How to Get a Business Loan: Step-by-Step Guide

Improve your approval odds and get the funding you need quickly by understanding available loan programs, qualification requirements, and commonly required paperwork.

There are many ways you can go about getting a small business loan, but done incorrectly, it can lead to wrongful denials or delays in getting your funding, at best. That’s where I come in to give you a lending hand (pun intended). I’ve had over a decade of experience in lending as a loan underwriter, so I’m uniquely qualified to help you navigate the loan process, avoid common mistakes, and help you get your funds as quickly and seamlessly as possible.

Step 1: Pinpoint your exact use case for the funding & the expected ROI

When borrowing money, ensure that it has a positive impact on your business. This could be ensuring you can continue paying debts to stay afloat or investing in the continued expansion of the company to generate additional revenue. One way you can do this is to create different scenarios and run forecasts of what your company’s financial future would look like.

For example, in one scenario, you could forecast how much revenue you’d generate if you decided not to get a loan. In another scenario, estimate how much additional income you would get if you used the loan proceeds for things like new infrastructure, computer hardware, research & development, headcount expansion, employee training, obtaining new certifications, and more.

If the expected return on investment (ROI) exceeds your costs of borrowing and getting a small business loan, you have a good case for continuing to the next step. Otherwise, you may want to reconsider your decision to take on the expense and obligation of a loan.

Step 2: Select a suitable type of loan

Loans come in several different forms and can be structured in a variety of ways. Below are some common loan types you may be able to choose from:

• Term loan: This is any type of loan in which funds are disbursed in a single lump sum.
• Line of credit: Here, you can draw funds repeatedly up to your designated credit limit. As you pay down the balance, you can continue to draw additional funds.
• Personal loan for business: If you can’t get a business loan because of your company’s credit or finances, using your personal income and credit to qualify can be a good alternative.
• Equipment financing: Funds can be used for business-related equipment, and since the loan is secured by business assets, you can typically get some pretty phenomenal rates on this type of loan.
• SBA loan: SBA loans are government loans issued by the Small Business Administration. These loans can offer incredibly competitive rates and terms, but often require a lot of paperwork. Take note that it can also take several weeks to months before funds are disbursed.
• Credit cards: These often carry interest rates greater than 20%, so they’re often best used for daily purchases that you can pay in full each month. However, it can still be a good option if you can snag a low introductory interest rate offer.

Step 3: Review your qualifications

Your ability to secure a loan will depend on whether you can document the financial ability to repay it, as well as demonstrate a history of willingness to make timely payments.

Understanding the strength of your company’s finances can give you an idea of what terms you can expect to receive, even if you’re unsure of the exact qualification requirements of a particular loan type or program. For example, if you have excellent credit and finances but are issued subpar terms, you can easily make the decision to continue your search elsewhere for financing.

Below are common qualifications that lenders evaluate:

• Credit: This is a snapshot of your current debts and how you’ve handled debt repayments in the past. Your credit score will also be evaluated by lenders in their determination of your creditworthiness.
• Income: In addition to your current revenue, lenders will typically also review your historical income going back at least two years to see if it is trending up or down. Your income will also be compared to your debts to determine whether you can afford to take on additional debt.
• Financial assets: This can include checking and savings accounts, or other sources of financial reserves, that could be used to weather temporary downturns in your business cycle. The idea here is that the more reserves you have, the less likely you’ll default on your loan even if business slows for a few months.
• Collateral: Pledging business assets in exchange for a loan can improve your approval odds and get you more beneficial rates and terms. This is because pledging collateral allows lenders to take possession of the item(s) in the event of a default, subsequently allowing them to recoup at least some financial losses resulting from your non-payment.
• Time in business: Startups have a high failure rate, so the longer your company has been in business, the more favorably it is viewed by lenders. Startups are generally classified as companies that have been in business for less than two years.

Step 4: Shop lenders & apply

It’s important to get quotes from multiple lenders before committing to any single one. This helps ensure you find the program best suited for you, and can also help you get the best rates and terms available. Once you’ve found a lender, you’ll need to submit a formal loan application.

I recommend considering multiple types of lenders as part of this process. This can include credit unions, banks, business loan brokers, and online lenders.

