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Applying for a Business Loan: A Step-by-Step Guide

Table of Contents

  • The 8 Steps to Your First Successful Business Loan
  • Applying for a Business Loan Online
  • The Pros and Cons of Online Business Loans
  • How to Apply for an Online Business Loan
  • Demystifying the Loan Application Process

It’s often said that building a successful business is more like a marathon than a sprint. However, seasoned business owners know all too well that at the best of times, it can feel a bit like you’re running both at once. During those hectic, early stages of a business’s growth, applying for a loan can be a daunting task filled with both hurrying up and waiting around. This makes navigating the tricky world of business finance seem intimidating to newcomers, creating a barrier between aspiring entrepreneurs and their all-important startup capital.

Despite what you may believe, getting approved for a business loan at the best rates isn’t as hard as you might think. It all starts with finding the best financing option for your business’s niche.

If you’re ready to apply for a business loan for the first time, make sure you read this in-depth guide before filling out the paperwork. We’ll cover all your steps from end-to-end, so you can forget about stressing over an application and get focused on your business’s bottom line.

The 8 Steps to Your First Successful Business Loan

Before we dig into the details, it’s important that we first outline, step-by-step, what needs to be done before you think about applying for a business loan.

There is a lot more to applying for a business loan than simply collecting the paperwork and filling it out at your local bank branch. There’s research and due diligence that’s incumbent upon any business loan applicant to complete if they want a loan that works for them in both the short and long terms.

After all, there are few aspects of business ownership more important than applying for your first business loan. But during these early stages of a business’s growth, entrepreneurs often accept just about any offer that’s given to them. Follow these eight steps to make sure that doesn’t happen to you:

  1. Determine whether a loan is truly necessary
  2. Check your creditworthiness
  3. Weigh your options
  4. Prep your financial records
  5. Choose a loan type
  6. Assemble the application
  7. Make your pitch
  8. Wait for approval

Far too often, business owners get hasty with their loan application and jump immediately to the final steps. That’s a good way to get the wrong financing deal. Instead, think of applying for a business loan as a long-term game that needs to be played strategically rather than rushed through to the finish line.

Step 1: Introspection

So, you’re questioning whether applying for a loan is right for your new business. If this sounds like you, stop and determine exactly why you believe you need access to a loan. Is it to start your business and manage its daily expenses? Or is it to scale the business or simply have a safety cushion to fall back on?

The reason you decide to apply for a loan should tell you a lot about what your options are and how you should go about navigating them. For instance, if you need a loan for startup capital, you might, in fact, be better suited for other financing options such as equity financing.

In recent years, getting approved for a loan has become faster and more expedient. The downside is, this ease sometimes hustles uninitiated business owners into applying for a loan they don’t need.

Our advice is to take a critical look into the mirror and truly ask yourself whether taking out a loan is an absolute must. If it is, then you can start shopping around for one.

Step 2: Starting Your Search

Once you’ve decided a loan is both necessary and in your business’s best interest, then you can start searching for a business loan. Luckily, you can apply for a business loan online just as easily as in person (often easier). But before you rush through your bank’s doors, start by laying the foundation.

Make sure your business’s financials are organized before you apply for your first business loan. Since taking out that first business loan is a major checkpoint in your company’s growth, you need to ensure it’s the right time to apply before pulling the trigger.

To do this, confirm your company is operating with a high credit score and positive financial metrics on its balance sheet. These ensure you’re more likely to get approved, and at more competitive rates.

The worse your business’s financial condition, the more expensive your loan will be. For this reason, you should make sure your company is in the green and not operating at a loss at the time of application.

Also, if your personal credit score is low (580 or below), you should start building positive credit as quickly as possible to bolster your chances of getting the loan approved.

How Much Funding Do You Need?

All business owners interested in taking out a business loan must ask themselves how much they need to borrow. If you only have a vague idea of much your company requires to get through its short-term expenses or upcoming capital project, you may end up borrowing (and paying interest on) more than you need.

On the other hand, some business owners are too conservative when it comes to asking for a larger or longer-term loan. No matter how exorbitantly high you think your desired principal is, you should always pitch the idea to the lender.

If you underestimate the amount of capital you need, you may end up seriously jeopardizing the financial sustainability of your company. So be sure you know what you’re asking for and what you need to make this investment successful.

Step 3: Know the Score

Not all small businesses are equal. There are many metrics and scores that separate trustworthy businesses from those who are riskier for lenders. If you want to get approved for an affordable business loan, you need lenders to put your business in the first category.

Business credit scores are a consideration for lenders, but it takes time for a small business to establish a strong credit rating, so most lenders also consider other qualifications and guarantees (some even use your personal credit rating). Business credit rating does impact your rates and overall financing costs, so it’s important to build a good reputation by maintaining lines of credit, making payments on time or early, paying off debts, etc.  

