’s DTI, divide your monthly expenses by your gross monthly income. Then, multiply that number by 100 and add a percent sign to see your DTI.Debt-to-Income Ratio (DTI) = Total Monthly Expenses ÷ Gross Monthly Income x 100Generally, if your DTI is high, it may be harder to qualify for a small business loan because having more debt than income can seem risky to potential lenders.

Is Your Cash Flow Sufficient?

Assess if you will have the cash flow to pay back the loan. Lenders may use several pieces of information to calculate your cash flow when determining if you meet their small business loan requirements. 

3. Calculate the Amount of Capital Needed

Creating an adequate business capital estimate can reduce stress and avoid the need to apply for another small business loan down the road. Knowing your needs will help you figure out your chances of obtaining a loan and estimating how much of a business loan you can get.Start by determining if your expenses are:
  • One-time purchases or ongoing: One-time major purchases can disrupt cash flow. Ongoing expenses happen monthly, quarterly, or annually and don’t change much.
  • Essential or optional: Can the business operate without this purchase? If not, it's essential. If so, it's optional. Essential expenses are typically prioritized over optional ones.
  • Fixed expenses: Fixed expenses don’t change significantly or often. These may include rent, insurance, or regular business expenses. Consider what your business loan may need to cover and adjust your desired amount accordingly.

Estimating Cash Flow

Project your cash flow for at least a few months out. Will you have enough to keep the business running and make loan payments? If not, applying for a business loan may need to wait.You can use the following formula to help calculate your future cash flow:Cash Flow Forecast = Starting Cash + Projected Inflows − Projected OutflowsProjected inflows include sales, investments, income, etc. Projected outflows include wages, rent, inventory costs, etc.

4. Choose the Right Loan for Your Small Business

Once you’ve gathered all the relevant information, you’re ready to start comparing loan options. You can do this on your own or you can work with a business loan broker. Below are the different types of business loans and why you may want to choose one over another.

Small Business Administration (SBA) Loans

SBA loans are backed by the U.S. Small Business Administration, so they pose less of a risk to lenders. Loans guaranteed by the SBA offer relatively favorable rates and terms.Many SBA loan programs suit the small business owners' unique needs, but the most popular program is the SBA 7(a). These loans can be useful for qualified small businesses needing up to $5 million for almost any business-related expense. Additional options include an SBA 7(a) Small Loan for up to $350,000, an SBA Express Loan with a turnaround of 36 hours, and an SBA 504 Loan which is used to purchase commercial real estate.

Why Choose an SBA Loan?

SBA loans are geared toward a variety of small business applicants, including startups, veterans, women, and underserved communities. They can be used to finance large, one-time purchases or smaller, ongoing expenses, allowing your company to grow and build business credit.

Things to Keep in Mind About SBA Loans

Since SBA loans are backed by the U.S. government, the qualification and application process can be longer and more complicated than a traditional bank or online loan. If you need funding quickly, lack a well-established business, or have poor business credit, you may want to consider a non-SBA-backed loan.

Term Loans

Small business term loans let you borrow a set amount of money that’s paid back with interest on a predetermined schedule. Lenders determine rates and terms based on your creditworthiness. Both long- and short-term small business loans are available. The type you choose to apply for depends on your company’s needs.

Why Choose Term Loans?

Term loans can be useful for large, one-time purchases because they allow you to repay over time, posing less risk to your business’s cash flow. With long- and short-term options, you decide what makes the most sense for you.Long-term small business loans typically have lower interest rates for qualified small business loan applicants. But, extending the loan could lead to considerable accrued interest over the life of the loan. A short-term loan may have higher interest rates, and businesses generally turn to them when they cannot qualify for another loan or line of credit. 

Things to Keep in Mind About Term Loans

While you can find term loans from several types of lenders, banks and credit unions may have lower interest rates. However, they may also have more stringent business loan application eligibility requirements.

Business Line of Credit

A business line of credit can be revolving or non-revolving and grant access to funding up to your credit maximum. Interest is only charged on unpaid balances from previous billing cycles. With a revolving line of credit, you can withdraw and repay as needed, but cannot spend over the approved credit limit. Non-revolving lines of credit end after you’ve paid the balance in full. 

