It’s a major milestone in a small business’s development to apply for their first loan. Although it’s not the most glamorous landmark, getting approved for a substantial loan is usually the first time a small business experiences a cash windfall.

To help you navigate the sometimes messy world of loan applications and paperwork, we put together this application process guide for small business loans. With it, you can find the best loan, rate, and term length for your business and its unique needs.

Types of Small Business Loans

Fortunately, applying for business loans leaves you with plenty of options to choose from. Below, we’ve listed the most common types of small business loans and the advantages that each provide:

  • SBA Loans: Loans that are guaranteed by the US Small Business Administration, usually offering some of the lowest interest rates on the market with long repayment terms.
  • Term Loans: Common business financing loans, offering lump sum cash which is repaid over a predetermined period at a set or variable interest rate. These usually result in fast funding but may require collateral or a personal guarantee.
  • Business Lines of Credit: Offers flexible take-what-you-need funding up to a predetermined credit limit, which is paid back with interest.
  • Equipment Loans: Loans with competitive rates for equipment purchases with a term length that matches the expected lifespan of the equipment. The equipment serves as collateral, which is repossessed if you fail to make repayments.
  • Invoice Factoring: Factoring companies provide fast cash to cover pending customer invoices during a short-term cash crunch.
  • Invoice Financing: Cash advances with pending customer invoices used as collateral.
  • Microloans: Small, low-cost loans of up to $50 thousand offered by nonprofit creditors.

Getting A Loan: A Step-by-Step Walkthrough

If your small business is ready to take the next step in its growth plan, you need to learn how to get a small business loan. Knowing how to apply for a business loan involves a few critical steps that we’ve outlined below.  

Ironing Out the Details

Your first order of business is to narrow down the loan you want. This is a critical step because, for instance, knowing how to apply for an SBA loan involves a different application process than, say, applying for a microloan from a nonprofit lender.  

Deciding on the type of loan you want is mostly a function of necessity. Consider the reasons why you need a loan, and how much funding you hope to acquire. Your answer should point you to the most favorable solution.

Narrowing down a purpose for your loan, as well as a set loan amount, is a must before you proceed any further with the application. Virtually all traditional creditors require these details before they can process your application. Existing businesses should prepare written income statements and balance sheets to support your application.

Reviewing Your Creditworthiness

Figuring out how to apply for a business loan first requires a thorough review of your creditworthiness. In other words, you need to check your qualifications. Some lenders, especially for high-value loans and financing, won’t touch your application with a ten-foot pole unless you meet a threshold FICO score.

In short, your business’s FICO score is one of the most reliable and commonly used credit scoring models for determining how trustworthy your company is for lenders. The higher your credit score, the more likely you are to repay your loan on time and, in turn, the more likely you are to get approved for a loan.

According to Experian, one of the three major credit reporting agencies, business credit scores are ranked as follows:

  • Exceptional: 800-850
  • Very Good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Very Poor: 300-579

Although those with “Very Good” and “Exceptional” FICO scores are more likely to secure lower interest rates and favorable terms on their loans, even those with bad credit scores can get approved for business financing.

Weighing Your Options

From online lenders to commercial banks and government agencies, your business has a variety of options that each have their own steps to getting a business loan. If your business has recently launched and hasn’t established a high business credit score yet, you may be better off applying to a smaller local financial institution than a multinational bank.

Other options, such as credit unions, also provide small business loans with competitive interest rates. These are especially attractive options for startups and newly incorporated businesses that haven’t yet started generating net profits.

For registered for-profit businesses operating mostly within the US, an SBA loan is another great option if you need financing of $50 thousand or less. However, you should speak to a loan officer at your local bank or credit union before deciding which is best for you.

Showing up in-person at multiple banks and financial institutions and picking up a loan application package will help point you in the right direction. Within the first few pages of the application, it should state the minimum requirements for a small business loan. If you meet these requirements, it may be worth applying.

Drafting A Plan

If you want to learn how to get a loan to start a business, you need a written business plan that details every aspect of your company and its short and long-term financial projections. When the times comes for you to meet and present to a loan officer, they will expect you to arrive with a document that outlines expenses, revenues, and a cash flow projection over at least 12 months.

Using free or low-cost small business accounting software, you can find out how to apply for a business loan using cash flow projections. Ensure that the document includes your projected profits and losses, as well as a completed balance sheet. These are the nitty-gritty details that every loan officer will want to see before deciding whether the loan is right for you.

Any application process guide for small business loans will tell you that you need a thorough business plan that covers all your bases regarding contingencies. To establish the highest degree of credibility possible with your loan officer, meet with a financial advisor to help draw up a business plan that includes a statement of collateral and the value of the asset used to secure the loan.

Booking the Appointment

Whenever we’re asked how to apply for a small business startup loan, we always stress the importance of preparing a presentation.

Once you’ve decided on the loan type and the institutions you would like to borrow from, call their staff loan officer and schedule an appointment. Ensure that your business plan and loan application is complete beforehand.

If possible, bring your laptop to the meeting and prepare a PowerPoint presentation that overviews the details of your business plan and financial statements. Include an executive summary that clearly explains what your business is and how it intends to grow into the future. Like any presentation, give yourself ample time to rehearse at home.

Once the presentation is complete and your application is finalized, you can expect to hear back from the financial institution in a matter of days or weeks regarding its status.

Applying for The First Time?

Although applying for a small business loan for the first time might seem intimidating at first, it’s a straightforward process that can be mastered with enough preparation. Once you’ve chosen between the few loan options available to you, most of the legwork involves simply preparing your business plan presentation.

Learning how to apply for a small business loan is, for the most part, a matter of rehearsal. Knowing how to articulate your business’s vision in a succinct and understandable way (i.e., neither too complex nor too vague) might be the most important step in nailing your loan application.

If the thought of meeting face-to-face with a loan officer and giving a short presentation scares you senseless, then you might be better off handing the responsibility over to a business partner. Alternatively, you could apply for a small business loan online.

Wrapping It Up

We hope that this application process guide for small business loans answers the question, how do you apply for a business loan? A complete loan application doesn’t just involve filling out paperwork: it also includes a winning mindset and a rehearsed, confident presentation pitch.

Growing your business is a labor of love, and you must be willing to do a little heavy lifting if you want to see results early on. When the times comes for your business to apply for a loan, ensure that you’ve done your research and considered every possible contingency in your business plan. After all, you can never over-prepare for something as important as taking out your first loan.