Another important metric creditors use to determine creditworthiness is your debt-to-income (DTI) ratio. This metric helps lenders measure your business’s overall financial health and ability to repay additional debts.

If your debt-to-income ratio is too high (under 35% is preferred, but ratios as high as 50% can still be OK), most creditors will deem you unfit to take out a new loan.

In short, your creditworthiness is an all-important aspect of your business loan application that, in many cases, will make or break your eligibility for a loan. Plus, once your creditworthiness is lost, it’s hard to restore—so make sure your debts don’t become unmanageable.

Step 4: Weigh Your Options

New entrepreneurs often assume that large national banks are their only option for getting a loan. However, you are more likely to get approved if you solicit a smaller, regional bank that has a history of taking on smaller clients.

Plus, there are other options such as credit unions, not-for-profit lenders, and even online lenders.

Make sure you review a variety of funding options and consult with a business advisor about each of them. These can include:

  • National banks (i.e., Wells Fargo, JPMorgan Chase, etc.)
  • Regional banks (i.e., local, regional)
  • Non-profit lenders
  • Online lenders (e.g., Fast Capital 360)
  • Microlenders
  • Credit unions

Step 5: Choose a Loan Type

Far too often, new business owners apply for a long-term bank loan without considering the alternatives. The truth is, locking down a long-term loan right off the bat, while providing your business with a secure stream of capital, comes at a high cost over time.

Unless your business has long-term capital expenses that cannot be covered by other means, another funding option may be a better choice. Below, we’ve broken down four of the most popular funding options for small businesses. One of these might suit your goals better than a bank loan.

SBA Loans

An SBA loan is a secured loan backed by the U.S. Small Business Administration, a federal government agency. Sometimes referred to as “7(a)” loans, SBA loans are low-interest financing solutions that are technically provided by commercial banks and non-profit lenders rather than the SBA itself.

When applying for a regular term loan at a bank, you will need to put up assets as collateral to secure the loan. Without assets on hand—such as real property, cash or inventory—to use as collateral, the bank will likely consider your application too risky to touch. This is where the SBA comes in, providing the capital guarantee needed to secure the loan on your behalf.

Since SBA loans are generally less expensive than regular term loans, they’re one of the most cost-effective ways to fund a small business.

SBA loans can be competitive to get pre-approved for, though, so be ready to meet the strict qualifying conditions that bar some companies from applying.

Business Line of Credit

Business lines of credit are a convenient, take-what-you-need option for financing a new company. Unlike traditional loans, a business line of credit offers accessible funding for companies that need an indeterminate sum of cash to tide them over a cash crunch or major capital expense.

A business credit line allows better control over your business debt than a regular term loan. Acting as a reserve source of cash to be used whenever needed, the line of credit can also supplement a traditional loan.

Compared to loans and equity financing options, business lines of credit offer the following advantages:

  • Flexible cash flow management
  • Quickly builds business credit
  • Allows you to control the funds
  • Lower interest rates than credit cards

Invoice Financing

A form of accounts receivable financing, invoice factoring involves the pledging of unpaid invoices as collateral in exchange for cash.  

Companies that need fast cash for short-term expenses often turn to invoice financing if they have high-value outstanding invoices yet to be paid.

Most banks and creditors offer between 75 and 90 percent of the invoice face value. The cash is then advanced to the borrower and the remaining balance is remitted after the invoice is paid in full, minus fees. Those who do not qualify for traditional bank loans can take advantage of invoice financing as the creditworthiness of your accounts is weighted more heavily than your business’s financial health.

Equipment Financing

If your business operates in an industry that’s highly capital intensive, such as the dental or medical industries, you may be eligible for equipment financing. To help purchase the expensive equipment needed to get your business up and running, banks and other creditors can advance you up to 100 percent of the value of the equipment, which you then repay with interest.

Some of the main benefits of equipment financing include improved cash management, since it provides on-hand cash that can be used for strategic investments, and lower interest rates, as the equipment itself serves as collateral.

Not all industries benefit equally from equipment financing. If you work in an industry that doesn’t involve capital-intensive equipment, you may be better off buying the necessary equipment with cash acquired through other means. These core industries tend to be well-suited for equipment financing:

  • Energy
  • Construction
  • Transportation and logistics
  • Information technology
  • Manufacturing

Step 6: Completing Your Application

Congratulations! You’ve narrowed down the type of loan or financing option that’s right for you, and you’re ready to move onto the process of applying. Now, you will need to visit your local bank or credit union and schedule an appointment with their in-house loan officer. The loan officer will be your first point of contact and go-to personnel for all things related to your loan.

