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How To Get A Loan For Small Businesses

by Lucas Finis
How To Get A Loan For Small Businesses

Starting or growing a small business requires access to capital. Loans are one of the most common sources of financing for small businesses. However, applying for and securing a business loan can seem daunting. This article will outline the loan application process on how to get a loan and different loan options available to small businesses.

How To Get Ready For A Loan

Before applying for a business loan, you’ll want to ensure your business is “loan-ready.” Lenders will evaluate several factors to determine your creditworthiness and ability to repay. Some key things to prepare include:

  • Business plan: Create a formal business plan outlining your company overview, market opportunity, financial projections, management team credentials, and intended use of funds. This demonstrates your viability to lenders to get a loan.
  • Financial statements: Provide at least 1-2 years of income statements, balance sheets, cash flow statements, and tax returns if available. This shows your historical financial performance. 
  • Credit score: Check your personal credit report and scores. Most lenders will check business owner credit as part of underwriting. Aim for scores above 700. 
  • Collateral: Consider assets you can pledge as collateral like equipment, real estate, and vehicles. This secures the loan for the lender. 
  • Down payment: Save a portion of funds from your finances or friends/family to show commitment to the investment. Lenders favor applicants putting “skin in the game.”

How To Choose a Loan Type?

How To Get A Loan

With financing preparations in order, the next step is selecting the right loan type based on your funding needs and situation. Common business loan options include:

  • Term loans: These fully amortize the principal over a set term, usually 1-10 years, with fixed monthly payments. Good for equipment, real estate, or long-term working capital needs. 
  • Lines of credit: Offers a revolving line you can draw from as needed, only paying interest on outstanding balances. Flexible for fluctuating short-term needs like inventory or receivables. 
  • SBA loans: Government-backed loans through the Small Business Administration have lower rates and easier qualifications than standard loans. Includes popular 7(a) and 504 loan programs.
  • Microloans: For very small businesses or startups, microloans under $50,000 provide an accessible option through non-profits or CDFI lenders.
  • Merchant cash advances: Daily repayment is deducted from future credit/debit card sales. Risky but approvals are quick for established businesses with steady card volume. 

Your financing needs, business maturity, credit profile, and ability to provide collateral will guide which type makes the most sense. Discuss terms and structure with multiple lenders to get a loan.


How To Get A Loan?

How To Get A Loan

Once you select a lender and loan type, the actual application process typically involves:

  1. Initial Loan Inquiry: Contact the lender by phone, online, or in person to discuss your needs and pre-qualify for a potential loan amount. 
  2. Loan Application: Complete the lender’s loan application form providing business and personal financial details as well as intended use of funds. 
  3. Supporting Documentation: Provide requested tax returns, financial statements, business licenses/permits, personal financial statements, and resumes. 
  4. Credit Check: The lender pulls personal and business credit reports to evaluate creditworthiness. May require collateral appraisal.
  5. Loan Underwriting: The lender analyzes all materials to assess risk factors and ability to repay based on cash flows and credit history. 
  6. Approval Decision: Within a few weeks, the lender issues a loan approval or denial letter outlining the next steps if approved.
  7. Closing: Sign final loan documents, provide any funds for closing costs, and receive access to loan funds after funding.
  8. Repayment: Make regularly scheduled principal and interest payments according to terms until full payoff or refinance.

Your preparedness and application accuracy are crucial to earning loan approval. Ask the lender for a checklist of requirements as well. With diligent preparation, small businesses can secure much-needed financing to grow.

Refinancing and Alternative Funding Options

If denied or want better rates as your business matures, don’t lose hope – consider refinancing existing loans or tapping new funding sources. Refinancing involves taking out a new loan to replace your current debt on better terms. Explore refinancing once improving cash flows boosts your credit profile. 

Alternative funding options could also work alone or in tandem with loans, such as equity crowdfunding, invoice factoring, purchase order financing, equipment leasing, or angel/venture capital. Grants and COVID relief programs may also be available depending on your industry and location. Exhaust all potential funding roads to support your small business goals.

Conclusion | How To Get A Loan?

Securing startup or growth capital takes thorough planning, diligence, and determination. But with the right loan preparation and persistent lender outreach, small businesses can find affordable financing solutions to fuel their next stage of success. 

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