How to Get a Business Loan in 6 Simple Steps

Updated Dec 6, 2022.
How to Get a Business Loan in 6 Simple Steps

Every business, irrespective of its size (small to medium-sized businesses or enterprises) may need a business loan to help boost its growth, profitability, and Return On Investments (ROI). Whether you want to start or grow your business, business loans can go a long way in helping you achieve your financial goals.

Getting a business loan is not as complicated as you think it is. With the right knowledge of the business loan process and its requirement, you will find it easier to navigate the loan process and lending standards.

In this article, you will learn everything you need to know to get a business loan in six simple steps.

Let’s get started.

Step One: Learn How Banks Evaluate Your Loan Application and Creditworthiness

The first step you need to know about getting a business loan is to learn how banks assess you. Before applying for any loan, you need to understand how the lender will rate your loan application.

The lender's gain, that is, the interest on a loan depends on whether you, the borrower, will be able to fulfill each regular payment. For them to know if you can fulfill those periodic payments, they will assess your cash flow, loyalty, collaterals, credit scores, and years of operation.

1. Cash Flow

One of the best ways lenders can use to confirm if a borrower can pay back a loan is to evaluate the cash flow. Your cash flow is a good clue on how well your business is doing. Also, it tells if you can pay back a business loan.

Lenders will go through your financial statements such as balance sheet and income statement to assess your expenses, past sales, revenues, and reports. They might also want to see your unpaid invoices because it also adds to the future cash asset.

Some lenders go further to request your company's bank statements, that is your bank statements for at least four months. They do this before even issuing a loan or a credit card. These documents they request tell them more about the financial health of your business. A positive gesture after the checks is a step forward to getting a business loan.

2. Loyalty

If your company's account is registered with a bank that is a business loan lender, you have a higher chance of getting loan approval. This type of business loan is called Paycheck Protection Program. It refers to a type of financial support some financial institutions offered their customers as loans to boost their businesses.

So if you want to acquire a business loan, it would be best if you consider lenders with whom you have a strong, well-nurtured, existing relationship. Apart from the quick loan approval, you stand to get the loan on flexible and favorable terms and conditions.

3. Collaterals

Financial institutions like banks often require collateral from a borrower before they offer business loans. Collateral is what you put down in case of non-payment of loans. It is either you agree that your physical business assets be liquidated in case you can not pay the loan, or you offer the personal property to the lender as a replacement for the loan.

In a loan application process, you might be asked to guarantee the loan with tangible properties. Some loans do not require collateral though, it is not an unsecured loan like people think. What the lenders do is secure your loan with a general UCC lien. It is often referred to as an unsecured loan because you do not apply for it with a tangible item like collateral.

Although in reality, there are unsecured loans, it is very rare. These types of loans are offered by lenders to their most trustworthy clients.

4. Credit Scores

In acquiring a business loan, a business credit score is a strong determining factor of your business creditworthiness. Before applying for a business loan, you need to understand your business credit profile. The reason is that, based on your past achievements, lenders want to know if you can make your periodic payments, either weekly, monthly, or quarterly.

Credit bureaus make it easy for you to see your credit scores. Personal bureaus like Equifax and Experian allow you to assess your credit score for a small fee, or even for free. These same bureaus work for business credit scores too.

Your credit profile will determine the approval status of your loan application. Most financial institutions are impressed with FICO scores of 670 and above. Online lenders still accept 600s from borrowers; some might go less than that.

There are still some alternative financing bodies that accept as low as 500. In essence, the higher your credit scores, the more options you have and the higher your chances of loan application approval.

5. Years of Operation

The number of years your business has been existing often determines whether loan lenders will approve your application. Startups find it somewhat difficult to secure business loans from major lenders.

These loan bodies want to see how well you have handled past debts while running your business. They want to see a track record of financial success so far despite some odds.

Traditional lenders always want a record of 3-4 years of operation while online lenders are okay with one year. If your business is a startup, the best option is to opt for business credit cards.

Understanding the Five C's of Credit
Source: Investopedia

Step Two: Decide What Type of Loan or Financing You Need

You must know the type of loan you want to acquire before forwarding an application. Even if you are not financially savvy, you need to be an expert at determining the type of financing that will satisfy your business needs and cover your credit account. There are lots of available options to choose from and here are some of them:

1. Traditional Bank Loan

You can request a loan from the bank you have a bank account (or do business) with. Also, you can meet a new bank and build a relationship from the loan application. Either it is your bank or a new one, you will need to fill in some necessary documents with which they will determine whether the bank will approve your business loan application.

