If you own a small business, chances are that you’ll need to get a business loan at some point. It’s one of the best ways to leverage debt in order to scale.
But getting a small business loan can be tricky. There’s a lot of back-and-forth paperwork involved and navigating the process can be daunting.
So in this article, we’ll go over the steps to getting a business loan and some tips to follow along the way.
Let’s get started!
Choose a Business Loan Type
Before you apply for a business loan, get clear on your goals for the loan:
- How will you use the loan?
- How much money will you need?
- How soon will you need it?
Your answers to these questions will determine the type of loan you should pursue. Here are the main ones to consider:
- Business term loans—These are the most common business loans. They give you a lump sum that you pay back in installments over an agreed period.
- Working capital loans—These are revolving credit lines similar to a credit card. You can use them to pay for most business expenses, and you only pay interest on the money you use.
- SBA 7(a) small business loans—These are loans backed by the Small Business Administration. As a result, their interest rates are typically low, while the lender requirements are stricter.
- Business factoring loans—These are loans in which a factoring company gives you capital in exchange for unpaid invoices. You get money in advance, while they make a profit once the invoices are paid.
- Microloans—As the name suggests, microloans are for smaller amounts of capital (between $5,000 and $50,000), and they are usually given to start-ups or struggling businesses. The SBA offers microloans, for example, that cater to women and minority entrepreneurs.
Find a lender
Once you’ve chosen the type of loan that meets your needs, it’s time to find a lender. As a rule, banks and SBA-backed lenders will have the best interest rates but stricter requirements and slower processing times, while online lenders will have higher interest rates but looser rules and faster processing times.
A good place to look for commercial lenders is SBA’s List of Lenders or comparison charts like those from Nerdwallet. Shop around for the best rates and don’t be afraid to contact a lender to learn more details. Whatever you do, you want to find a lender with fair policies and secure software.
Collect Application Information
Next, collect all the information you need for the application. This will vary by lender, but generally, it includes your business name, tax ID, business plan, financial statements (e.g. profit and loss statements), and information about you as the business owner.
Review the Application
Check that all your application information is accurate. Dot your i’s and cross your t’s. And remember, it’s always best to have a second pair of eyes look over it.
You might even consider consulting a small business development center (SBDC). They provide free counseling and assistance to local entrepreneurs in all 50 states.
Submit the Application
To submit the application, follow the process the lender has put in place. They may want you to submit online, over the phone, or in person.
Once you’ve submitted, wait on the lender to make a decision or contact you with follow-up questions. Lenders approve or decline applications for loans based on their risk assessment of you and your business.
That’s it! Now you know how to apply for a small business loan. To boost your chances of getting approved, follow these final tips:
- Plan in advance—If you know you’ll need a loan, start preparing in advance. Put yourself in the lender’s shoes and start building your business credit so you can get the best interest rate.
- Know the full cost—Most loans have different fees attached on top of the interest. Read the fine print to know the final cost of the loan so you know what you’re getting into.
- Have a contingency plan—Things don’t always go as expected. Have a plan B in case you can’t pay off the loan the way you planned. This could be another credit line or a private underwriter.
Whatever you do, pick a lender and loan that meets the needs of your business. Your decision here can mean the difference between your business thriving or failing. Just do your due diligence and you’ll set yourself up for success.