How to Apply for Small Business Loans

A small business loan is a funding option to give business owners the necessary capital to start, maintain, or expand their operations. Unlike personal loans or residential real estate loans designed for consumers, small business loans are tailored to the unique needs of small businesses. 

Small business loans can be used for many purposes, such as investing in equipment, covering cash flow needs, and driving business growth. These loans provide a crucial lifeline for entrepreneurs and existing business owners, offering the financial support needed to operate successfully. 

In this article, we’ll walk you through applying for small business loans. We’ll explore various types of loans available, eligibility criteria, and the application process. 

Types of small business loans 

Small businesses often require financial assistance to start, expand, or manage their cash flow. Various types of loans cater to different needs and situations. Some common types include term loans, lines of credit, U.S. Small Business Administration (SBA) loans, business credit cards, personal loans for business, and hard money loans. 

The type of loan you apply for could affect the eligibility requirements and application process.

Loan type	Best for
Traditional term loan	Expansion projects or large one-time purchases
Line of credit	Managing fluctuating cash flow or covering short-term expenses
SBA loan	Startups, expansions, or businesses in need of long-term financing
Business credit card	Convenient and flexible spending for everyday expenses, small purchases, travel, and gas purchases
Business personal loan	Sole proprietors or entrepreneurs with good personal credit and little business credit
Hard money loan	Businesses with poor credit or those needing quick financing with collateral

Traditional term loan

A traditional term loan provides upfront funding in a single payment, which the business borrower repays over a set period with fixed monthly payments and interest rates. It’s ideal for financing expansion projects, purchasing equipment, or other large one-time expenses.

Line of credit

A line of credit offers flexible funding access up to an established limit, allowing businesses to withdraw as needed. Interest is only charged on the amount borrowed, making it suitable for managing fluctuating cash flow, covering short-term expenses, or taking advantage of business opportunities.

SBA loan

The U.S. SBA backs SBA loans, which offer longer repayment terms and lower down payments than traditional loans. They’re designed to support startups, expansions, or businesses needing long-term financing, often with favorable terms and rates.

Business credit card

The way a business credit card works is similar to a personal credit card. It allows businesses to make purchases and track expenses conveniently. It’s good for everyday expenses, travel, gas purchases, and managing cash flow, with the added benefit of rewards or cashback programs.

Business personal loan

A business personal loan is based on the personal creditworthiness of the borrower and may require a personal guarantee. It’s suitable for sole proprietors or entrepreneurs who need financing but lack established business credit.

Hard money loan

A hard money loan is a type of short-term financing option secured by collateral, such as real estate or equipment. It’s often used by businesses with poor credit or those needing quick financing, albeit with higher interest rates and shorter repayment periods.

Where to get small business loans

Small business loans are available from many sources, including traditional banks and credit unions, online lenders, SBA-approved lenders, and specialized lenders. As you explore these lenders, it’s helpful to keep the advantages and disadvantages of each type of lender in mind:

• Banks and credit unions: Traditional small business lenders, such as banks and credit unions, offer stability and competitive rates but may have stricter eligibility criteria.
• Online lenders: These lenders offer convenience and accessibility for small business loans but may charge higher loan fees and interest rates.
• SBA lenders: Most traditional financial institutions offer SBA loans. Any lender approved by the U.S. Small Business Administration can offer this government-backed financing.
• Specialized lenders: These lenders offer tailored solutions for businesses in niche industries but may have limited availability and potentially higher costs.

Read on to learn about the most common places to get small business loans.

Traditional financial institutions

You can get small business loans from many traditional lenders. National commercial banks, local or regional community banks, and credit unions are traditional places for businesses to secure loans. These financial institutions typically offer competitive rates and terms on small business loans.

Online lenders

Besides traditional banks and credit unions, online lenders have become increasingly popular for small business financing. With streamlined application processes, these lenders often provide quick and convenient access to funds. However, you might pay higher rates and fees with an online lender.

SBA-guaranteed loans

When considering Small Business Administration (SBA) loans, it’s essential to understand that borrowers obtain them through approved lenders like banks and credit unions, not directly from the U.S. government. 

The SBA guarantees a portion of the business loan, reducing the lender’s risk. Because of this guarantee, lenders can extend financing to businesses they might otherwise consider too risky. 

While SBA loans offer favorable terms and lower down payments, the application process can be lengthy, and approval may be more stringent than traditional loans.

Specialized lenders

While most small businesses may not require specialized lenders, some niche industries benefit from tailored financing solutions. For example, some lenders offer specialty programs for healthcare businesses, agriculture firms, construction companies, and other specialized firms. 

These specialized lenders are well-versed in the unique needs of these business industries and can provide customized loan options. So, it can be worth looking into one if you operate in a niche industry.

