If you’re looking for financing for your business, you may feel overwhelmed by the thought of the process—planning, researching, and of course, actually applying for different business loans.
Although some of the overall application process will depend on the loan product and lender you’re applying with, there are a series of simple steps you can follow to learn how to apply for a small business loan—and we’re here to help.
In this guide, we’ll break down each of the seven steps you need to follow to successfully apply for a business loan.
Let’s get started.
How to Apply for a Small Business Loan in 7 Steps
If you’re wondering how to apply for a business loan, you’ve probably already decided that you need one.
This being said, the first step in the business loan application process involves planning: Why do you need a business loan?
Although this may seem like a question with an obvious answer, if you’re just starting your business, you may know you need financing, but you might not have determined exactly what purpose you plan to use your financing for. This is an important decision to make—as we’ll soon discuss, certain financial products are better suited for different purposes and some can only be used for specific purposes.
Therefore, you may determine you need a business loan for a variety of reasons, including:
Ultimately, the possibilities are endless—and the reason that you decide to apply for a business loan should be unique to your business. Nevertheless, it’s important that you understand why you need a business loan first, and decide what you’re going to use the funds for before continuing through the application process.
Next, after you’ve decided why you need a loan, you’ll need to determine how much business financing you need.
Once again, determining the amount of financing you need will help you figure out which business loan product will be able to best meet your needs. As we’ll explain below, certain products, like SBA loans and traditional term loans, for example, are better suited for larger needs and higher amounts, whereas others, like business lines of credit and short-term loans, will likely be better for smaller projects and lower amounts.
Therefore, you’ll want to think about how much financing you need to serve your purpose—for instance, you might decide you need a $100,000 loan to purchase inventory. On top of this, however, you’ll also want to consider how much financing you can afford.
To make this determination, you’ll want to consider your current revenue and cash flow, in relation to your expenses, as well as any current debts you owe. You may use a business loan calculator or calculate your debt service coverage ratio to help you figure out, realistically, what kind of business loan you can afford.
Now that you’ve established why you need a business loan and how much financing you need, you’ll want to review your business’s qualifications.
After all, you don’t want to spend significant time and effort applying for a small business loan you would never be approved for. Ultimately, the specific business loan requirements you’ll need to meet will vary based on the product and lender, but there are three main factors you’ll want to think about ahead of time: your credit score, time in business, and annual revenue.
When you apply for a business loan, your personal credit score will usually be one of the first things that a lender looks at. If you have a high personal credit score, you’ll be more likely to qualify for a variety of loans—and loans with the best rates, terms, and amounts. On the other hand, if you have less-than-ideal personal credit, your options will be more limited, and you’ll want to be sure you pay close attention to minimum credit score requirements when looking at your different business loan options.
Next, you’ll also want to consider how long you’ve been in business. On the whole, businesses who have been in business for two years or longer will be able to qualify for the best business loans. This isn’t to say, of course, that there aren’t financing options for startups—however, just like you’ll have a more difficult time applying for a business loan with bad credit, your options will also be limited if you have only a few months in business.
Finally, you’ll want to check to see what your annual revenue was last year, and in general, what your cash flow and business finances look like. Most lenders will have a minimum annual revenue requirement, as they’ll want to see that you generate enough money within your business to afford and pay back a loan. As you might imagine, the more revenue you can show, the more likely you are to qualify for a loan—and one with the best rates and terms.
What’s the next step in learning how to apply for a business loan?
Now that you’ve done the research necessary to determine why you need financing, how much you need, and what your qualifications look like, you’re ready to start looking for the right type of business loan for you.
As we mentioned, there are a variety of types of business loans and certain products will be better suited for distinct purposes, amounts, and qualifications.
Overall, you might consider any of the following financial solutions:
Guaranteed by the Small Business Administration, SBA loans are a great option for business owners who don’t qualify for bank financing but still have great credit and strong business financials.
SBA loans have some of the best rates and terms on the market and can be used for a variety of purposes. The most popular SBA loan program, the 7(a) program, offers loans up to $5 million, which can be used for everything from working capital to buying an existing business.
