Accounting & Finance

How to Get a Business Loan: Essential Steps for Small Businesses

Last updated by

October 30, 2020

Obtaining additional financing is often essential to launch and grow a business. You have daily expenses, salary payroll, equipment, and inventory to cover.

Sometimes it seems that small businesses have to jump through hoops to get a business loan due to today’s stringent bank lending standards. It can seem nearly impossible.

Although it’s challenging to get approved for a small business loan if you’re prepared you to have a better chance of getting approved.

Here are five essential steps to show you how to get a business loan.

Table of Contents

1. Determine Why You Want a Small Business Loan

You need to know precisely why you need a small business loan. There are a variety of reasons why you may need one, and financial lending institutions will want to know why.

Some of the reasons include launching a business, growing your business to the next level, having a safety net or just managing daily expenses.

2. Choosing the Right Loan For Your Business

Your purpose for applying for a small business loan will determine the type of loan you will or will not qualify for.

If you’re a startup business, it’s nearly impossible to be approved for a loan the first year your company does business.

That’s because lenders want to know you have cash flow so you can repay the loan. Startups are the first types of companies lenders disqualify from the starting gate when it comes to financing.

If you’re a startup company, it’s best to apply for business credit cards. You can also rely on personal loans from friends and family, or nonprofit microloan lenders may offer.

If you want to get a business loan and your small business has a history and earnings of at least a year or more, you may have more financing possibilities.

Some loan types are below.

Term loans
SBA loans
Invoice Factoring
Business Lines of Credit

What Are SBA Loans Used For?

SBA loans can be used for a variety of purposes, but generally speaking, can be broken down into two categories:

Working capital, including financing and refinancing debt
Asset purchasing, including items like equipment, renovations, real estate, furniture, and more

This loan type’s flexibility was designed intentionally, as the needs of small businesses vary greatly, depending on their type and location.

SBA loans can only be given out by a lender that has been approved by the Small Business Administration – this can sometimes be more difficult to find than a standard loan.

As is standard with many government-backed programs, there are more hoops you have to go through than for a traditional loan. For starters, you have to meet SBA eligibility requirements. These requirements vary based on a variety of factors, including the size of the business, its type of ownership, its location of operation, and more.

Furthermore, there are often online marketplaces that can help you find low-interest SBA loans. One such example is an online marketplace that acts as a one-stop-shop for small business loans. Lantern credit helps you find information about loans and identify the perfect loan vendors for small business owners that are looking for such a loan.

3. How to Find the Best Lender for Small Businesses

When you’re researching how to get a small business loan, you need to look in a variety of places.

Some of these financial lenders can be found in banks, online lenders like searching for small business loans in Canada or in other areas and nonprofit microlenders.

Some of these lenders provide options including accounts receivable financing, term loans, lines of credit for businesses.

When choosing between loan providers, choose the lender with the lowest APR and whose regular payments you can manage to repay.

When you decide on the kind of lender and financing options that you want, make sure to compare, compare other financial lenders by annual percentage rates which are the total cost you’ll pay and the terms of the loan.

When to Borrow From A Bank

Here’s when it’s a good idea to apply for a traditional bank loan.

You have good credit.
You can offer collateral.
You don’t need cash in a hurry

Banks offer options such as lines of credit, commercial mortgages to invest in properties or refinancing currently owned properties and term loans.

Small businesses have a difficult getting approved for business loans due to low sales volume small cash reserves, little or no collateral to secure a loan or less than stellar credit.

Funding takes longer than other means with banks, generally two to six months, so if you need fast financing, it’s not your best option. On the plus side, banks typically offer lower APRs than other loan types.

How To Get A Small Business Loan From Microlenders

Microlenders make good choices for small business loans when you can’t land a loan because your business is too small.

Microlenders typically lend short-term loans for an amount under $35,000. These loans are offered by nonprofits, and the APR you’ll pay is generally higher than a traditional bank loan.

This type of loan will often require financial statements and a detailed business plan. You will need to convey what the loan will be used to pay.

Microloans, although a tedious process provides a good option for startups and small businesses that cannot qualify for bank loans, are new businesses, have fair credit or don’t have collateral.

When To Borrow From Online Lenders

Online lenders make an excellent borrowing option for small business loans when you are a newly established business, you need rapid funding, or you possess little or no collateral to secure your loan.

Online lenders can provide lines of credit starting at $500 and as high as $500,000. The annual percentage rates (APR) for online lending loans typically range from 7% to slightly over 100%.

The exact amount will depend on the type and size of the loan, the lender the terms of the loan, credit history, and whether or not the lender requires collateral to secure the loan.

Compared to banks, approval rates are higher, and disbursement is faster than banks, sometimes as quickly as one business day.

4. How Lending Institutions Determine If You Qualify.

Here are some of the questions and criteria lenders use to approve or deny your loan.

How Long Has Your Business Been Established?

Lenders want to know how long your business has operated. You need to be in business for one year to qualify for a non-traditional loan and for two years to be eligible for a traditional bank loan.

What Is Your FICO Score?

Having a high FICO score will improve your chances to be approved for a small business loan. But it’s only one factor.

If you don’t know your credit score, you can get it from the three major credit bureaus: Experian, Equifax, and TransUnion. You can often get these scores for free online.

Do You Earn Enough?

Most lenders require you to earn at least $50,000 per year. Some require as much as $150,000 a year. Ask a lender for its minimum annual earnings before you apply for a loan.

Looking at your company’s financials will help you to know if you can afford the payments. Keep in mind, some lenders require daily or bi-monthly payments. Here are some ways to increase your salary.

5. Compile Your Documents.

Once you’ve decided on your lenders, you’ll apply to it’s time to get together your paperwork.

Here are some of the documents lending institutions require.

Personal tax returns
Business tax returns
Business financial statements
Bank statements (business and personal statements)
Legal business documents such as commercial lease, incorporation or franchise docs