Some online lending facilitators provide online access to applications and business advisors to help with this stage. In that case, you may simply be able to speak to an advisor over the phone to complete this process. For more on how to do this, skip steps 7 and 8 and go right to the section  “Applying for a Business Loan Online.”

Without a facilitator to vouch for you, meeting with a loan officer, likely face-to-face, will be a critical step in acquiring your loan. Few lenders will be willing to grant you a loan unless they have gotten to know you first and have had the chance to evaluate your company and its management on a personal level. After all, your business’s trustworthiness amounts to more than just a FICO score or credit rating.

Collecting Your Papers

You should never show up empty-handed when you meet with a loan officer or bank rep. Make sure you bring all the documents needed to identify yourself and validate your relationship to the business, including:

  • A piece of government ID
  • Your customer list
  • Business license and permits
  • Your latest accounts receivable aging statement
  • Proof of ownership

Although the first items are self-explanatory, the bottom three may need some explanation.

The business licenses and permits required will vary by industry and the state in which your company is headquartered. All federal business licenses can be found on the SBA database. However, most federal-level licenses are issued by the US Department of Agriculture, the Bureau of Alcohol, Tobacco, Firearms and Explosives or the Alcohol and Tobacco Tax and Trade Bureau. Be sure to look up your state’s local permits and licenses, too.

Your accounts receivable aging statement is another important part of the preparation process for applying for a loan. In this case, you need to collect a printed report detailing for how long your customer’s outstanding invoices have gone unpaid.

The AR Aging Statement informs lenders about your customers’ financial health. If your invoices take too long to be paid, then lending to you may present too great a credit risk to take on.

Last, you’ll need to provide proof that you are, indeed, the lawful owner of the company. For this, you will need a copy of any of the following documents:

  • Articles of Incorporation
  • Owner’s tax return including Schedule C
  • The DBA with owner’s name attached
  • Stock ownership documents
  • IRS form K-1
  • Company stock certificates

Again, much of this can be skipped if you’re working with a loan facilitator, and your business advisor will already have relationships with the lending officers and be able to speed up the process.

Step 7: Planning Your Pitch

Once your application is signed, sealed and delivered—and you’re not using an online facilitator—you should prepare to meet face-to-face with your financial institution’s loan officer. This is the representative who you will be “selling” your loan application to, so to speak.

During this meeting, you will pitch your case for why your business can be trusted with the money by explaining its intent.

While nobody expects you to piece together a full PowerPoint presentation with infographics, clip art and animations, you are expected to come with a rehearsed pitch and organized business plan.

Using visual aids when needed, give yourself 10 to 15 minutes to go over, point-by-point, your planned capital expenses and roadmap to profitability.

The key to a successful pitch is to keep your message short and sweet. Nothing spells shoddy management like a rambling, unfocused business plan that doesn’t clearly delineate key financial forecasts for the next 2 to 3 years.

To this end, your presentation should be capstoned with an executive summary that succinctly states your main talking points and your company’s competitive advantage.

Step 8: Wait for Approval

Where you apply will determine how long it’ll take to hear back from the creditor. After you file your application and present your pitch, it may take months for large, national banks to process and approve your small business loan application.

Keep in mind that multinational banks have large corporate bureaucracies that can sometimes be slow-moving—don’t be surprised if it takes two months or longer to get a response, especially if it’s an SBA loan.

Smaller, regional banks that brand themselves on helping small businesses tend to take significantly less time to process small business loan applications. In most cases, these local lenders are actively seeking out small business loans to add to their books.

These institutions aren’t as interested in large enterprises that can put up hundreds of thousands in collateral. Instead, it is common for many regional banks’ staff to be dedicated to small business services.

If you apply for an online business loan, you could be approved much faster. Many online lenders that offer merchant cash advances, cash flow loans and working capital loans specialize in reviewing loan applications within 48 hours of receiving them.

Applying online with a platform that specializes in facilitating these kinds of loans can offer real advantages in terms of convenience and ease of financing.

Applying for a Business Loan Online

Today, there’s no longer any need to walk through the doors of a brick and mortar bank or credit union and apply for a loan in person.

Today, you can apply for a loan from the comfort of your home thanks to online lenders that are now providing a safe and competitive alternative to traditional commercial lenders.

If you’re not familiar with this process, here’s a quick primer on  what online business loans are and how you can get approved for one.

What Are Online Business Loans?

Like the name suggests, online business loans are repayable loans that are applied for and received through the Internet. From end-to-end, online business loans are managed and reviewed via the Internet using secure web portals or web applications that ensure your data is encrypted, confidential and safe from security threats.

