Business Funding

How to Get a Small Business Loan in Just 6 Steps

Read Time: 7 min

As a business owner looking for funding, you may find yourself researching how to get a small business loan. Entrepreneurs are known for being driven, opportunity-seeking, and problem solvers. While all of these traits are keys to success, starting a new venture requires money, and often, loans are a means to secure the funds you need to get your business off the ground. Business loans are notoriously hard to get for small businesses that may lack the business history or credit score to secure a regular business term loan. However, there are lenders who specialize in small business or start-up loans that are conscious of this. If you are a small business owner and need funding, read on to learn how how to get a small business loan, how to find lenders that offer small business start-up loans, and what you need to know about SBA loan requirements.

What Qualifies as a Small Business Loan?

The United States Small Business Administration (SBA) works with lenders by setting guidelines and making it easier for them to access capital. Why is this important to know? Because by reducing the risk to lending partners, SBA loan requirements make it easier for business owners to obtain funding.

Small business start up loans are inherently risky, as the entrepreneur is often starting from scratch, and there is no guarantee of business success nor any historical data to analyze.

The SBA does not lend money directly. It works with lending institutions, micro-lending organizations, and community development organizations to enable easier access to capital for all.

How to Get a Small Business Loan: A Step-by-Step Guide

The application and approval process for your small business loan will take a considerable amount of time. If you require funding, please follow the steps below and begin the process as early.

Step 1: Understand What It Means to Borrow for Your Business

Before you apply, use a loan calculator to get a clear idea of how much you will need to borrow. Consider the following:

best small business loans
  • Are there any licenses you will need?
  • How much will the equipment cost?
  • How much will be needed for equipment maintenance?

When you borrow money, not only must you pay it back by a specific time frame, but there are also interest and fees to take into account. Take the time to figure out what loan term will be best and how much you truly will need to launch the business.

Step 2: Determine the Type of Loan You Want

There are a wide variety of financial solutions out there. Some of the best small business loans are listed below for your reference. It is important to take into account what your business goals are and which will be most beneficial.

All in all, always have a financial plan in place to ensure you are borrowing responsibly and you feel confident that you can repay the amount back in the given term.

SBA small business loans

SBA loans are one of the most popular types of small business start-up loans on the market. These were created to make it easier for minorities or those who may struggle to secure traditional loans to obtain financing. Loan amounts can be as small as $10,000, making it ideal for small business owners.

Only SBA-approved lenders can provide this type of product based on SBA loan requirements. They will often ask for a business plan and collateral (real estate, for example). The length of the loan can extend up to 25 years and the minimum credit score requirement is 650, which is much more lenient than a traditional term loan.

PPP loans

The Paycheck Protection Program (PPP) provides paycheck loans to help businesses keep their staff employed during the COVID-19 crisis. There has been a recent surge in federal funding for COVID-19 recovery small businesses can utilize.

SBA lenders issue PPP loans and require applicants to use these funds to cover specific items such as:

  • Rent
  • Utilities
  • employee benefits
  • Payroll
  • and much more

In some cases, SBA loans may even be forgiven if the business owner follows all the criteria in their first, second, or subsequent draw for a PPP loan.

SBA disaster loans

Whether due to a natural disaster, civil unrest, or declared disasters, this type of loan was created to help business owners through times of hardship.

Some of the areas in which these loans can assist borrowers with are:

  • Physical damage to assets after a disaster
  • Mitigation assistance after a declared disaster
  • Economic relief after a disaster
  • Covering operating expenses while an employee is off on active military leave

Small business line of credit

Among the various options of loans for small businesses, a small business line of credit (also called a revolving line of credit) is a highly flexible and low-cost method of covering short-term financial needs.

Whether credit is needed due to business loss or expansion, this type of product allows a business owner to access their credit line, repay it, and access the credit line again whenever needed. There is a specific maximum amount they will have access to depending on their credit score and cash flow. It is very similar to a credit card in which a person can borrow and pay it back with interest on the specific amount utilized.

The lender may charge a monthly line of credit fee for months if the line is not used. It is important to speak to your provider about their terms.

Small business term loans

Term loans are the most common type of loan. These terms require the borrower to repay the full amount in a period between 2-10 years, and require a minimum credit score of 680.

Small business term loans are serviced by private lenders and they require a history of profitability to be provided. It is rare for a business that has been active for less than two years to obtain approval for this type of loan. Also, the loan amounts are ideal for companies who require larger loans (in the hundreds of thousands).

Equipment loans

Equipment loans are perfect for business owners who require equipment to maintain operations. These loans can are offered by banks, private lenders, and credit unions.

In general, businesses can finance about 80% of the total equipment amount. However, you will need a high credit score to secure this type of funding. The payment schedule is very flexible and, if you provide all of the required documentation, the approval process can be fast.

Speak to your loan provider about any additional fees that may be associated with this type of product.

Step 3: Compare Small Business Loan Providers

Every provider has its own set of standards and requirements. For example, one lender may require a higher credit score than another. However, that may be the only factor in your way along your journey of securing financing. It is important to do your research and contact lenders who have a long history of service, offer favorable interest rates, and can work with you as challenges arise or expansion is needed in your business.

Best small business loans

Ultimately, the best small business loans are not always ones provided by the largest financial institutions. Do your homework and be clear on what your business needs are and how much you are requesting and why. The best option will be the lender who understands your position and can provide you with stellar service and rates that meet your needs. Consider federal and private loans and which work best for your small business.

Step 4: Consider the Loan Requirements & Qualifications

Similar to traditional loans, there are SBA loan requirements to consider if you wish to be approved and obtain financing. Read below for the two most common factors to take into account.

Credit score

Your business credit score is one of the top small business loan requirements that a lender will analyze. In general, lenders can accept credit scores as low as 650, but the higher the score, the higher your chances are of approval. This is especially true with higher loan amounts.

Business timeline

sba loan requirements

Each loan application has a time frame in which a business owner can expect to hear back regarding approval.

Securing a line of credit for example is one of the fastest ways to obtain loans for small businesses. The line of credit can take up to a day or two at most to be approved if you meet the requirements. An SBA loan on the other hand can take up to 30-90 days.

Make sure to plan and map out when to begin applying based on the type of loan you choose. If you operate in a high risk industry, it can often take longer to secure financing.

Step 5: Gather All Required Documents

While most lenders do not require a business plan, it is still wise to make one to boost your chances of success. The documents required for your small business loan application will vary but it’s best to be prepared.

Some of the most common documents requested are:

  • Business cash flow documents
  • Balance sheets
  • Personal and business tax returns
  • Personal and business bank statements
  • Articles of incorporation
  • Business licenses
  • Driver’s license
  • Financial projections
  • Income statement
  • Commercial lease

Make sure to have these handy as several if not all of these documents will be requested by your lender during the application and approval process.

Step 6: Apply for Your Small Business Loan

Once you have decided which of the small business start-up loans is best for you, it is time to contact a lender. If you decide to use an SBA loan product, the SBA can help you find a lending partner near you. For all other financing options, contact your bank, credit union, or other financial institution to discuss what they can offer.

Now that you know how to get a small business loan and the SBA loan requirements, you are well on your way to fulfilling your financing needs. Contact a professional today and begin your application. Good luck!