Loans vary in amounts depending on your needs. Repayment time varies also from one to twenty years or more depending on the terms and conditions tied to the agreement. The interest rates will also be discussed between both parties.

2. Cash Flow Loan

Cash flow loan, just as the name implies, focuses mainly on the cash flow in your business. As for this type of loan, the lenders want to be sure that you have the cash flow to manage debts. Lenders are more interested in your business' past, present, and future cash flow than in your asset value. This type of loan is primarily used for a company's day-to-day operations.

Cash flow loans are influenced by the performance of a business, not a business credit score. Unlike bank loans, it does not require a thorough financial analysis of a business. It is usually a short-term loan.

3. Microloan

Microloans are intended to finance small startups that do not have the necessary documents to prove their financial intelligence in terms of servicing debts. These types of lenders do not look into your credit as thoroughly as others although your credit profile is very much significant.

They also prefer to work with small-scale businesses (from the name ‘micro') who request smaller loan amounts between the ranges of $1,000 to $50,000.

When you submit your loan application, you should get approval between 30 to 90 days. The rates on these loans are better compared to credit cards. Microloans usually do not work for long-term income raise.

4. Business Credit Cards

Credit cards are one of the best ways that startups and small-scale businesses can access substantial capital to grow their businesses. It is also a wonderful option for mature businesses. Credit cards are better used for a short-term funding process. More importantly, your credit profile is a major loan approval factor.

Oftentimes, it is easier to qualify for a business credit card than a term loan because you are sure to receive an approval message within three weeks of applying. Business credit cards have some benefits like cash back rewards, loyalty points, etc.

5. Online Loan

Online loans have been the ‘go-to' choice for many small businesses today. It is due to the swift responses to loan applications and the way they make the funds readily available to clients. If you are willing to settle your debts in less than five years by paying a higher APR (Annual Percentage Rate), chances are that you get a loan within the range of $25,000 to $500,000.

Online loans are processed faster than traditional bank loans. Another thing is that the terms and conditions are also flexible for startups. An advantage of online loans is that lenders can approve your application the same day you submit it. Also, the funds will be available in your bank account in the space of three days after loan approval.

6. Vendor Financing

This option is one of the most underrated in the business world. Startups and small-scale businesses can get funds as much as $1,000 – $100,000 directly from vendors that they partner with. Some vendors do not even offer these loans with interest but the payback time can be as short as two weeks. This type of loan or financing does not usually come with high rates.

As a business owner, if your credit history is appealing, your application might be approved within a few hours after submission. Vendor financing is mostly considered an option when a business can not get a bank to approve its application due to some circumstances.

You can use any of the best business loan calculators such as Bankrate and Nerdwallet to determine the amount you need to borrow, how much interest you need to pay back, and the timeframe it takes to pay the business loan.

Step Three: Compare & Decide on a Lender

Now that you know the evaluation process of most loan lenders and the type of financing fit for your type of business, the next step is to decide on the type of lender to pick. It is not all business loan lenders that provide all types of financing services.

The best thing to do is to narrow down your search to the category of lenders that offer your choice of financing and will also quickly approve your loan application after considering your creditworthiness.

The following are the different categories that lenders fall into:

1. Direct Lenders

Traditional banks, online lenders, micro-lending programs, and credit unions all fall under this category. In this category, you do not need to go through any third party to submit your loan application, receive approval, get funds, or even make periodic payments when paying back the money borrowed.

Some circumstances determine if you can successfully get loans from the lenders under this category.

When you want to get loans from traditional banks:

  • It would be an urgent need of cash
  • You must have been working for at least three years
  • You must have a good credit history

When you need to seek loans from online lenders:

  • You probably need quick funding
  • You are running a startup that is barely a year old
  • You lack collateral

When to get financing from micro-lenders:

  • Maybe traditional banks are not working out
  • You are running a new business
  • You don't have a credit history or you have one that is not pretty good

2. Lending Marketplace

This option is where third parties help you find online lenders based on the qualifications you have. It is like a proposal to some set of people telling them why you need the loan and how capable you are of paying back within the said time. People are marketing your requests to online lenders.