The SBA CDC/504 loan program is also a popular program, providing loans up to $20 million to be used specifically for commercial real estate and large equipment purchases.
Ultimately, SBA loans are a top option for small businesses, however, they require a long and intensive application process and are not the easiest to qualify for.
Medium-term loans are structured like bank loans, but they’re offered by online, non-bank lenders, making them easier to qualify for most small business owners.
With their large amounts and reasonable interest rates, medium-term loans are a good option for business owners looking for funding for one-off expenses, but either can’t qualify for bank or SBA loans or, need faster funding.
Short-term loans are structured just like their medium-term counterparts, but as the name implies, they have shorter terms.
These loans typically offer smaller amounts of capital (up to $250,000), that are paid back over a shorter term, usually ranging between three and 18 months. Issued by online lenders, short-term loans are much faster to apply to, and much more accessible for borrowers with bad credit or newer business owners.
This being said, however, you’ll pay more for speed and the simplicity of these business loan applications, as short-term loans have interest rates starting at 10%, but reaching as high as 90%.
Business lines of credit are one of the most flexible forms of financing for small businesses. Similar to a credit card, a business line of credit allows you to pull on a credit line with a set amount, accessing funds whenever you need it. With this product (and unlike a term loan), you only pay back the funds you draw, and only accrue and pay interest on that capital.
Both banks and online lenders offer business lines of credit—and these credit lines are great for working capital, covering cash flow, and funding emergencies or unexpected opportunities. Although the application process may take longer with a bank, generally, business lines of credit have simple applications and are fast to fund.
Plus, unlike some term loans, you may find it easier to qualify for a business line of credit with bad credit or as a new business.
If your business needs to free up cash flow that’s held back in your customer’s unpaid accounts receivables, then invoice financing is likely going to be the right type of business loan for you.
Invoice financing companies advance you a percentage of the value of your outstanding invoices, freeing up cash to use for your business.
As you may expect, this type of financing will only be applicable to certain businesses, however, if you need financing for this specific purpose, you’ll find that invoice financing is fairly easy to qualify for and access quickly. Generally, lenders evaluate your application based on your customers’ repayment history and won’t rely as heavily on your business’s qualifications.
Finally, another specific type of business financing is equipment financing.
Like invoice financing, equipment financing is designed particularly for businesses that need funding to purchase equipment. With this type of financing, therefore, you’ll receive a lump sum loan of up to 100% of the equipment’s value, which you’ll pay back with interest over a set period of time.
When you pay the loan back, you’ll own your business’s equipment outright.
Once again, like invoice financing, equipment financing will only be an option for businesses who need to purchase equipment—however, because the equipment you’re buying serves as its own collateral on the loan, you’ll find that equipment financing is fairly easy to qualify for.
Once you’ve compared all of the different types of business loans and determine which one will best meet your needs, you’ll want to start shopping lenders.
As you probably know, different small business lenders offer different products, and therefore, you’ll want to find a lender who not only offers the product that you’re looking for, but also one that has requirements you think you’ll be able to meet.
This being said, as you’re learning how to apply for a small business loan, there are generally three types of lenders to consider: Bank lenders, SBA lenders, and online lenders.
Bank lenders can include big banks—Chase, Bank of America, Wells Fargo—as well as local community banks.
Overall, banks can offer a variety of business loans, everything from traditional term loans to business lines of credit to equipment financing. As you might imagine, each bank will offer their own unique suite of business loan products.
Ultimately, bank lenders will provide business financing with the best rates, terms, and amounts. This being said, however, it’s also very difficult for most small business owners to qualify for a business loan from a bank. On the whole, you’ll need excellent credit, a few years in business, and a significant annual revenue in order to qualify for a bank loan for your business.
Additionally, bank loans will be some of the slowest to fund and will require a lengthy, time-consuming application process. In fact, many banks will require that you visit a branch to apply for a business loan.
With this in mind though, if you do think you can qualify for a business loan from a bank and you don’t need funding quickly, you’ll certainly want to apply to access loans with the most desirable rates and terms.
