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Getting a Small Business Loan: The Quick 5-Step Guide

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Gaining capital can be hard for a small business but getting approved for financing doesn’t have to be an impossible feat. There are several different lending products to choose from depending on your business’s needs. Just be sure to investigate which option is best for your business and that you meet the eligibility requirements.

That may seem easy, and for the most part, applying for a small business loan isn’t rocket science. But lenders aren’t just handing out free money for you to live your dream, especially if you’re just getting started (and even if it appears that way, know that there’s probably a high interest rate, exorbitant fees and a short term attached).

Startups, or businesses that have been around for less than a year, have the toughest time getting financing. Lenders want to see that borrowers have a track record for success and if you’re the new kid on the block, you probably don’t have that. Another reason why lenders are skittish with startups is because half of them won’t be around five years down the road. The U.S. Small Business Administration reported that 50 percent of all new businesses survive the first five years and even less — about 33 percent — make it to 10 years.

Even with statistics like this, some startups and more mature small businesses are securing external financing. The SBA reported that small business accounts for a huge portion of all business borrowing. In 2015, bank loans for small businesses totaled nearly $600 billion. Smaller shops are getting money and below is a list of five key steps that are imperative for securing a small business loan.

5 quick steps to getting a small business loan

1. Clearly identify why you need funding and how you plan to use it.

Starting a business, purchase inventory, expansion and strengthening its financial standing are among the most popular reasons why many small businesses seek financing, according to the SBA. Determining your business’ needs and how financing could help you achieve them is a big part of getting started. Be realistic and prioritize the things your business needs and how outside funding could assist. Creating a business plan could also help keep you accountable for reaching your target goals that need external funding. If you find yourself stuck, there are organizations such as the SCORE Association, Small Business Development Centers (SBDCs) and local chambers of commerce that provide free resources to help you create a business plan, find financial assistance and more. Clarity is necessary not only to keep you on task but because some lenders require detailed documentation of how the funds will be applied.

2. Research lenders and loan products.

Small businesses have a few paths available when it comes to obtaining capital. If your personal savings or contributions from family and friends aren’t an option, then you’re going to have to get it from another outside source. The SBA states that available financing options generally fall into two categories: debt and equity. Debt financing includes long- and short-term products such as working capital loans, commercial leasing and cash advance products that banks and most online lenders offer. You maintain ownership of your company and once the debt is paid off, you can go about your merry way.

With equity financing, you get an infusion of needed cash from an investor that doesn’t have to be repaid in exchange for an ownership percentage in your company. If giving up a piece of your company isn’t for you, then getting capital from a lending institution is probably your best option.

There are a lot of different loan products available. Would a line of credit help you meet your needs or would a working capital loan be better? Do you only want short-term financing or would you need more time to repay the loan? These are the types of questions that need to be answered while researching lenders and the products they offer.

You can do a simple Google search or review lender reviews on sites like ours or contact organizations like SCORE or the SBDC to see their recommendations. When you’re researching lenders, you want to find out how much this loan would cost you and how soon you have to repay it. Read the fine print, make sure your business is eligible for the loan and ask questions so you won’t be surprised down the road.

3. Gather required documentation.

Each lender requires different items in order to secure a loan with them. Some just want to make sure your business makes money while others want everything short of your first-born child (ahem, SBA-backed loans). Whatever the case may be, it’s best to be overly prepared than under-prepared. Below is a list of things applicants generally need to submit with their application.

  • Personal identification
  • Business financial statements
  • Personal financial statements
  • Business federal tax returns
  • Personal federal tax returns
  • Business plan
  • Tax ID number
  • Business overview and history
  • Business lease/mortgage statement

Though it’s not on the list and underwriters will pull it when reviewing your application, knowing your personal FICO score, your business’ FICO SBSS score and the items on your credit report ahead of time is strongly encouraged. The FICO score, which ranges from 300 to 850, is used in lending decisions. If you notice items on your credit report that could hurt your chances of getting approved, see if you can make arrangements to pay them off, dispute inaccurate ones or have them removed from your report if it’s been seven or more years. Remember, each year, you’re able to obtain a free copy of your credit report from the three major credit reporting agencies — TransUnion, Experian and Equifax.

4. Possibly provide collateral.

Not every small business lender requires borrowers to provide a down payment. But for those that do, the required amount varies. Collateral-backed loans lessen the risk to lenders and can include cash, real property or inventory. For example, SBA-backed loans generally require borrowers to have a down payment of 10 to 20 percent of the loan’s value while hard money loans typically are secured by real estate. Find out what percentage of the borrowed amount you have to provide and formulate a plan to save that amount if you don’t have it available.

5. Apply for your loan.

Now that you have an idea of where you stand and have taken the necessary steps to be eligible, it’s time to go get that loan. Double-check the requirements for the application and, if available, review the lender’s checklist. Some lenders have speedy application and approval processes and could release funds to you in as little as 24 hours. Others could take several weeks, depending on the size of the loan and specific lender, to get the whole process complete. It varies.


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