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How To Get A Small Business Loan

Written by Banks Editorial Team

Updated April 16, 2024​

3 min. read​

how to get a small business loan

A small business loan can help your business survive and grow. Knowing how to get a small business loan to gather the needed information can make your loan application successful.

At any time, getting a small business loan may be critical to your company’s growth or even to weathering a bad stretch. Fortunately, there are many types of lenders to small businesses. Alternative lenders specialize entirely in helping small businesses get the capital they need when they need it.

But, first, let’s review some critical steps in getting get a small business loan.

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How to Get a Small Business Loan

Here are some decisions you will have to make, steps to prepare your application, and how to know you are getting the loan you need for your business on the best terms.

1. Decide the Lender and Loan Type

Commercial banks, commercial banks, government lenders like the Small Business Administration (SBA), and private, independent, specialist lenders can help secure funding for your small business. Another alternative is peer-to-peer lending programs or online lending marketplaces.

As with all loans, terms and limitations exist depending on the type of loan you choose. As an example, if you select an equipment financing loan, you may only be able to use the funds towards equipment financing and not other things.

2. Manage your Risk Profile

Among the first concerns of any lender, even the SBA, will be how likely you will pay back the loan. For that “due diligence,” the lender will look at aspects of your credit, the history of your business, your financial statements, and other factors. Before you apply for your loan, you should check out, and if necessary, correct and improve your relevant record:

  • Your personal and business credit rating and record.
  • Your financial statements, which, if possible, should be audited by a certified public accountant (CPA) firm. Any potential lender will look at these carefully, so ensure they are accurate and up to date even if you decide not to invest in a formal audit.
  • Your cash available and other current assets as well as your loans outstanding.
  • How long your business has been operating and profitable.
  • Other investors, private or corporate, in your business.

If you can obtain your first loan, apply it successfully in your business, and repay it, you have taken a considerable step toward building your business’s credit for the next time you need funds.

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4. Gather Information for Your Application

Loan applications vary in their complexity, and lenders specializing in the needs of small businesses will provide more help, but you will have to assemble the basic information:

  • The basics. The name of your business, your federal tax ID, a list of your executives and their backgrounds, and the legal structure of your business (such as LLC or S corporation)
  • A financial projection. Your projected financial picture shows the lender what your future operations will look like and your expected cash flow.
  • Official documents. Your certificate of incorporation or foreign corporation filings and copies of relevant insurance, including key man insurance and liability coverage.
  • Other documentation. Your current credit report, two or three years of your full, signed tax returns, your business plan, and your best case (or pitch) for start-up or growth funding.

5. State How Much you Want to Borrow and For What

All lenders to a small business will have a limit on what they will lend and sometimes strong preferences for what types of investments:

  • Working capital loans can help to finance your daily operations, especially at times like these when your business needs to stay open until the pandemic ends, and prepare to take advantage of new opportunities when business rebounds.
  • Accounts-receivable loans tend to be short-term and to be made against future payments you will be receiving.
  • “Small business” loans are the generic name by which the SBA and some other lenders designate loans with unique features such as size, the terms of the loan, and schedule of payback intended to meet the needs of small businesses.
  • Equipment loans are common because they are directly invested in the increased productivity made possible by machinery, trucks, computers, and software. Usually, the loans are a percentage of the cost of the equipment, and the equipment serves as security for the loan.
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6. Provide Security for the Loan

Returning to a lender’s prime concern, getting the loan repaid, you should decide what you can offer as security. As mentioned above, the equipment can serve as security, as can other company assets or your account receivable. The terms of your loan, including especially the interest rate, will be more favorable if the lender views the loan as “secure.” If your personal assets and credit are strong, your personal guarantee to repay the loan is also a form of security. But realize, then, that both your company and your personal financial status are at risk.

7. Understand the Loan Terms

Several times, now, the issue has come up: What will be the terms of the loan you are offered? Each type of loan mentioned has somewhat different terms. But your specific loan also will have its own terms that reflect your financial situation, the size and purpose of the loan, and other factors. Among some terms important to review and perhaps run by your accountant:

  • The interest rate. Is it fixed or variable over time because it is tied to some benchmark like the “prime rate”?
  • The interest payment schedule. Do you make interest payments monthly or on some other schedule?
  • Payment of the principal. When is the principal amount of the loan due, or is it paid back gradually over the life of the loan?
  • Costs of the loan. How much is the origination fee, which the bank charges for administrative costs of the loan process and other costs of the loan?
  • Conditions on your business. Does the loan impose certain operating conditions on your business, such as the total amount of debt you can assume? And are there limits on how you can use your loan?
  • Reporting requirements. What reports and other documentation will be the bank expects from you, and on what schedule?
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