• Credit unions: As not-for-profit organizations, you can frequently get more competitive rates and terms. Underwriting guidelines also tend to have more flexibility built in, with a greater ability to have credit policy exceptions issued. However, the range of loan programs offered may be limited.
• Banks: You can typically find the widest range of loan programs from regional or nationwide banks. However, underwriting flexibility tends to be limited, and stricter qualification requirements can make it more difficult to get approved without good credit and finances.
• Business loan brokers: Brokers have a network of lenders and can help you find the best one for your circumstances. Many charge a small fee for their services, but it can be well worth it if they can find you a better program than you would have on your own.
• Online lenders: Lenders operating primarily online can often provide the best rates since they don’t have overhead costs associated with things like leasing office buildings as branch locations. One potential downside, however, is limited availability of customer service.

Step 5: Provide required documentation

Now that you’ve selected a lender and submitted a formal loan application, you’ll need to provide paperwork to support your ability to repay the loan, as well as allow the lender to verify your business.

This can vary depending on the lender you choose, the loan program you’ve applied for, as well as the complexity of your company’s credit and finances. However, preparing the following commonly requested paperwork can allow you to speed through the approval process more quickly:

• 2 years of personal and business tax returns
• 3 to 6 months of business bank statements
• Current profit & loss statement, balance sheet, and cash flow statements
• Copy of current lease agreements

Step 6: Review the lender’s decision on your loan

Once you’ve provided everything the lender has requested, it will review your loan to determine whether it meets its lending guidelines, as well as the rates and terms you’re eligible for. It can typically issue one of the following decisions on your loan:

• Approved: This is the best outcome, and indicates your loan has been approved with no additional paperwork required.
• Conditionally approved: This means you’re likely to get approved, and the lender just needs some minor documents to issue a full approval. Examples of this could include simple things, like an updated bank statement or a more legible copy of a document.
• Counter-offer: This can be issued if the lender was unable to approve you for the loan program or terms you initially requested, but has found an alternative program you’re eligible for.
• Suspended: Incomplete applications or those missing critical information typically end up in a suspended status. This means the lender needs a lot more information before it can determine the next steps for your eligibility.
• Denied: If a lender is unable to offer financing, it will issue a loan denial. If this happens, I recommend asking how it reached that decision and what steps you can take to remedy the situation.

Step 7: Review terms in final loan documents and verify disbursement of funds

Once you’re approved, you can review the loan terms to ensure they’re acceptable to you before signing the final paperwork, at which point the funds will be disbursed. At a minimum, I recommend reviewing the following loan terms:

• Loan amount and interest rate
• Fixed vs variable interest rate
• Loan term
• Payment due dates and grace periods, if applicable
• Frequency and amount of payments
• Payment method
• Fees (such as pre-payment penalties and late fees)

Alternatives to consider

1. Rollover for business startups (ROBS)

A ROBS is a way for you to get tax- and penalty-free access to the funds in your retirement account. Since you’re using your own money, it’s not a loan that has to be repaid, so this is a good alternative if you cannot get a loan because of your credit or finances.

Take note that a ROBS does have its risks. Since it involves navigating through multiple areas of tax rules and regulations, a ROBS done incorrectly could result in hefty fines and penalties by the Department of Labor or the Internal Revenue Service.

To mitigate this risk, I recommend working with a ROBS provider that can guide you through the process while also offering financial guarantees and protections in the event of an audit. For this, you should consider Guidant Financial, as it has some of the best consumer protections, resources, and expertise when it comes to ROBS transactions.

2. Crowdfunding

Crowdfunding is a way to raise funds from a large number of individuals. If your business has a large following of customers, you can offer each individual investor some sort of benefit, such as equity, rewards, or discounts on future purchases. Many crowdfunding platforms exist to help you organize your campaign. Popular platforms include Kickstarter, GoFundMe, and Indiegogo.

Frequently asked questions (FAQs)

What credit score is needed to get a business loan?

This depends on the type of loan and lender you choose. Good credit is generally considered to be a score of 680 and above, something that will allow you to qualify for most loans. However, there are also business loans that have no minimum credit score, as long as you have strong finances or are willing to pledge collateral in exchange for funding.

How long does it take to get a business loan?

It typically takes between one and two weeks to get a loan. This depends on the lender you choose, your loan program, and the complexity of your business finances. Government programs can often take several months before your loan is approved and funds disbursed, while many of the best short-term loans can fund in as little as 24 hours.

Can I get a business loan as a startup company?

Yes, it’s possible to get a loan as a startup company with fewer than two years of history. However, you’ll generally need to have a good business plan along with strong credit and finances. Keep in mind that even if approved, you may not qualify for a lender’s best advertised rates and terms.