How to apply for a business loan in 5 steps

Key points

• The application process for a business loan can vary depending on the type of loan you choose.
• Certain types of loans can be difficult to obtain if your business is relatively new.
• Be sure to have your documents ready before you apply to speed up the process.

As a small business owner, one of your top priorities is to obtain capital for your business. While that can come from multiple sources, understanding how to get a business loan can help you obtain financing when you need it most to start or grow your business.

Whether you’re applying for an SBA loan, a bank loan, an online loan or any of the other business financing options, the process can look a little different. However, here are some of the more common steps you may need to take.

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Credibly business loan

Loan amounts

$5,000 to $600,000

Time to fund

As soon as the same day

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Via Credibly's website

Loan amounts

$5,000 to $600,000

Time to fund

As soon as the same day

1. Determine which type of loan you need

Business owners have a lot of different loan options to choose from, though what you’re eligible for can vary depending on your operating history, revenues, credit history and more. Here are some of the options you may come across:

• SBA loan.
• Term loan.
• Line of credit.
• Equipment loan.
• Microloan.
• Invoice financing.
• Invoice factoring.
• Merchant cash advance.
• Personal loan.
• Business credit card.
• Vendor financing.

The type of loan or line of credit you choose will depend on your situation and your needs. If you need to borrow a lot, for instance, you may want an SBA loan, term loan or equipment loan, which can offer large loan amounts and longer repayment terms.

If you need ongoing access to financing, you may consider a line of credit or a business credit card. And if your business is relatively new or you don’t have a good business or personal credit history, you may consider options such as microloans, vendor financing, invoice financing, invoice factoring, merchant cash advance, personal loans or business credit cards.

Take some time to research each option thoroughly, including their costs and repayment terms, to determine which one is best for you. For example, online loans are easier to obtain than loans from banks and credit unions, but they may charge higher interest rates and fees.

Tip: You’ll also want to nail down how much you need to borrow to achieve your goals and crunch the numbers to get an idea of what the monthly payment would be and whether your business can afford it. To estimate how much business debt you can afford to repay, use a business loan payment calculator to figure potential monthly payments.

2. Understand what lenders are looking for

While some of the factors that commercial lenders consider are similar to what you’ll find with consumer lenders, others are unique to small businesses. In general, it can be more difficult to obtain a loan for your small business than for personal use.

“Many small businesses are seasonal in nature and have considerable volatility in cash flows throughout the year. Small businesses also tend to have fewer assets which can serve as collateral against a loan,” says Ben Johnston, chief operating officer of Kapitus, a small business lender. “As a result, many lenders are unable to assess small business risk appropriately and either refrain from lending in the space or charge high rates to compensate for the risk associated with the asset.”

Here’s a quick summary of what lenders look at during the loan application and underwriting process:

• Credit history: Lenders may consider both your business and personal credit histories when you apply for a loan. Credit score minimums will vary by lender and loan type, but the better your credit, the better your chances of getting approved.
• Operating history: New businesses have a high failure rate, so it can be tough to qualify for a loan from a bank or credit union or an SBA loan when you’re in the first two or three years of operation. However, other financing options may still be available, such as online loans, credit cards, invoice financing and factoring.
• Collateral: Many business loans require that you put up some form of collateral, such as equipment, heavy machinery and accounts receivable, among others. If your business can’t pay back the debt, the lender may seize the collateral to satisfy the loan.
• Revenue and cash flow: Lenders will want to see how much revenue your business generates, as well as how you manage your cash flow.
• Industry: Some industries tend to be riskier than others, so the nature of your business could potentially impact your ability to obtain affordable financing.
• Business plan: Many lenders may want to see a business plan that provides information on the history of your business, your experience, your competitors, what you plan to do with the funds and more. Essentially, they want to know that you have a plan to use the capital wisely and pay back the debt.

3. Compare lenders

Once you have an idea of what type of loan is right for you, shop around and compare at least a few lenders that offer it. As you go through this process, compare loan amounts, interest rates, repayment terms, fees, collateral requirements, eligibility criteria and any other feature that’s important to you.

In some cases, you may be able to get prequalified without a credit check, but many lenders may require you to submit an official application to receive an offer.

4. Prepare your documents

Before you start the application process, it’s important to collect the various documents you may need to provide to the lender. This can speed up the process, particularly with loans that can take weeks or even months to fund.

Your best bet is to contact the lender to determine which documents are required, but this list can help you get started:

• Business plan.
• Owner resumes.
• Income tax returns.
• Bank statements.
• Balance sheet.
• Profit-and-loss statement.
• Cash flow statement.
• Collateral details.
• Business license and registration documents.
• Articles of incorporation.
• Contracts with third parties.
• Lease agreements.
• Franchise agreements.

“Reviewing this documentation also gives the owner a chance to personally assess the financial situation of the company and consider exactly how much money is truly needed and what repayment terms can be supported by the cash flow of the business,” says Johnston.

5. Submit your application

Once you’ve narrowed down your list of options to one lender, submit an application online, at one of the financial institution’s physical branches or over the phone.

You’ll typically need to provide information about yourself and your business, as well as the amount you’re seeking. Since you already have your documents, you’ll be able to provide those as needed during the application process.

After you’ve submitted your application, it may take mere hours or several weeks to complete the process and receive a final decision, depending on the type of loan you choose. Be patient with the process and be prompt with your responses if the lender reaches out for more information or documentation.

Keep in mind that many lenders will require a personal guarantee, which means that you’re responsible for paying back the loan using your personal assets if your business can’t afford to. “As a result, small business owners should have confidence in the future performance of the business before taking a loan that carries a personal guarantee,” says Johnston.

Frequently asked questions (FAQs)