How To Navigate The Process Of Securing A Small Business Loan


Starting and growing a small business often requires capital beyond your personal savings. An infusion of funding obtained through a small business loan can provide the working capital to get your business off the ground or support key expansions. But navigating the process of qualifying for and securing a loan can seem daunting for first-time entrepreneurs.

This comprehensive guide breaks down the step-by-step process for getting a small business loan. With realistic expectations and the right preparation, your dream of launching or expanding your own business can become a reality.

What Exactly is a Small Business Loan?

A small business loan is financing provided by a lender to help start, operate, or grow a small business. Loans can serve many purposes, such as:

  • Providing working capital to cover day-to-day operating expenses
  • Purchasing inventory, equipment, or other fixed assets
  • Renovations or expansions of business facilities
  • Hiring additional staff
  • Launching marketing campaigns
  • Refinancing existing debt

Loans for small businesses typically range from $5,000 to $5 million. The loan amount, terms, interest rates, and eligibility requirements depend on factors like your personal credit history, time in business, annual revenue, collateral, and the policies of the specific lender.

Compared to traditional bank lending, requirements for small business loans have expanded in recent years, making capital more accessible for women, minority, and veteran-owned businesses.

Key Steps for Securing a Small Business Loan

Getting approved for a small business loan involves meticulous preparation and planning. Following these key steps can help ensure your application is complete, increasing your chances of securing financing:

Understand Your Financing Needs

Have a clear purpose for the loan by estimating costs associated with your business goals. Common needs include:

  • Working capital to cover operating expenses like inventory, payroll, rent.
  • New equipment, machinery, or vehicles.
  • Furnishings and renovations for new office or retail space.
  • Technology upgrades like new computers, systems, or ecommerce infrastructure.
  • Funding to hire and train additional staff.
  • Expansions into new products, services, or locations.

Getting input from a small business credit counselor or SCORE mentor on realistic startup costs can help you determine how much capital you need.

Research Your Loan Options

With your financing needs defined, the next step is researching the different types of small business loans and lenders. Loan options include:

  • SBA loans backed by the government, which offer longer terms and lower down payments.
  • Lines of credit providing revolving access to funds.
  • Equipment financing for purchasing machinery, vehicles, and other fixed assets.
  • Microloans typically under $50,000 from non-profit lenders.
  • Merchant cash advances providing quick financing by purchasing a share of future sales.

Compare interest rates, terms, and eligibility criteria from multiple lenders including banks, credit unions, and online lenders.

Gather Required Documents

Lenders will want to scrutinize your personal and business finances before approving a loan. Key documents you’ll need to submit include:

  • Personal financial statements for each owner/investor.
  • Federal tax returns for the previous 2-3 years.
  • Existing business financial statements like profit and loss, balance sheets, and cash flow.
  • A business plan with financial projections.
  • Documentation of available collateral like real estate or equipment.

Having organized records shows you are serious and prepared.

Choose the Right Lender

Important factors when choosing a lender include:

  • Experience with lending to small businesses in your industry.
  • Competitive interest rates without hidden fees.
  • Flexible options like delayed payments for seasonal businesses.
  • Responsiveness and transparency during the application process.
  • Positive reviews from other borrowers.

A small business consultant can help identify the best lenders to work with.

Complete the Loan Application

With your documents ready, it’s time to thoroughly complete the loan application. Be responsive to lender requests for additional details. Ask questions if any aspect of the terms or requirements is unclear before signing.

Patience is key as it can take weeks or months for lenders to process applications and verify details. Persistence and regular follow up can help speed up the process.

Negotiate Terms

Before accepting the loan, try negotiating for the most favorable terms possible. This could include reduced fees, lower interest rates, or flexible repayment plans tailored to your projected cash flow.

If certain terms are non-negotiable, discuss possible concessions like delayed due dates for the first few payments. Every bit helps reduce the burden once you begin repayment.

Review the Loan Agreement

Carefully review the loan agreement before signing and accepting funds. Verify that the details match what was negotiated, and beware of any clauses around penalties for late payments or early payoff.

It can be helpful to involve a business lawyer or financial advisor for guidance around contracts and fine print. Their expertise can prevent unexpected surprises down the road.

Set Up Repayments

Once approved, set up automatic payments from your business checking account to avoid missed payments and late fees. Budget appropriately to ensure enough cash flow is available for scheduled installments.

Many lenders allow additional principal payments which helps reduce overall interest costs and pay off the balance faster.

