How to Get a Small Business Loan in 9 Steps

There are a few things you can do to set your application up for success, and it starts with understanding what small business loans are and how they work.

What is a small business loan?

A small business loan is a type of business loan designed to help small business owners get the financing they need. Many of these loans are guaranteed by the Small Business Administration (SBA), which means the SBA agrees to repay the balance of the loan if the small business owner defaults. 

These loans are issued by financial institutions like banks and credit unions, not the SBA itself. This means you’re able to choose the lender you want to work with, and the one that offers you the best loan and loan terms.

How to get a small business loan in 9 steps

Every lender is free to set their own requirements and application process for small business loans. However, most will expect applicants to follow similar steps. These are the most common steps people need to take to apply for and obtain the loan they require.

1. Make sure you qualify

SBA loans are designed to help small business owners get the working capital they need. To that end, the SBA has several strict eligibility requirements that must be met before a small business owner can qualify for a loan. Before you apply for financing, make sure you meet these requirements.

• The business must be operational. Unfortunately, you can’t apply for a small business loan if you’re trying to finance an idea. Your business must be in operation at the time of the application.
• You must operate a for-profit business. These loans are only available to for-profit businesses. If you’re not registered as a charitable organization or you’re starting a nonprofit, you may be able to apply.
• The business must be of an appropriate type. The SBA only guarantees loans to certain types of businesses. Review their exclusion list to make sure your company is eligible for financing.
• The business must be in the U.S. SBA loans are only available to businesses that are located in the United States. If you’re operating a business with headquarters in another country, you’ll need to look for different financing methods.
• You must be able to repay the loan. You’ll need to show the lender that you’re able to repay the loan if they issue you one. This means you should be earning regular income from the business and have a reasonable credit score. 

2. Outline why you need a business loan

Lenders want to gain a general understanding of why you need the business loan in the first place, and one of the easiest ways to explain how you’ll use the money is to submit a business plan. Your business plan should include:

• An executive summary that explains the purpose of your business
• Market analysis for your business’ industry
• An explanation of the company structure and how the business operates
• The products or services you’ll provide
• Your marketing strategy
• Financial projections for the first year
• How you’ll use the money from the SBA loan

If you don’t already have a business plan in place, be sure to create one before applying for a small business loan. Keep in mind that business plans are dynamic documents. It’s normal for them to change and grow over time. If your initial plan isn’t as well-fleshed out as you’d like it to be, lenders should understand.

3. Choose the type of loan you want

There are different types of SBA loans available, and the type you choose depends on your needs and goals. Review the types of loans that may benefit your business most. These are just a few of the options available.

• SBA 7(a): This loan is the most common type of SBA loan and can be used for most business-related expenses, including building working capital, purchasing real estate, and other similar costs. Terms vary by lender, but the maximum principal amount for SBA 7(a) loans is $5 million.
• SBA 504: This loan helps people purchase assets like real estate or equipment that will help them grow their business. The maximum loan amount is $5.5 million.
• SBA microloans: These are small loans with a maximum loan amount of $50,000. These loans help business owners make improvements, cover cash flow lulls, purchase supplies, and other similar smaller expenses.
• SBA Express loans: These loans have a maximum loan amount of $500,000 and can be used for most business purposes without restriction. 
• Term business loans: If a business doesn’t qualify for an SBA-backed loan, they may be able to apply for a business term loan through their preferred lender. Lenders set the terms on these loans.
• Personal loans: For businesses just starting out, personal loans may be a good choice. These loans have few restrictions, and often offer flexible eligibility requirements.
• Business lines of credit: Business lines of credit are a type of revolving credit that lets business owners borrow money repeatedly as long as they pay off what they borrow. There are typically no restrictions on how these funds can be used.

If you’re not sure which type of loan is right for your business, you may want to speak with your loan officer. They’ll help you better understand your options.

4. Check your credit scores

Lenders like to base their decisions on the business owner’s personal credit score and the business’ credit score. At the very least, you should consider your personal credit score before applying. You can likely check your score in real time through your bank, credit union, or personal credit card issuer. 

Federal law requires each of the three credit reporting bureaus to offer free access to one credit report per year. You can also check your personal score for free through AnnualCreditReport.com, which is the only website formally authorized by the federal government to centralize access to these reports.

Business scores take between three and six months to show up. If your company is new, you’ll typically rely solely on your personal credit when applying for financing. You can check business credit scores at these credit reporting agencies:

• Dun & Bradstreet
• Equifax
• Experian

If your score is on the lower end, you may want to try to build it up by paying down existing debt, staying current on bills, and other similar strategies. Remember that lenders set their credit requirements for small business loans and unsecured business lines of credit, but most will be more willing to issue loans to applicants with higher credit scores.

5. Gather documents

Lenders will typically ask you to submit certain documents as part of your loan application. These documents help lenders learn more about the business and your financial situation so they can make an informed decision. Compile these documents ahead of time so you’re ready to send them to each lender you apply with as needed. You’ll typically need to give your lender the following documents, as well as any others they request.

• Bank statements: Your business’ bank statements and, in some cases, your personal bank statements can provide lenders with insight into your financial situation. Each lender will tell you how many statements you need to provide.
• Tax returns: You may be asked to provide copies of your personal income tax returns as well as tax returns for your business for at least the last year. 
• Profit and loss statements: Often called P&L statements, profit and loss statements tell lenders about your profits over the course of the year while also showing them the losses you incurred. If you don’t have a P&L statement, speak with your accountant.
• Balance sheets: Your business’s balance sheets show lenders your assets, liabilities, and equity at a set time.
• Proof of business: You may need to provide proof of your business’s formation, business license, and other similar documents showing that your company is structured the way you claim and can legally operate in your city or state.

Again, each lender will have their own requirements. Speak to your lender to learn more about the documents you’ll need to provide as part of the application.

6. Build your business’ credibility

Lenders want to see that your business is registered and able to operate in your industry and location without facing legal penalties. By forming an LLC or a corporation, you’ll show that your company is legally able to operate in your state or county. A business formations attorney can help you figure out which type of registration will work best for your long-term business goals. 

If your company also operates in a regulation-heavy sector, making sure you’re in compliance with all necessary regulations is essential. Getting compliance support when you’re starting out can reduce the risk of compliance violations and may instill confidence in your application.

7. Compare lenders

It’s a good idea to get quotes from several lenders rather than settling on the first lender you find. This gives you the opportunity to compare the rates you’re offered and see who will give you the best loan for your needs.

Try to get quotes from at least three lenders if possible, to gain a better understanding of the loans you may be eligible for and the amount of money you’re likely to qualify for. 

8. Review loan terms

Once you have quotes from several lenders, you’ll want to review the quotes in detail. This means looking at the loan principal, the rates, any fees associated with the loan, and other similar factors.

While it’s tempting to choose the loan that offers the lowest interest rate and the highest principal amount, doing so may not always be the best option. Be sure to compare the annual percentage rate (APR), which includes fees and other costs associated with the loan, as well as the interest rate the lender will charge. Higher APR loans typically cost more over the life of the loan. 

9. Close on the loan

Before you can get the money, you’ll need to go through closing. During the closing process, you’ll finalize the terms of the loan with the lender and sign all necessary documents or paperwork. Once everything is signed, the lender will transfer the money to your business checking account. 

Once you close on the loan, you’ll typically need to start making payments based on the repayment schedule you and the lender agreed to. Most loans require monthly payments.