At one point, you will need to take out a loan to grow your small business, but navigating the long process of securing a loan can be intimidating. Knowing the steps to take out a business loan can reduce frustration and improve your chances of getting approved quickly and easily. 

Understand what protocols to follow, how to shop for qualified lenders, and how to apply for a loan when your small business needs it the most.

Seven simple steps to getting a small business loan

1. Establish whether you are eligible to get a business loan.

The following questions will help you determine whether you are eligible to take out a small business loan.

What’s your credit score?

You can ask the three credit bureaus (Equifax, Experian, and TransUnion) to provide you with your credit report. You can also find out your credit score for free from personal finance websites and credit card issuers.

According to Suzanne Darden, a finance specialist at the Alabama Small Business Development Center, banks prefer to offer low-interest rate loans to borrowers with a minimum credit score of 680.

If your credit score is below that threshold, you need to consider loans from non-profit microlenders or small business loans for borrowers with bad credit.

How long have you been in business?

You need to have been in business for a minimum of two years to qualify for bank loans and a minimum of one year to qualify for most online small business loans.

Do you have sufficient income?

Most lenders require a minimum annual revenue of $50,000 to $250,000. If your revenue isn’t high enough, you need to consider other options, such as SBA microloans, short-term business loans, or equipment financing.

2. Ascertain what payments you can afford.

Carefully gauge your business’s financials, particularly cash flow. Determine how you can afford to make monthly loan repayments. Consider this since some online lenders require daily repayments.

Your total income should be at least 1.25 times your total expenses to comfortably repay your loan each month. For instance, you should be able to afford a monthly loan payment of $1000 if your income is $10,000 each month and you pay $7000 in rent, payroll, and other costs. 

3. Determine how you want to collateralize the loan.

A secured loan requires collateral, such as property or equipment, which can be seized by the lender if you fail to repay the loan. It can be risky to put up your collateral, but it is a surefire way to get a loan at a lower interest rate.

Additionally, lenders may demand a personal guarantee from you, which means you’ll need to personally repay the loan if your business fails. 

4. Figure out the type of loan you need to fund your business.

When you apply for a small business loan, lenders will ask you the reason. Your answer will likely fall into three categories that will help determine the type of business loan most suitable for you.

  • When you want to start a business. – Generally, companies in their first year of business can’t get loans since lenders require cash flow to support repayment of the loan.  You’ll have to rely on other types of startup financing, such as business credit cards and personal loans.
  • When you want to manage your day-to-day expenses. – Flexible financing options, such as a business line of credit, could help. You can tap into this fund when you need to cover various expenses, such as unexpected repairs or payroll.
  • When you want to grow your business. – Usually, SBA loans backed by the government or traditional term loans have higher borrowing maximums. For instance, SBA loans can sometimes reach $5.5 million.

Some lenders may also offer specific products customized to suit a growing company’s needs, like loans for vehicle purchases or equipment.

5. Compare small business lenders.

Online lenders, banks, and non-profit microlenders are the three main sources to get small business loans, and each of them offers multiple products. Though, one may be better than the other in certain instances.

When should you get a business loan from online lenders?

  • You have no collateral.
  • You lack time in business.
  • You need immediate funding.

Online lenders offer small business loans and lines of credit ranging between $1000 – $5 million. The average annual percentage rate ranges from 6% to 99%, depending on the length of the repayment term, the borrower’s credit history, type and size of the loan, the requirement of collateral, and most importantly, the lender.

Small business lenders usually don’t have APRs as low as the traditional banks, but their approval rates are higher and offer funds faster than banks.

When should you get a business loan from banks?

  • You have good credit.
  • You’ve been in business for at least two years.
  • You don’t require fast cash.

Traditional bank options include commercial mortgages, term loans, and lines of credit to purchase properties or refinance. 

The U.S. Small Business Administration provides general small-business loans with its 7(a) loan program, disaster loans, and short-term microloans through banks. 

The SBA also offers a 504 loan program to help promote communities’ economic development by financing a business’s fixed asset purchases, such as equipment, building, or land, through long-term, fixed-rate financing. 

It can be tough to take out a small business loan from a bank due to various factors, such as lower sales volume and cash reserves. Banks can take longer to provide funds but usually offer the lowest-APR option.

When should you get a business loan from microlenders?

  • You are a new business.
  • You have no credit history or bad credit.
  • You can’t secure a traditional loan.

Microlenders are non-profit organizations that lend short-term loans of less than $50,000. The APR on these loans is higher than bank loans. Applying for such loans can be a lengthy process since they require a detailed business plan, financial statements, and a description of the purpose of taking out a loan.

Microloans may work the best for smaller companies or startups that can’t qualify for bank loans due to poor personal credit history, limited operating history, and lack of collateral. 

Lendee, one of the most trusted microlending platforms, gives you access to a network of lenders willing to help no matter what your credit score is. Lendee makes sure you get loans at a fair rate. 

6. Gather all your documents.

Make sure that you have all your documents in place before you apply for a small business loan.

You’ll need to submit a combination of the following documents depending on your lender:

  • Business and personal bank statements.
  • Business and personal tax returns.
  • Business financial statements.
  • Business plan.
  • Business legal documents that include your commercial lease, articles of incorporation, and franchise agreement.

7. Apply for a business loan.

Now that you know the type of loan and lender most suitable for your business, it’s time to apply. Look at two or three similar options based on loan terms and APR. 

The best way to find out the total cost of your business loan for the year is through APR, which includes all loan fees in addition to the interest rate.

Out of the loans you qualify for, choose the ones with the lowest APR and apply with your documents.

Moving forward

There’s plenty of funding out there for small businesses, but it all comes down to following the steps mentioned above to apply for a loan and picking the option most suitable for you.