A Guide on How to Get a Small Business Loan

A woman is at a bank learning how to get a small business loan

Opening and running a small business is exciting. However, it is not without its challenges. One of the biggest challenges faced by small business owners (and those wishing to start up a new business) is securing financing.

Banks tend to have tight lending policies, and small businesses are often considered to be more of a risk. Doesn’t seem fair, does it? You may need financing for a variety of different reasons – starting your business, growing it, or even simply covering your normal, day to day expenses (including inventory and payroll). How are you supposed to get financing if banks aren’t as willing to lend to you?

Fortunately, you aren’t out of luck. There are plenty of options available for small business loans. Here are a few tips on how to get a small business loan to help you get your business started or keep your small business running successfully.

11 Steps to Get a Small Business Loan

1. Determine why you need the money.

There are a wide variety of reasons that you may need money for your small business. You may need a small business loan to get your new company off and running. You may be doing really well, but are simply unable to grow or expand your business.

You might need money to help you manage your day to day expenses, which might include inventory or payroll for your employees. Maybe you need to conduct research and development, or create a marketing campaign.

Whatever your reason for needing a small business loan, determine it. Lenders will ask you why you are applying for a loan in the first place. You will also need to determine how much money you think that you will need. This is important information for your potential lender to know as well.

Having a plan in place on how you will use the funds will help to increase your chances of getting your small business loan.

2. Research small business loan options.

What do you think of when you think of getting a loan? Most people tend to think that the only place you can get a loan is through a traditional bank. When it comes to getting a small business loan, however, there are numerous options available, including:

3. Apply for a Small Business Administration (SBA) loan.

This is a government backed loan that is designed specifically for the needs of small businesses. The most common type of SBA small business loan is a 7(a) loan. These loans have longer repayment periods and smaller down payments than traditional bank loans.

They can be used for a variety of different purposes, including land, new equipment, or even just working capital.

While you can find SBA loans through several different well-known banks (large banks as well as community banks), you can also find small business loans online. There are plenty of reputable direct lending websites (such as Swift Capital and LendingTree), as well as peer to peer lending sites (such as LendingClub and Prosper).

4. Take out a business line of credit.

A business line of credit is a type of working capital loan that works in a similar fashion to a business credit card. Once you are approved for your line of credit, you are given a certain amount. You can withdraw up to that amount of money. As you repay what you have borrowed, the line of credit replenishes, and you can draw on those funds again.

5. Consider invoice factoring.

These types of loans are commonly used by small business owners who bill larger invoices, but your accounts receivable tend to be slow to make their payments. These loans work by essentially “selling” your accounts receivable (for a set fee) in order to receive immediate working capital. This way, you can keep your business running smoothly without fear of being behind in your payments.

6. Look into small business term loans.

Term loans are typically used for day to day operations, expenditures, or expanding your business. Your principal is typically repayable within 6 months to 3 years. They can be secured or unsecured, and your small business loan interest rates may be fixed or variable.

If you are just starting your small business, getting financing may be a bit more challenging, as many types of loans tend to require that you be in business for a specified amount of time. But it is important to know that you still have options available. One option for the aspiring small business owner is what is known as a microloan.

Microloans were originally developed in order to assist poor businesses (typically in poorer countries) that were struggling to get their start.

They are now used all across the United States (and throughout the world) to help new small businesses get their start. Microloans typically provide $35,000, but some microlenders will provide up to $50,000. They not only help you to start your business, but they can also be used to help grow a small business as well.

A newer option available for getting the financing you need for a small business startup loan is crowdfunding.

Crowdfunding (popular websites include Indiegogo and Kickstarter) relies on investors to help you get your small business started. Investors provide you with money in exchange for specific perks, such as the goods or services you plan to sell.

You may also consider looking into angel investors for a small business startup loan. Angel investors are successful business owners who are looking to invest their time and money to help a new business to succeed.

There are plenty of small business loans (for both established and new small businesses) that are targeted toward specific types of business owners. For instance, if your small business is owned by women or by military veterans, you may consider looking into small business loans specifically for women or VA small business loans.

What if there was a way to get money to finance your small business that you didn’t have to repay? Sounds too good to be true, right? But it is true. They’re called small business grants.

Some grants are federally or state funded. Others are available through nonprofit or organizations or corporations. Some are targeted toward specific types of businesses, such as those that are owned by women or military veterans.

While this option sounds most ideal, it is important to keep in mind that there are several people who want free money, so it may take some extra time and effort on your part to get a small business grant.

7. Figure out if you qualify.

Once you have researched your options thoroughly and determined what option (or options) is best for your specific needs, you will need to figure out if you can actually qualify. Qualifying for many types of small business loans requires specific requirements.

One of the biggest factors for small business loan eligibility is your credit score. For instance, an SBA small business loan requires a credit score of at least 680 or higher.

Don’t know your credit score? There’s an easy way to find out. You are entitled to one free credit report from each of the three major credit reporting agencies (Equifax, Experian and Transunion) annually.

You can also get your FICO score from many major credit card issuers (and personal finance websites) for free. If your credit score is below 680, you may need to look for small business loan lenders who work with individuals with bad credit.