Tips for Getting Approved

Since lenders are taking a risk, gaining loan approval requires demonstrating your business is a worthy investment. Tips to improve chances of getting approved include:

  • Credit score above 720 with positive payment history.
  • 2+ years in business with steady annual revenue.
  • Solid business plan with growth projections.
  • Available collateral like real estate, equipment, or investments.
  • Existing capital or investors already committed.
  • Strong cash flow plus profitability.
  • Low debt-to-income ratio.
  • Experience and expertise in your industry.

Meeting these criteria upfront minimizes risk for the lender and bumps your application to the top of the pile.

Alternative Financing Options

If you get declined for a small business loan, don’t despair. Many other financing options exist including:

  • 401(k) or IRA funds
  • Crowdfunding through sites like Kickstarter and Indiegogo
  • Grants for women-owned, minority, or veteran-owned businesses
  • Angel investors or venture capitalists
  • Invoice factoring providing cash advances on outstanding invoices
  • Using business credit cards with 0% intro APR periods

With persistence and creativity, there are always financing solutions available for determined entrepreneurs ready to put in the sweat equity.

Types of Lenders to Consider

Many financing providers offer small business loans catered to different situations:

  • Banks and credit unions provide traditional loans with full vetting.
  • SBA Lenders offer government-backed small business loans.
  • Online lenders like Kabbage, OnDeck, and Fundbox provide quick approvals.
  • Microloan programs through CDFIs or non-profit lenders.
  • Family and friends who can lend based on trust and goodwill.
  • Credit card companies like American Express that offer small business cards.
  • Peer-to-peer lenders who connect individual investors with borrowers.
  • Merchant cash advance companies provide funding based on credit card sales.

Don’t limit yourself to big banks. Many alternative and non-traditional lenders work specifically with small business owners.

What Factors Do Lenders Evaluate?

Lenders dig deep into your business and finances when reviewing applications. Key aspects they evaluate include:

  • Credit score and history of managing past debts.
  • Time in business and annual revenue track record.
  • Profitability based on tax returns and financial statements.
  • Projections for future earnings growth.
  • Available collateral assets to secure the loan.
  • Existing cash flow plus capital reserves.
  • Amount of outstanding business debt obligations.
  • Business plan feasibility and management expertise.

Preparing documentation that gives an accurate picture of these factors is crucial for loan approval.

Mistakes to Avoid When Applying

When seeking a small business loan, some missteps to avoid include:

  • Submitting inaccurate or inflated financial documents.
  • Poor organization and preparation of application materials.
  • Not having a current business plan.
  • Letting emotions override logic when negotiating terms.
  • Accepting unfavorable repayment terms out of desperation.
  • Applying with damaged personal credit.
  • Taking on more existing debt before applying.

Rushing into financing before you’re ready can lead to disappointment and problems repaying the loan down the road.

Use Cases for Small Business Loans

Some examples of how to put your new capital to work:

  • Hiring a sales team to drive growth.
  • Developing and launching a new product.
  • Opening an additional office or retail location.
  • Purchasing specialized equipment to boost production.
  • Acquiring a competitor or expanding facilities.
  • Bridging seasonal businessrevenue gaps.
  • Expanding manufacturing capabilities.
  • Implementing a new IT system or ecommerce infrastructure.
  • Securing larger quantities of inventory at discounted rates.

Any business initiative with high potential returns is worth considering if it improves cash flow.

Frequently Asked Questions

Most lenders look for a credit score of at least 720 to improve the chances your loan application will be approved. Anything under 650 will likely lead to a denial. Scores in the low 700s may get approved but with less favorable interest rates or stricter repayment terms.

How long does the application process take?

In general, expect the small business loan application process to take between one and six months depending on lender workload and internal processing timelines. Simpler applications for smaller loans may take only a week or two if you have excellent credentials. Larger, more complex applications often take at least three months as lenders meticulously verify details and evaluate risk factors. Patience is a virtue.

What are common fees and costs associated with loans?

Standard fees when securing a small business loan include 1% – 3% origination fees charged by the lender to process the application plus any third-party fees for services like appraisals. If approved, you may also incur closing costs between 2% – 5% of the loan amount as well as any state registration fees that apply. Shop around as these fees vary.

The Bottom Line

Securing a small business loan requires diligent preparation, patience, and focus. But with an organized approach and persistence, funding your dream is within reach. Define your needs, assess your options, and highlight your accomplishments. With the right loan product and lending partner, you’ll secure the capital to take your business to the next level.

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