How to Get a Small Business Loan

Starting your small business requires dedication, motivation, commitment, hard work…and money. From hiring employees to renting a space and purchasing inventory, you need cash in order to get your business up and running. Loans for small businesses allow entrepreneurs to take important steps for their enterprises during the beginning and growth stages of the business lifecycle. 

Whether the loan is used for the purpose of establishing your enterprise, developing and purchasing products, or to cover basic initial operating expenses like remodeling a storefront or paying municipal taxes, this upfront capital is critical for small business owners looking to turn their dreams into a reality.

A small business loan can give you the capital needed to buy supplies, pay vendors, hire and compensate a team of employees, lease a location or office, and more. But do you know how to get a small business loan and how to successfully secure financing for your business? Read on to learn more about finding and applying for loans for your small business.

 

What is a small business loan?

A small business loan is financing obtained by an entrepreneur in order to fund their small business. This loan could come from a traditional bank, an online lender, a local credit union, or any other financial institution.

 

Small business loan vs. SBA loan

The term “small business loan” refers to any loan meant for financing a small business, which is obtained from a bank or traditional financial institution. 

A Small Business Administration (SBA) loan is specifically focused on easing the early stage financing process for small businesses, and often offers more favorable conditions for entrepreneurs.

In general, an SBA loan offers borrowers a lower interest rate and longer repayment period than a conventional loan. SBA loans typically require less upfront collateral than a traditional loan.  Notably, SBA loans are not administered via the SBA – rather, they happen through from SBA-approved lenders. 

 

How to get a small business loan 

To get a small business loan, you’ll need to approach a bank, credit union, online lender, the SBA, or other financial institution. You’ll then complete an application, attaching paperwork about your business, and wait to hear back if you’ve been approved or rejected. This might sound simple, but there’s a number of things you need to do before submitting an application.

 

To-do list for your small business loan

You should consider taking the following steps before applying for a small business loan in order to ease the process and boost your chances of your request being approved by the lender.

 

Establish a solid business plan and roadmap to profitability

Proving that your business can pay back the loan is one of the most important factors considered by the lender. Demonstrate that your business model works by charting your plan and future cash flows.

 

Create an appealing one-pager covering your business’ basics

This document should include pertinent facts about your business, such as your Tax ID and Employer ID number, how long you’ve been operating, the size of your team, and your average gross annual revenue.

Essentially, the one-pager should have all the hard numbers and facts the lender needs to see in order to determine that your business is on solid ground and that you’re a responsible borrower. 

Tip: use a tool like Canva.com (it’s free!) to create a visually appealing document and save it as a PDF to have on hand. 

 

Review your business credit score and get your paperwork in order

Make sure that you have all required documentation, as well as a good business credit score. Your business credit score indicates that your business is fiscally responsible, regularly pays money owed to suppliers and vendors, and that you don’t have outstanding debt.

If your business credit score is shaky, consider taking steps to improve it and waiting for it to become higher before applying for the loan.

 

Research lenders and market conditions

This is the time to take a deep dive into what’s going on in the market. Take a look at which lenders are offering the conditions, like interest rates and length of repayment, which are best suited for your business’ unique needs. 

 

Secure collateral 

In all likelihood, your lender will want to secure collateral in exchange for the loan. That means you’ll agree to forfeit personal or business assets, such as real estate, equipment, inventory, future invoices and payments from customers, and even cash, should your business fail to repay the loan. 

The value of the collateral requested by the lender is dependent on a number of factors, such as the amount of the loan, your business credit score and history, the industry in which your business operates, and the overall risk the loan poses to the lender.

If you’re not able to secure sufficient collateral for the loan, your application may be denied. There are alternative options to traditional collateral, such as signing a personal guarantee or UCC lien, which some financial institutions are willing to accept.