Why Choose a Business Line of Credit?

If you need to manage cash flow during seasonal fluctuations or have unexpected expenses, a business line of credit can provide quick funding without the commitment of a small business loan. 

Things to Keep in Mind About Business Lines of Credit

A business line of credit can be a relatively affordable option for shorter-term needs, with interest rates generally falling between 5% and 20%. If you aren’t sure whether you’ll be able to pay the monthly balance on a line of credit, it may be worth exploring other financing options over applying for a business loan.

Microloan

Microloans are typically offered by nonprofit organizations and peer-to-peer lenders in amounts up to $50,000. Applying for these small business loans often has a personal aspect other lenders lack.

Why Choose a Microloan?

Microloans are used for businesses needing small amounts of financing. Mission-based lenders can be one option when searching for microloans because they may offer specialty funding for minorities and underserved communities. SBA microloans are also available and may offer more competitive interest rates than other lenders.

Things to Keep in Mind About Microloans

Generally, eligibility requirements for business microloans aren’t as strict as they are for term loans.Check with lenders to confirm interest rates so you can accurately estimate how much a microloan may cost. 

Equipment Financing

Equipment financing is for purchasing business-related equipment like machinery or vehicles, where the equipment acts as collateral. Both small business startups and established businesses may benefit from equipment loans to keep business operations running smoothly.

Why Choose Equipment Financing?

If your business needs new equipment but doesn’t have the savings to purchase it, equipment loans may offer favorable interest rates. There are also leasing options if you anticipate regularly replacing or upgrading equipment.

Things to Keep in Mind About Equipment Financing

Generally, the equipment acts as collateral when pursuing equipment financing. This type of financing can also be limiting, as you can only use the funds for business-related equipment.

Invoice Factoring and Financing

With invoice financing, lenders use your business’ unpaid invoices as collateral for a cash advance. You are responsible for collecting unpaid invoices from clients and repaying the lender once you receive payment.With invoice factoring, a lender purchases unpaid invoices from you, then collects payment directly from your clients. 

Why Choose Invoice Factoring and Financing?

Business-to-business (B2B) organizations with irregular billing cycles can use invoice financing or factoring to pay for operating expenses without waiting for clients to pay. Lenders advance a percentage of the outstanding invoice amounts, which you can use to reinvest in your business or pay your bills.

Things to Keep in Mind About Invoice Factoring and Financing

Business-to-consumer (B2C) organizations that don’t invoice customers regularly will likely be ineligible for invoice factoring or financing.Additionally, because the lender takes on more risk with invoice factoring, the terms may not be as favorable as those for invoice financing. However, if you choose invoice financing, you are responsible for collecting payments from customers and paying the lender. If customers are late, any late fees from the lender fall to you.Lenders may also charge non-refundable processing and repayment fees for invoice financing and factoring. Check with your lender about additional fees so you can budget accurately.

Commercial Real Estate Loans

Getting a business loan for commercial real estate allows you to purchase a building for business use. These loans can be in the millions, and typically offer competitive interest rates because they are backed with the real estate you are purchasing.

Why Choose Commercial Real Estate Loans?

If you need to acquire a business property, a commercial real estate loan may be your only option for financing. Because commercial real estate can be pricey, paying for it without getting a business loan could strain the business’s finances and cash flow. 

Things to Keep in Mind About Commercial Real Estate Loans

Commercial real estate loan approval and structure typically factor in loan-to-value (LTV) ratio: the size of the loan divided by the value of the property, expressed as a percentage.Loan-to-Value Ratio (LTV) = Loan Amount ÷ Commercial Property ValueUsually, the lower the LTV, the better the rates and terms you’ll receive on the loan. Most commercial real estate loans have LTVs between 75% and 80%. Commercial real estate loans may carry additional costs for things like appraisal, inspection, and filing fees. Ask your lender about expenses to gauge whether a commercial real estate loan is the right choice for you. Recommended: What Are the Fees Associated With Business Loans?

5. Compare Types of Lenders for Small Business Loans

Banks, credit unions, online lenders, and peer-to-peer networks all offer loans for small businesses.