Once you enter your business information where necessary, it will be matched to the best choice of a lender based on your financing needs. The marketplaces are online and application submission, approval, and funding are quite fast compared to traditional lending services.

3. P2P Lending

Peer-to-Peer (P2P) lending is a type of service where business owners seek business loans or financing from business owners and others. In recent years, this service has grown and has become more appreciated than before. It is also one of the best options for business owners who have been turned down multiple times by traditional lenders. A very good example of P2P lending is crowdfunding.

In P2P lending, you get a chance to share your business' credit situation and what you need to get back on track. You will also go further to explain how more funds can generate lots of income for your business. It will capture the interest of a lender and they will reach out to genuinely help your business.

Another advantage of P2P lending is that you can get funded even with an average credit score. Most P2P lenders are also business owners so it does not take them much to understand your plight.

Common P2P Business Loan Uses
Source: LanternCredit

As an add-on, the following questions will help you identify the right lender:

  • Do I have personal assets or collateral?
  • How is my credit score?
  • How soon can I pay back the loan?
  • How much do I need for my project?
  • Do I have an account with the banks I want to request a loan from?
  • How long have I been doing this business?

Answers to these questions tell you if a particular lender is the right one or you need to pick another option. Also, remember that there are some requirements you can find your way around. Do your best to find an alternative to the requirements if that lender is the best option for you.

Step Four: Determine the Chances of Getting Approved

When applying for loans, you will surely meet lenders who will be interested in your application based on some basic information about your business. However, the main application process will require a thorough inquiry into your business' credit history.

As a business owner, you should increase your chances of loan application approval by filtering your applications to the lenders your qualifications will most likely impress.

Traditional Banks Approval

Starting with traditional banks, if your credit score is lower than 680-750, then your chances of getting approval are very slim.

Most banks make use of credit scores to rate your creditworthiness. It tells them how well you manage past debts and how efficiently you used those loans. So a business with a credit score as low as 500-600 should not bother seeking help from banks because there are lots of business owners with better credit scores who want to secure loans just like you.

Online Banks Approval

Online banks that charge higher interest rates find it easier to approve your application and may be a good option for you depending on the reason you are taking the loan. For you not to regret any actions taken, utilize your time and energy very well to weigh your options and understand the odds before applying because decisions like these can determine a lot concerning your business span.

Understand the Lenders’ Process for Approval

For some lenders, they can tell you your chances of approval with just a few questions. Within the next few minutes, you will either get a ‘yes' or ‘no'. If it is the former, then you proceed to provide any further information to find out the amount you are getting and the interest rate on the money. Also, you would know how much to be paying back periodically. If it is the latter, it would be best to consider the next option.

Identify why the lender is not impressed with your application, fix that part up before approaching the next lender. Or better still, meet another lender that does not care about that aspect of qualification and discuss with them.

There are categories of lenders that do not give a sign of your approval until after some time into the process. Some just sign the final papers after some days and reach out. Others take two to three weeks. Some use nothing less than three months to evaluate your application.

This is why it is important to consider how urgent you need the funding before approaching a lender. If you want urgent funding, online lenders are the best option. But if it is not an urgent need, then you can stick with traditional banks.

Step Five: Gather the Required Business Loan Documents

After getting the right lender to meet, before applying, ensure you get all necessary documents related to the application and approval process. Gathering documents for the application of a small business loan can be tiresome but it is an unavoidable step in trying to secure funds.

For startups, the first few years of their business are an entrepreneurial hurdle that they must cross. During this time, they are trying to gain ground in the marketplace. Simultaneously, they would be left with options on how to secure funds to build assets and increase business cash flow.

Despite the short year of operation of their business, they must be able to gather some important documents that say a lot about the business plan.

Getting these files ready beforehand will ease the process of acquiring a small business loan. For clarification, here are some common documents most lenders ask for:

  • Business licenses, i.e. proof of permission to establish your business.
  • Bank account statements
  • Business credit scores (personal CS too)
  • Loan application history
  • Tangible collateral available to replace future non-payment of loan
  • Tax returns and documents for your personal and business tax accounts.
  • Any relevant legal contracts
  • Business lease (if there is)
  • Project financial statements (so that the lender can get a picture of your future income expectations)

Other financial documents that are relevant to your business such as notes receivable, accounts receivable, unpaid invoices, etc.

For some lending options, you might also need:

  • Business cash flow and costs details
  • Business plans and updated marketing strategies

If you still want a precise answer to the ”What documents should I bring” question, just prepare any paperwork or electronic files that contain information about your business plans, marketing goals, and financial statements.

