This post was reviewed and updated on July 27, 2020

How to apply for a small business loan in 7 steps

Learning how to apply for a small business loan or other business financing can not only help you get the right loan for your business but can also assist in deciding whether it’s the right move in the first place.

1. Get familiar with your personal credit and business credit profile

What are lenders seeing when they look at your credit profile and your loan application? Before you start applying, you should know. For most small business owners, your personal credit score will always be part of the equation for any business creditworthiness decision, so it’s important that you do everything you can to maintain a good personal credit score. The bigger your business gets and the stronger your business credit profile becomes, the less lenders will rely on your personal score, but for most small business owners, it will always be part of the discussion.

One of the most misunderstood things about business credit is that it actually exists. Every small business owner really has two credit profiles, their business credit score and their business credit. Building and maintaining a good business credit profile is more important than every as the economy regroups after the economic challenges caused by the coronavirus. Fortunately, if you regularly meet your credit obligations (including your business leases and your utility bills), it doesn’t take long to build a strong business credit history.

There’s a synergy between hour personal score and your business profile that works best when you make an effort to separate the two. In other words, avoid using your personal credit for business credit purposes and only use your business credit to pay for business expenses. Using a personal credit card to pay for business expenses, for example, can actually hurt your personal score and doesn’t do anything to help your business profile.

Because it’s human nature to positively impact the things we pay the most attention to, regularly monitoring both your personal and business credit history is the first step to building a strong profile. You can monitor both for free at Nav.

2. Write up a business plan

Many traditional small business lenders (think banks, credit unions, and the SBA) will likely want to see a business plan that explains why you need the funding, how you plan to use the money, and what you’re going to do to pay it back. Even if your lender doesn’t require a business plan, it’s a good idea to help you gather your financial records and make sure you have everything in place before you apply for a business loan.

Writing up a business plan isn’t just a good exercise for convincing a lender to approve your application, though. It’s can also be an important step in determining whether or not borrowing money right now is even a good idea. What’s more, a formalized business plan is a great road map for your business and can help you navigate challenges or leverage successes.

Many small business loans require collateral or a personal guarantee, and if you borrow money unwisely, it could affect more than just your company if you can’t repay the debt. Walking yourself through a business plan, will help you get a better idea of your reasoning and the feasibility of repayment.

If you realize during this part of the process that borrowing right now isn’t a good idea, you can start working on a plan to get to that point. On the flip side, if your business plan is solid, it can fortify your decision and make the rest of the process go more smoothly.

3. Visit you local SCORE Chapter or SBDC Office

If you’re unfamiliar with SCORE or the SBDC, they are a great resource available to small business owners that won’t cost you anything to use. SCORE has offices all across the country and has been helping small business owners build successful businesses for over 50 years with free mentoring and advice. The SCORE mentors are all volunteers who are experienced business professionals who are there to give back to the small business community. It’s likely there will be a volunteer who not only has some great advice, but has also experienced the challenge you’re facing personally at some point. In addition to one-on-one mentoring, SCORE also regularly offers helpful webinars and other programs to help small business owners.

Like SCORE, SBDCs (Small Business Development Centers) have offices all across the country offering one-on-one guidance and advice to small business owners. I was first introduced to what an SBDC was at the local community college, and many of them are located at similar colleges or universities all over the United States. Like SCORE, they can help you with creating a business plan, bookkeeping skills, marketing initiatives—as well as help you prepare a small business loan application.

Both of these groups are excellent resources that have no other motive than to help the small businesses in their communities.

4. Find the right type of loan

There are several different types of small business loans available today, many of which are designed for certain types of businesses or to meet special financing needs. If you’re brand new and looking to cover working capital, for instance, your options will be more limited than if you’ve been in business for years and have a strong track record.

Here’s a quick summary of some of the more common business loan types available:

• Term loan: Term loans include both long-term and short-term loans. Term loans are offered by financial institutions such as banks, credit unions, online lenders, and other alternative lenders. Traditional lenders like banks and credit unions typically have the lowest rates, but they have the strictest qualification criteria. For example, banks like to work with borrowers who have a personal credit score in the 700s, but will sometimes accept a 680 score as their minimum threshold. Most online lenders are not as strict and are willing to work with borrowers with lower scores that can demonstrate the ability to make periodic payments.  These loans can range from short-term loans  of a few months to terms up to twenty years depending on a number of factors, including loan purpose, loan amount, credit history, etc.

• SBA loan: Typically term loans or lines of credit backed by the U.S. Small Business Administration are offered through financial institutions like banks and credit unions. The SBA is not a lender, but guarantees these loans offered by their network of SBA lenders. Like traditional term loans, SBA loans  have relatively strict eligibility requirements if compared to a comparable online loan or line of credit.

• Line of credit: Unlike a traditional loan, a small business line of credit is a revolving form of credit, allowing you to access to cash when you need it, pay it off, and use it again during the term of the credit line. It’s best for short-term financing needs or brief lapses in cash flow when you need to cover working capital and other operating costs. Depending on the lender, it’s possible to get a line of credit even if you’re a relatively new business.

• Invoice financing: Provides financing based on unpaid invoices. You can qualify for a loan of a percentage of a verifiable invoice, and payment is typically due in full when you receive the money from the customer. Because the invoice amount is used as collateral, you may be able to get invoice financing regardless of how new your business is.

• Merchant cash advance: Works as an advance on your credit and debit card sales. Merchant cash advances are available for any business that accepts credit cards, but the cost of financing is very high.

• Microloans: Typically offered by nonprofit lenders, microloans are designed for startups with relatively small financing needs. As the name implies, these are relatively small, short-term loans.

