How To Get A Business Loan: The Step-By-Step Guide

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.

How To Get Approved For A Business Loan

Step 1: Determine How You Will Use Your Small Business Loan

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:

• Purchasing new equipment
• Buying land, office space, or buildings
• Refinancing high-interest debt
• Hiring new employees
• Covering payroll expenses
• Purchasing inventory or supplies
• Working capital
• Starting or acquiring a new business or franchise
• Funding startup projects

Step 2: Calculate The Amount Of Your Small Business Loan

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.

Step 3: Calculate How Much Money You Can Afford To Borrow

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.

Step 4: Check Your Credit Score & Report

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:

• Identifying errors in your credit report
• Disputing errors with the credit bureaus
• Paying bills on time
• Contacting creditors about late payments
• Keeping your credit utilization at 30% or lower
• Paying off debt as quickly as possible
• Not falling victim to credit scams that promise to raise your score for a fee

Step 5: Decide What Type Of Small Business Loan You Need

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.

Step 6: Research Small Business Lenders

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.

Step 7: Prepare Loan Application Documents & Collateral

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:

• Balance sheets
• Profit and loss statements
• Personal and business credit reports
• Personal and business income tax returns
• Bank statements
• Business licenses
• Franchise agreements
• Quotes from contractors and vendors
• Personal guarantees from all owners

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.

Step 8: Apply For Business Loans & Compare Offers

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:

• The reason you’re applying for the loan
• The amount you wish to borrow
• All documentation required to complete your application
• Explanations for negative items on your credit reports

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.

Step 9: Loan Approval & Disbursement

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.

How do you know if a business lender is reputable and trustworthy?

Shannon has been writing for Merchant Maverick about small business software and financing since 2015. She started writing professionally about business topics in 2005. Shannon has been featured in the Washington Post, Reader's Digest, US News, MSN, Yahoo Finance, Business Insider, and other publications. She has a bachelor's degree in English from San Diego State University and currently resides in San Diego, California.

Shannon VissersLead Staff Writer

It can be difficult to suss out bad lenders from good ones, but I would check user review websites like Trustpilot, Better Business Bureau, and others to see if there are a lot of complaints about a lender before you commit to them.

The Bottom Line On How To Get A Business Loan

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.