But don’t worry about financing if you have less-than-stellar credit. There are ways to get a small business loans with bad credit, too.

You may also consider looking at a microloan.

How long you have been in business also determines your eligibility for a small business loan. In order to qualify for most small business loans, you will need to have been in business for at least 2 years.

Profitability is also important. There are many lenders who will require that you earn at least a specified amount of money each year. This will also help to determine whether or not you will be able to make the required minimum monthly payments on your new loan along with the rest of your monthly payments.

But what if you are just starting your business? While you may have the credit score, you might not have the time in business or the income available.

That doesn’t mean that you are out of luck! Many types of small business startup loans tend to look at other factors rather than credit history or the fact that you don’t have any years in business.

Instead, lenders for small business startups tend to look at the bigger picture. They want to see a solid business plan, that you’ve done your homework and that you are passionate about your new venture.

8. Get small business insurance to get a loan.

The info above is a lot to consider, I know. But it’s all information that could help you take one more step towards your business dreams and goal of getting a small business loan.

While many of the above can help make your case when financing your business, don’t forget to also consider small business insurance coverage when preparing to apply for a small business loan.

Curious to know what types of risks business insurance could help protect against? A general liability policy can help to protect you in the case of any third party property damage, bodily injury, or medical bills that result from something that happens on the job. A professional liability policy helps to protect you against any claims of negligence made by customers.

Sure, the above may not happen–and we hope it doesn’t! But if it does, there’s a possibility that it could cause a lot of damage to your business or personal finances. The average general liability claim for property damage or bodily injury is $30,000. That could dig you a financial hole that’s hard to climb out of.

It’s not easy to focus on what could go wrong in the future while you’re just starting out, but corporations that issue small business loans want to know that you understand the potential risk.

Depending on the specific small business loan, you may be required to have small business insurance coverage to be considered eligible.

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9. Have all of your documents ready.

Before you apply for your small business loan, it is important that you have all of the necessary documentation ready. Depending upon the type of loan you are applying for, documents you may need include such things as:

  • The name of your business.
  • Your Federal Tax ID.
  • Your legal structure (if you are an LLC, an S Corporation, or something else).
  • Business and personal tax returns (typically within the past 2 to 3 years).
  • Bank statements (both business and personal).
  • Financial statements for the past 2 to 3 years (including balance sheets, income and loss statements, cash flow, etc.).
  • Projected financial statements.
  • A detailed business plan or an investor pitch.

10. Offer collateral when applying for your loan.

Be prepared to offer collateral when you are applying for a small business loan. Lenders are very interested in your ability to repay the loan. In the event that you cannot, they want to be able to recoup some of their losses.

Collateral is like a type of security deposit, and may consist of equipment, land, or your accounts receivable (among other things).

In the event that you default on your loan, the lender then takes possession of the collateral. Some small business lenders require a personal guarantee from the principal owner.

These types of guarantees are risky, however, as they put the principal owner’s personal assets, as well as business assets, at risk for being taken should the loan go unpaid. Offering collateral can help to increase your chances of being approved for your small business loan.

11. Understand the terms of the proposed loan.

If you have applied for more than one small business loan, you don’t have to accept the first offer that arrives. In fact, it is best to compare the terms of your proposed loan and compare them to one another and make sure that they make sense for your business.

Take a close look at the small business loan rates, and whether they are fixed or variable. Ask yourself the following questions before you accept the loan terms:

  • How often is the interest payable?
  • What is the origination fee (if any)?
  • Are there any other costs or fees associated with the loan (underwriting fees, processing fees, etc.)?
  • Is there any type of collateral required (not all small business loan lenders require collateral)?
  • Do you need to present periodic statements or other documents throughout the duration of your loan period?
  • Are there any types of limitations on how the money from your small business loan can be used?
  • Can you repay your loan early without penalty (and if there is a penalty, what is it)?

Understanding the terms of your small business loan will help you to ensure that you choose the best one for your needs, and that it helps you to achieve your specific goals.

Keep Up with Your Online Presence if You Want a Small Business Loan

Many small business loan lenders like to keep up with the businesses that they lend money to. This may include taking a look at the information available online about your business.

Keep up with your online presence, which can help to improve what your lender sees. Update your website periodically as appropriate. If you make use of social media sites, review your presence there.

You should also take a look at any recent reviews that you have received on your website as well as other websites such as Yelp. Make any changes, such as adding new information or deleting outdated information, as appropriate.

Securing the funds you need to start and run your small business can help you to not only succeed, but flourish. It may seem difficult, at first, to get a loan. But if you know where to look, and what type of loan you need, you can find a small business loan that is best suited to your business and your specific needs.

With a bit of preparation, you can greatly increase your chances of getting that small business loan and bringing your small business to the next level!

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Mariah Bliss

I love writing about the small business experience because I happen to be a small business owner – I’ve had a freelance copywriting business for over 10 years. In addition to that, I also head up the content strategy here at Simply Business. Reach out if you have a great idea for an article or just want to say hi!
Mariah writes on a number of topics such as small business planning, contractor insurance, and business licenses.