When it comes to security, major strides have been taken in recent years to make online banking and lending as safe as traditional lending. For instance, Secure Sockets Layer (SSL) encryption is now a standard technology that makes the link between the web server and host’s browser highly threat-resistant.

SSL encryption ensures that all data and messaging between the lender and borrower is kept private.

Further, the TRUST eCertified Privacy Certificate certifies that lenders or platform have taken steps to ensure that the highest data privacy standards are upheld, and all collected data is kept confidential and secure.

Regardless, to keep your data secure, exercise due diligence and thoroughly research any lender or platform you use to apply for an online business loan.

Choosing an Online Business Loan Type

There are several options available to you if you’re interested in applying for an online business loan. Most, though not all, of the most affordable online business loans are SBA loans, which are backed by the U.S. Small Business Administration.

Lenders who issue SBA loans have to follow guidelines set forth by the U.S. SBA, which help lower interest rates and create more favorable terms and conditions for borrowers.

Not all SBA loans are created equal, however. Below, we’ve listed all the most popular forms of SBA loans and what expenses they’re best used for:

  • 7(a) Loans: Small business loans well-suited for business expansion projects, equipment and inventory purchases and general working capital.
  • Microloans: Loans of $50 thousand or less, ideally suited for smaller business projects and short-term inventory purchases.
  • CDC/504 Loans: Higher-value loans used to purchase assets such as real estate or other forms of real property.

Each of the above SBA loan options can help small and medium-sized enterprises expand operations, scale or simply provide working capital. Best of all, online lenders offer the above loans at rates that rival traditional lenders and with significantly faster processing times.

Find the loan that’s right for you.

 

Online Merchant Cash Advances

Another option when it comes to online borrowing is taking out a merchant cash advance. These loan types involve a lump sum cash infusion issued in return for a portion of the company’s sales.

Most online merchant cash advances require a minimum credit score of 500 or higher. Typically, online lenders issue merchant cash advances in the range of $3,000 and $500,000, depending on the revenues of the borrowing company.

The Pros and Cons of Online Business Loans

There are a host of benefits that come with applying for a business loan online. But, like all things, it has its share of trade-offs, too. To get the full picture, make sure you check over both the advantages and relative disadvantages associated with applying for an online business loan.

Pros

Ask anyone who’s ever applied for an online business loan, and they will tell you that they’re far more convenient and expedient than the traditional application process.

Whereas with a brick-and-mortar bank it might take upwards of a month for your application to be reviewed, online lenders can process a loan application in as little as a day.

For businesses going through a cash crunch, online financing provides accelerated access to cash. For those who in dire need of cash, you can even get approved for some online business financing the same day that you apply—however, usually at a higher cost.

The wide variety of options online borrowers can choose from adds a degree of customization that traditional lenders rarely offer.

Between SBA loans, merchant cash advances, short-term loans and more, there are online business funding options that suit every business’s needs and unique challenges.

Cons

Expedited funding is rarely cheap. If you need cash in only a few days, an online business loan or cash advance is in your best interest, but may translate to slightly higher annual percentage rates (APR) or factor rates.

Another trade-off is that online business loans sometimes come with shorter repayment terms. In other words, in exchange for greater convenience, online business loans need to be repaid faster than a regular business loan.

It’s also important to carefully vet online lenders to ensure that they don’t tack on any hidden fees or terms.

How to Apply for an Online Business Loan

Once you’ve narrowed down which type of online business loan you want, you can start the application process by visiting the website of the lender you wish to apply through.

Typically, online lenders require applicants to contribute the following information to fill out the secure application forms:

  • Income and annual revenue information (often in the form of a bank statement)
  • Social Security number
  • Business name and legal name
  • Business tax identification number
  • Personal contact information

Once the application is filed through the lender’s web portal, the waiting game begins. Fortunately, most online small business loans have a very short turnaround time, or, in some cases, they can be instantly approved the same day.

After you are approved for the business loan, funding will be transferred to your company bank account in as little as 24 hours.

The speed at which you receive funding will depend on the policy of the lender. On some platforms, borrowers can log into their account through the lender’s web portal to check the approval and deposit status of their loan.

Demystifying the Loan Application Process

Although applying for your first business loan can seem overwhelming, it’s not as daunting a task as you might think. Especially with the advent of secure online business loans, it’s now easier than ever to get approved for financing on your terms.

The key to a successful loan application is to find a loan option that works best for you. Since no two small businesses are the same, neither are their unique needs and challenges. Whether you should apply for an online business line of credit, a traditional term loan, a short-term loan or an SBA loan will be determined by the capital expenses and cash flow your business expects in the years ahead. If you connect with the right lender for the right kind of financing, your business will be set up for success today and in the years ahead.

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