Online Lenders

Online lending can be helpful for small businesses that are just starting out or need funding quickly. Applying for a business loan online may offer several advantages, including:
  • Fast application review
  • Quick access to funds
  • Can be easier to qualify for with little business credit or history
  • Easy to compare different lenders
  • Options for unsecured loans
However, online lenders typically can’t beat the APRs from banks and credit unions. 

Traditional Banks

Banks can offer term loans, lines of credit, equipment loans, and credit cards. Some banks partner with the SBA and offer government-backed loans for approved borrowers, including their 7(a) programs. Additionally, interest rates and terms may be more favorable with a bank than other types of lenders. But, applying for a business loan with a bank typically takes more time than with an online lender.Small businesses may find it challenging to get approved for a business loan with a bank, because banks may require good credit, collateral, and established business history. Funding may also take longer to get because of the more rigorous application and approval process.

Peer-to-Peer (P2P) Lending Networks

Peer-to-peer (P2P) lenders match small business loan applicants directly with investors (not financial institutions). As a result, they may be attractive to small businesses struggling to get financing elsewhere. Deciding factors may include credit scores and social media profiles — anything that helps each party determine if they want to partner. These business loan requirements vary greatly as a result.P2P marketplaces set the terms and rates for the loans, which vary depending on the borrower's creditworthiness. They also help facilitate money transfers and payments.As you’re researching your options, investigate transaction fees charged by different P2P marketplaces, which could fall to you, the investor, or both. 

Credit Union

Credit unions are similar to banks, but are member-owned and not-for-profit. As a result, profits are typically returned to members in benefits such as reduced fees, more competitive loan interest rates, or higher rates on savings accounts. Many people choose to apply for business loans from credit unions because they offer competitive interest rates and terms, and may have more flexible qualification standards. They also tend to be community-oriented, which may benefit small businesses wanting to invest in the areas they live.

6. Gather Documents

The final step is gathering the necessary documentation for your small business loan application(s).Documents you need to provide vary by loan and lender. But, here are a few items lenders typically require:
  • Business and personal bank statements
  • Business and personal tax returns
  • Business legal documents
  • Personal identification and resume
  • Business plan
  • Revenue statements
  • Accounts receivable and payable

Small Business Loan Application Checklist

Small business loan application checklist

7. The Application Process

Now that you know how to apply for a small business loan, it’s time to find the right lender. The first step will be researching different lenders and comparing what they have to offer. Once you find a lender you want to work with, you’ll have to apply for the loan, submit the necessary documentation, and wait for approval. If your loan is approved, funds can be in your account in as little as 24 hours with some lenders.

Applying

Filling out the application may take you some time, but thanks to the research you’ve done in how to apply for a small business loan and the documents you’ve gathered, it won’t be as difficult as it might have been. How you’ll apply for a business loan depends on the lender. An online lender may permit you to link your business accounts through its website. For a bank or credit union, you will likely apply in person at the branch or via a phone call. 

What to Expect After Applying

Once you’ve applied, you’ll wait to see if you’re approved. Some lenders approve borrowers instantly, whereas others may take a few business days. If the lender requests additional documentation, be sure to respond quickly to prevent delaying the process. Once approved, funds typically will be in your account within one day to one week.

What Happens When You Get Your Loan

You will be notified when the loan is approved and the next steps in the process. For example, after an SBA loan is approved, you can expect to receive the funds in the designated bank account after five to seven business days.

The Takeaway

To apply for a small business loan, you’ll first want to determine what it is you need a business loan for. Knowing this will help you choose the right type of small business loan for your situation. Once you’ve decided on a loan, you’ll want to review the loan requirements, gather the necessary documentation, and research and compare lenders. Shopping around for lenders allows you to find the best rate and terms for your small business.Lantern by SoFi allows you to compare multiple small business lenders all in one spot. With a single application, you’ll receive a small business loan offer from one of our top lenders, all with no obligation to you.

Frequently Asked Questions

Is it hard to get approved for a small business loan?
Can I get a loan for a first time business?
What credit score do you need for an SBA loan?
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About the Author

Lantern

Lantern

Lantern is a product comparison site that makes it easy for individuals to shop for products and compare offers with top lenders. Lantern is owned and operated by SoFi Lending Corp., the digital personal finance company that has helped over one million people get their money right.
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