• Business credit cards: Like consumer credit cards, business credit cards provide a revolving line of credit you can use and pay off as long as the account is open. It’s a good option for any type of business because approval is primarily based on personal credit history.
• Commercial Real Estate Loans: A mortgage loan taken out by a business for commercial property, rather than residential property. Unlike a traditional residential mortgage which typically have 30-year terms, a commercial real estate loan will have a term from 5-20 years.

Your time in business and credit profile will make a big difference regarding what type of financing you may qualify for. For example, traditional lenders prefer to see several years in business, $1 million in annual revenue, and a personal credit score in the 700s (though they will sometimes go lower). The SBA’s threshold is around 660. Many online lenders will work with much younger businesses provided they have a year in business, $100,000 in annual revenues, and a decent personal credit score. Some lenders will even work with borrowers with a score in the 500s (but you should expect interest rates to be higher).

Depending on the business need you’re trying to fill, there will likely be more than one option that will meet your need. Many lenders prefer to lend in larger amounts and some lenders prefer to work in specific industries. Having a strong business and personal credit history is not a guarantee of loan approval, but it will provide more loan options.

5. Determine which type of lender is the best fit

Historically, commercial lenders have been banks and credit unions. But with the rise of internet technology and the growing need for startup financing, small business lending through an online lender or a microlender is becoming more popular.

Banks and credit unions: In general, banks and credit unions are a good option when your business is well established with strong sales volume and cash reserves, and you have a good personal and business credit profile. They are not a good choice if you need the financing quickly, as the application and funding process can sometimes take several weeks, or even months.

Banks and credit unions typically require collateral, so be prepared to offer real estate or some other asset as collateral to secure your loan. Traditional lenders typically offer some of the lowest interest rates to those businesses that qualify.

Online lenders: If you need money faster, don’t have specific collateral, or are relatively new in business, online lenders may be a better choice. These lenders can provide term loans, lines of credit and most other forms of financing. You should expect to pay higher interest rates or fees to an online lender. 

Microlenders: These lenders are a good choice for new business owners who can leverage a small amount of capital into a bigger business benefit. They often work with newer businesses and also offer mentoring and guidance to help these newer businesses succeed. Because they’re often funded by nonprofits, they’re typically smaller-dollar loans at low, and even sometimes 0% interest. 

6. Shop around

Once you know which type of business loan is best for your needs and the type of lender most likely to offer that loan,  compare at least three to five potential lenders. It can be tempting to go with the first offer you see for the sake of convenience, especially when you need the money now, but don’t succumb to that temptation, you could miss out on a lower interest rate or better overall terms.

At Nav, you can register and get matched with loans based on your credit profile. Depending on your creditworthiness, you may be able to compare several lenders in one place, saving you time.

The type of business financing you apply for will also depend on what you need as a borrower. What works for a company looking to cover working capital may not work for another company looking to purchase real estate. Make sure you know exactly what your business needs are and what your budget can handle. Your loan purpose should really drive this decision.

The more lenders you compare, the better your chances of getting the best loan available for you. But avoid spending too much time on this part of the process. If you’re finding multiple lenders that offer similar terms, that may be the best you can get.

5. Understand how to qualify for a business loan

Each lender has different eligibility criteria you’ll have to meet, so once you pick a lender, research what those criteria are. While some will share this information publicly on their website, others may require you to call in to get it.

Most all lenders will require your personal information as the owner of the business, and will likely require your personal credit score as well. They’ll also look at your business credit profile, so be sure to check your credit before applying to know where you stand.

This process can take time, but it’s much better than going through the entire application process only to find out that you didn’t qualify from the start.

Also, look into what documentation the lender requires. Depending on the lender, they may require some of the following:

• Your business plan
• Financial statements
• A business banking account
• 3 months of bank statements
• Your business license
• Other legal documents, including articles of incorporation, etc.
• Tax returns, including business tax returns
• Collateral, if required

By getting these things together before you apply, you can speed up the process.

7. Submit your application

Now that you’ve done your due diligence, submitting the application may be the easiest part of the process. Depending on the lender, you may be able to apply online or over the phone, but many traditional lenders still require applications to be done in person.

Whatever the method, be sure to have your documentation ready to upload, fax or hand to the loan officer. Make sure you understand the underwriting and funding process, so you can have realistic expectations for how long it’s going to take and what you can do to make things go more smoothly.

Again, depending on the type of lender and loan, the application and funding process can take anywhere between a day and several months. 

Other frequently asked questions

How do I get a business loan to start a business?

As outlined above, brand-new businesses may have a tough time getting approved for a traditional loan or line of credit, so in addition to some startup financing offered by the SBA, you’ll want to focus on online lenders and microlenders. It is very difficult for idea-stage companies to qualify for loan without revenue and cash flow that will determine whether or not you have the ability to service debt. As you shop around, make sure you understand each lender’s eligibility standards and what information they require to complete the application process.

How do I get a business loan from a bank or credit union?

If your business is well established, a bank loan or  a loan from the credit union will potentially be a good option. Unlike online lenders, banks and credit unions may be less likely to allow you to complete the entire application process online. Even if one does, it may be wise to work with a loan officer in person anyway to give you a better chance to explain your business plan and address potential concerns.

How do I apply for a business loan with bad credit?

Whether you have bad personal or business credit, it will make it more difficult to be approved for a business loan. There are lenders that will work with a borrower with less-than-perfect credit, but you should expect to pay a higher interest rate and have fewer options.

If your personal or business credit score is less than stellar, you may need to do some extra research to find lenders that are willing to work with bad credit borrowers. You may also be asked to provide collateral, a down payment (for equipment financing, for example), and a personal guarantee.

The bottom line

Learning how to apply for a small business loan can be stressful, but taking the time to understand the process can help match you with the right loan and lender and improve your chances of getting qualified. As you follow these steps, you’ll be in a better position to get the financing  option that best suits your business needs.