Ask the expert

Eric Kirste

CFP®

Seek the advice of family, friends, and peers with experience with small business loans. See if they have referrals for particular specialists or bankers. Then, determine the type of loan you may need. Will this be for a large purchase? How long do you need it for? Is it for a start-up or expansion of the business? This can guide you in deciding where to apply.

How to get small business loans

Getting a small business loan requires meeting specific eligibility criteria, which vary depending on the loan and lender. For example, SBA loans often require more documentation due to the government guarantee, but qualifying can be easier than traditional loans.

Prospective borrowers should be prepared to provide the necessary documents promptly. Most lenders typically request:

• Business financial statements for the most recent two to three years
• Business tax returns for the most recent two to three years
• Collateral documentation (e.g., A/R and inventory aging reports, equipment invoices)
• Personal financial statements and tax returns for major business owners
• Management resumes
• Business organizational documents

Additional requirements for SBA loans, startup loans, or larger/riskier loans may include:

• Business plans
• Customer and inventory lists
• Cash flow projections or forecasts

Before applying for a loan, prospective business owners must legally form their business and be ready to provide details about it. This may include a business plan, cash flow projections, sales forecasts, and other information demonstrating the business idea’s viability.

Ask the expert

Eric Kirste

CFP®

When applying for a small business loan, be ready to answer these questions: How long have you been in business? You need to be in business for at least six months to one year for most online loans and two years for many bank loans. How much does the business make? You may qualify for different loans or lines of credit depending on how much you make. If your earnings are insufficient to qualify for certain loan products, consider looking into business credit cards or SBA microloans. Can you afford the payments? If you take on debt for the business, can the business income sustain the loan payments, or will you need to pay for them?

Common challenges and solutions

As you’re preparing to get a small business loan, these are some common challenges and how to potentially overcome them: 

Challenge	Potential solution
Limited credit or business history	Offer collateral or a personal guarantor with strong financial strength.
Insufficient historical cash flow or profitability	Present a detailed business plan that demonstrates future growth and profitability.
Lack of collateral for secured loans	Explore alternative financing options or seek lenders specializing in unsecured loans.
Lengthy approval process	Prepare all documents in advance and maintain open communication with the lender.
Inadequate business plan or financial projections	Seek assistance from a mentor, consultant, SCORE, or a Small Business Development Center (SBDC).

Overcoming these challenges is possible. However, it requires proactive planning, thorough preparation, and leveraging available resources to strengthen the loan application and increase the business loan’s approval chances.

Ask the expert

Eric Kirste

CFP®

To improve your chances of small business loan approval, follow these best practices: 1) Seek out loans or lines of credit from lenders that report to business credit bureaus so you can build credit during your repayment. 2) Pay your loan on time since your payment history is one of the most important factors determining your business credit score. 3) Articulate the plan and intentions for the funds you want to borrow. A strategic plan will likely help answer critical questions by the lender, regardless if they ask or not, and improve your chances. 4) Regularly review your personal credit score and look for ways to improve it. 5) Be organized! Gather your business documents, such as bank statements, income statements, tax returns, etc.

How to apply for small business loans

When applying for a small business loan, you must gather the required documentation, research lenders and loan options, submit your application, await approval, and sign the loan documents. Once all of this is done, you’ll receive the loan proceeds.

Approval and funding timelines vary from hours to weeks or months, depending on the lender and loan complexity. Maintaining transparency and promptly providing requested information can expedite the process and increase your chances of approval.

Applying for a small business loan generally involves the following steps:

1. Gather the required documentation: Most lenders need you to provide financial information, organizational documents, and other relevant paperwork. Be prepared to provide these promptly to expedite the approval process.
2. Research lenders and loan types: Explore different business lenders and loans to find the best fit for your business needs. Consider important factors such as interest rates, terms, repayment schedules, and loan conditions.
3. Submit the application: Complete the business loan application provided by your chosen lender. Ensure accuracy and completeness to avoid delays in processing.
4. Await approval: Approval timelines vary based on the lender and the complexity of the loan request. While some lenders may approve you within hours or days, it could take several weeks or months, particularly for large or complicated requests.
5. Sign the loan documents: Once approved, you’ll need to sign the business loan documents provided by the lender. Some lenders may also require you to provide financial statements or maintain specific financial ratios for the loan to be in good standing. Make sure you understand these requirements.
6. Get funded: After all documents are signed and in order, you can expect funding to follow shortly afterward (e.g., hours or days). 

When discussing loan options with potential lenders, it’s essential to inquire about the expected timeline for approval and funding. Approval and funding times can significantly vary, so ensure you go into the loan process with the correct expectations.

Lastly, maintaining transparency and promptly providing requested information can expedite the process and increase your chances of approval. Avoid withholding or providing misleading information, as this can undermine trust with the lender and jeopardize your loan application.