Most lenders, especially banks, would not just believe words of the mouth that your business is a prospective one and you will be able to service your debts properly. They need proof that your business has what it takes to utilize any loan they offer and pay back their money with the agreed interest rates in the agreed time frame.

Step Six: Fill Out the Loan Application

Filling out a loan application can be another laborious task. But if you have successfully done the previous step, then it should be much easier for you. Once the necessary documents are gathered, it is easy to fill out the application and submit it. Expect an approval message between the next 24 hours to three months depending on the type of loan you applied for.

You start loan applications with the basic information. In this section, you will have to provide your name, business name, phone number, and the legal structure of your business. The next set of questions address the type of business you run. You do not need to over-explain, just tell them your sources of revenue, your target audience, and your products.

In the finance section, you will provide your bank account information, i.e. your account number, and your deposit/withdrawal information. Also, lenders might ask you for collateral or personal property to put down in case of non-payment of loans. You have to weigh your options carefully before you choose collateral.

The next section will ask for your business information like business' ownership i.e. is it a sole proprietorship or partnership business? You may need to put in some personal information like marital status. Most applications end with information about the agreement of loan amounts.

Extra tip: Carefully go through the document, again and again, to be sure your information is correctly indicated.

How to Get a Business Loan FAQ

What Credit Score Is Needed for A Business Loan?

Credit scores are part of what lenders use to evaluate your creditworthiness as a business owner applying for a loan. These scores are gotten from your past operations and the achievements you have. 

Lenders want to know if you have what it takes to manage debts successfully, i.e. making periodic payments at the appropriate time. 

Different financing bodies have a range of credit scores that they accept as creditworthiness. For traditional banks, they accept scores between the ranges of 680-750. If your score is lower than this range, then you have to look into another lending option. 

Online lenders can accept scores in the 600s. Other alternative financing sources accept 500 and above. Startups with low credit scores can obtain loans from these sources. But the higher your credit score is, the higher the options at your disposal.

How Much Income Do You Need to Get A Small Business Loan?

The income you need to be making before you can get a small business loan depends on the lender you approach. Most lenders require you to be making at least $20,000 annually before they can approve your application because it gives them more confidence that you can pay back the loan. If you are new in your business, some lenders can come down a bit to accept $10,000 annual income from you. 

Ensure that whatever business you are into, your plans are well structured to earn you a handsome annual income so that loan applications are not as difficult than they seem.

What Is The Easiest Way to Get A Small Business Loan?

There are different financing sources you can get business loans from. Each of these sources has its difficulties when trying to apply. But so far, after comparing the qualifications needed, response time, and interest rates, online lending is the easiest way. 

Online lenders accept credit scores as low as 600. They approve an application pretty much faster than other means. Once your application is approved, you will be funded within the next three days. Online lending is much easier for startups and small-scale businesses that do not have impressive credit scores. Unlike traditional banks, interest rates and terms are also flexible for business owners.

Is It Difficult to Get A Small Business Loan?

The only time it is difficult to get a small business loan is when you do not have the necessary qualifications that prove your creditworthiness. Different lending options have what they look at before approving a loan application. 

Some of the requirements are high credit scores, good credit history, tangible collateral, etc. Some lenders consider some requirements more important than others.

Also, as a business owner, you might not have all the requirements which are why you need to consider different lending options and pick the best your qualifications can get.

Can I Use The SBA Loan to Start A Business?

Yes, you can use the SBA loan to start a business. Oftentimes, SBA (Small Business Administration) loans are used by established businesses that have to operate for a while. You can use the loans for expansion, tools purchases, real estate investments, etc. However, the SBA loans have a program that can suit people who want to start a business.

For SBA loans, there is no minimum time for years in business to qualify. All you need to do is provide a detailed business plan and strategy. Also, you need to prove your ability to repay the loan.

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Martin Luenendonk

Editor at FounderJar

Martin loves entrepreneurship and has helped dozens of entrepreneurs by validating the business idea, finding scalable customer acquisition channels, and building a data-driven organization. During his time working in investment banking, tech startups, and industry-leading companies he gained extensive knowledge in using different software tools to optimize business processes.

This insights and his love for researching SaaS products enables him to provide in-depth, fact-based software reviews to enable software buyers make better decisions.