As we mentioned briefly above, most SBA lenders are actually banks. However, since SBA loans are so unique, it’s worth considering SBA lenders as separate from basic bank lenders.
This being said, if you’re looking for an SBA loan, you’ll need to find a lender that both offers this type of business loan and actually offers the specific SBA program you’re interested in.
If you’re looking for an SBA 7(a) loan, you’ll find that some of the best lenders are, in fact, big banks—including Chase, Wells Fargo, U.S. Bank, and more.
For the CDC/504 program, on the other hand, the loan will actually come from two lenders, a bank and a CDC, or Community Development Corporation (with the third part of the loan coming from you, the borrower, as a down payment). So, if you’re looking for this type of SBA loan, you’ll need to find a lender that accommodates this program as well as find a local CDC in your area.
Ultimately, not all banks offer SBA loans, so you’ll want to pay close attention to the ones that do and the programs they offer if you’re looking for this kind of business financing. Plus, as is the case with general bank financing products, you’ll want to remember that applying for an SBA loan will require a lengthy process and significant documentation. These loans will also be slow to fund, taking anywhere from a few weeks to 30 days or longer.
Finally, whether you don’t think you can qualify for a bank loan, need access to faster funding, or are looking for a simpler application process, you’ll want to look into online lenders to find and apply for the right business loan for you.
Online, or alternative lenders, such as Kabbage, Funding Circle, and BlueVine, will offer a range of products—including everything from lines of credit to short-term loans to invoice and equipment financing.
On the whole, online lenders will have flexible qualification requirements and will be more accessible to business owners with bad credit, little time in business, or who simply can’t qualify for a bank or SBA loan. Additionally, online lenders will be the best option for fast funding and simple, often automated application processes with limited documentation.
It’s important to note, however, although it will be easier to qualify for and apply for a small business loan from an online lender, these products will also be more expensive, with shorter terms and lower amounts, in comparison to bank and SBA loans.
The next step in learning how to apply for a business loan is preparing the actual application.
Once you know the type of business loan you’re going to be applying for and the lender you’ll be applying with, you can start filling out the application and gathering the documents you’ll need.
On the whole, the application process will be specific to the lender you’re applying to—as we’ve mentioned, banks and SBA lenders will require significant documentation and many banks will require that you apply in person. With alternative lenders, on the other hand, you’ll very likely be able to complete your entire application quickly and easily online with limited documentation.
This being said, however, there are some business loan requirements you can expect to provide regardless of the lender. These include:
Once your application is prepared and everything is filled out completely and correctly, you’re ready to apply.
Depending on the lender, after you apply, you may receive an initial offer, or you may be asked for additional documentation. In any case, it’s important to respond quickly to any request or question your lender has, as this will help expedite the process.
After the lender has all of the information and documentation they need, they’ll start the business loan underwriting process to determine whether or not you qualify, and if you do, what loan amount and terms you’re eligible to receive.
At this point, you’ve learned how to apply for a small business loan, and therefore, you’ll be ready to review and compare any and all offers you receive from different lenders.
Now that we’ve reached the end of our guide, you should understand how to apply for a small business loan.
Although some of your process will be specific to the type of loan you’re applying for and the lender you’re working with, you can follow these seven comprehensive steps to make everything move as quickly and seamlessly as possible.
This being said, it’s important to remember a few key points as you’re looking to apply for a business loan.
First, you want to make sure you plan ahead of time, so that you know what you need a loan for, how much you need, and what type of loan will best fulfill these requirements. Next, you’ll want to evaluate your business’s qualifications and keep these top of mind when you’re comparing lenders—you don’t want to spend significant time and effort on a bank loan application, for example, if you have poor credit and would, therefore, be unable to qualify. Finally, you’ll want to complete any business loan application wholly and carefully and thoroughly compare offers from different lenders to ensure that you’re getting a business loan with the best terms and rates possible.
Ultimately, applying for a business loan may seem complicated but it’s often a necessary part of business ownership—plus, after you’ve completed the process once, it will only be easier to get through the next time.