How to choose a small business loan lender

When selecting a small business loan lender, it’s crucial to weigh various factors to ensure you find the right fit for your needs. Key considerations include whether the lender offers local decision-making, a streamlined lending process, and any available discounts or incentives.

The following are considerations to keep in mind when choosing a small business loan lender: 

• Local decision-making: Opting for local lenders, such as community banks or credit unions, can be advantageous. Loan decisions are often made locally, offering personalized attention and better insight into complex business needs. Notably, many national banks also offer local decision-making.
• Streamlined process: National lenders often provide streamlined underwriting and approval processes, resulting in faster loan processing times. This can benefit straightforward loan requests, with approvals and funding within days rather than weeks or months.
• Incentives and discounts: Some lenders offer incentives or discounts for specific criteria, such as being a veteran-owned business or maintaining a deposit relationship with the financial institution. Inquire with your lender about any available offers to potentially reduce costs.

Before settling on a small business loan lender, consider whether they offer prequalification for business loans. Prequalification allows you to see your rates and terms without affecting your credit. While some lenders allow small business loan prequalification, many prefer conducting a thorough analysis before deciding.

Additionally, consider not only the interest rate but also the level of service and loan terms offered by the lender. While prioritizing the lowest rate is tempting, working with an expert who understands your business and can provide comprehensive banking services may justify paying a premium.

Alternatives to a small business loan

When small business owners face difficulties securing a traditional loan or are uncertain about its suitability, they have several alternatives to explore.

Some potential alternatives to a small business loan include seeking venture capital from investors, applying for grants offered by government agencies or nonprofits, considering support from business incubators, and exploring options for borrowing from friends or family.

Each alternative offers unique benefits and considerations, providing entrepreneurs with various avenues to secure funding and support for their ventures.

Venture capital

Venture capital funding involves investors providing capital to startups or early-stage small businesses in exchange for equity ownership. Entrepreneurs can explore venture capital options by researching firms, attending industry events, and networking with potential investors.

Small business grant 

Small business grants are non-repayable funds that government agencies, nonprofits, or corporations provide to support specific business activities or initiatives. 

Entrepreneurs can begin searching for small business grants by visiting government websites, exploring grant databases, and contacting local business development organizations for information on available opportunities.

Business incubator 

Business incubators support startups and small businesses, providing resources such as office space, mentoring, and networking opportunities. 

Entrepreneurs can find suitable business incubators by searching online directories, contacting local economic development agencies, and attending relevant events or workshops.

Friends or family loan

Borrowing from friends or family can be an alternative funding source for small businesses. Still, it’s essential to formalize the agreement and treat it as a business transaction to avoid straining personal relationships.

FAQ

Do SBA loans come from the U.S. government or individual lenders?

SBA loans are backed by the Small Business Administration (SBA), a U.S. government agency, but individual lenders, such as banks and credit unions, issue them. 

The SBA guarantees a portion of these loans, reducing the risk for lenders and making it more likely for small businesses to get funding. However, the individual lenders handle the application process and the loan management, not the SBA itself.

What factors do lenders consider when evaluating a small business loan application?

When evaluating a small business loan application, lenders often consider the business’s credit history, cash flow, and revenue. 

They also look at the business plan, the owners’ experience and credit history, the business’s financial health, and the potential collateral offered. Some lenders might also consider the market potential of the business and the owner’s industry experience.

How important is a business plan when applying for a small business loan?

A business plan is crucial when applying for a small business loan, especially for startups and new businesses. It demonstrates to lenders that you have a well-thought-out strategy for your business. 

The plan should include financial projections, market analysis, a clear description of your products or services, and a marketing strategy. A strong business plan can boost your chances of loan approval.

Are there specific small business loans for startups or new businesses?

Yes, several specific small business loans are designed for startups and new businesses. These loans often have more flexible eligibility criteria to accommodate a lack of extensive business history or revenues. 

Some lenders and programs, including certain SBA loans, are geared toward startups and may offer more favorable terms or guidance to new business owners.

How does personal credit history affect a small business loan application?

Personal credit history is significant in small business loan applications, especially for startups and smaller businesses. Lenders use it as an indicator of your reliability in repaying debts. 

A strong personal credit score can improve your chances of approval and help you secure better terms. A poor credit score can limit your options and increase interest rates.

What collateral, if any, is required for securing a small business loan?

The requirement for collateral varies depending on the type of loan and the lender. Larger small business loans may require collateral, such as real estate, equipment, or inventory. Unsecured loans, which don’t require collateral, are also available but might come with higher interest rates or more stringent credit requirements.

Are there special loan programs for minority- or women-owned businesses?

Yes. These programs promote diversity in business ownership and often offer favorable terms, reduced fees, or educational resources. Examples include certain SBA loan programs, state-specific initiatives, and loans from nonprofit organizations focused on economic development in minority- or women-led businesses.