4 steps to getting a business loan

When starting a new business or expanding an existing one, you may need to buy equipment, open a new location, or start a new marketing campaign. There are many reasons why businesses may want to spend some money up front to earn more money down the line. 

But funds might not be immediately available for those efforts, or you may prefer to keep a reserve of available cash for monthly expenses or emergencies.

A business loan can come in handy, though you may be wondering how to get a loan from the bank for your business. It can be secured well in advance of planned expenses, or right away to address a current need. Here are some steps to follow in the process of getting a loan from a lender for your business.

Steps to getting a business loan

Review your credit profile

Before you go through the steps of applying for the business loan, take some time to evaluate your overall picture as a borrower. This exercise will help you anticipate what type of loan your business will qualify for, how much to request, and the documents you will need.

Banks will consider your personal credit score and credit history, as well as your business credit profile. Credit history is a key indicator to banks of the likelihood that you’re a worthy borrower who will deliver on financial commitments. Banks often require personal credit scores from everyone who has a 20% or greater stake in the business. 

Banks and financial institutions may have slightly different credit requirements than the Small Business Administration (SBA). Banks often like to see credit scores in the 700s, whereas SBA loan requirements may be slightly lower. Please check with your individual lending institution to learn the current requirement.

Available cash flow is another consideration for banks to determine your likelihood of making on-time, regular payments. Lenders will look at what’s in your bank accounts right now, along with past sales, current expenses and debts, and any future budgeted items.

Time in business is another important consideration for banks that review business loan applications. It’s not a disqualifier, particularly for startup businesses, but this factor is considered in the overall application. A traditional business with an established record could speak to years of creditworthy history, whereas a new business might have to work a little harder to prove its qualification for a loan. 

Available assets and collateral may also be included in the business’s overall financial picture. These tangible assets are considered a form of backup should the business default on the loan. 

Choose your financing

There are different types of financing available that can address the type of loan that your business needs. These include the following options:

• Traditional bank loans can offer lower interest rates and be paid off over a longer period
• SBA loans also offer lower rates and can be set up with a longer payoff time frame
• Non-bank loans can be done online with a quicker review process than SBA or traditional bank loans but have higher APRs and a shorter payoff window
• Business credit cards may be a useful short-term option for a newer business, with more flexible qualification requirements
• Line of credit loans can be re-used multiple times but have a higher bar for qualification
• Cash flow loans and business cash advances can be used for immediate cash needs, typically with a higher APR

Choose your lender

After evaluating your business’s creditworthiness and the type of loan that will work best for your needs, it’s time to consider what lender to choose. 

When determining the best type of lender for your business, think about how much you need to borrow, your credit scores, your timeline for securing the funds, how much time you want to pay it back, whether you need cash or a charge account, an acceptable interest rate, and any collateral you’re willing to put up.

There are several categories of lenders that offer business loans.

• Direct lenders are banks, credit unions, non-bank online lenders, and investors. You will work directly with that lender and not with a third-party intermediary.
• Peer-to-peer or P2P lenders are better known as crowdsourcing. Startups may publicize their initiative online and get donations and investors in the cause. 
• Loan marketplaces help you find lenders based on your needs and qualifications, and present a number of options to choose from.

Gather your documents and submit

Depending on the type of loan you apply for, you can expect to submit the following types of documents and evidence for consideration:

• Personal and business credit scores
• Bank statements
• Tax returns
• Any legal contracts pertaining to the business
• Other loan, expenses, and debt documentation
• State licenses and registration

And now it’s time to submit your application, usually online. You may need to provide additional documentation upon request once the lender starts reviewing your application, then the waiting begins for final approval. 

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