5 Easy Steps to Get a Small Business Loan

The process of finding and applying for a loan might sound complicated, but don't worry – it’s really not.

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The process of finding and applying for a loan might sound complicated, but don’t worry – it’s really not. Nowadays, most lenders have online applications that do an excellent job of making the process easier. However, it always helps to have some knowledge under your belt before applying, so we’ve put together a list of steps to help you succeed.

Step 1: Understand your different financial options

You will want to start by understanding your options for funding your small business:

  • Traditional bank loans — A traditional bank loan is perfect if you have good credit, or have been in business for a long time and aren’t in a rush to secure funding. If you have ever obtained a consumer loan (like financing a car or getting a mortgage), your experience with a traditional bank loan will be similar: the requirements to qualify for a loan are higher than requirements for other loan options, and the bank underwriting the loan will have strict, structured rules. 
  • Alternative lenders — Additionally, there are alternative lenders who focus specifically on small businesses, such as BFS Capital. With a quick online application and no upfront fees, it’s easier to secure one of these loans, even if your credit isn’t perfect or you haven’t been in business for 10 years. These typically come with a higher interest rate than a bank loan. 
  • SBA loans — Another potential source of funding is the SBA loan. SBA loans are a great option if a bank has turned you down. However, expect to jump through several hoops, such as time consuming paperwork, denial due to bad credit, and long wait times in the application process. 
  • Credit unions — Credit unions also offer loans. If your credit score is below 690 and you need a lower interest rate, a loan from a credit union could be a great option for you. The downside is that credit unions offer fewer financial options than larger banks and often have less than desirable online services. 
  • Crowdfunding and P2P lending — Outside of financial institutions, crowdfunding and peer to peer lending are interesting options. These funding sources rely on social circles and individual contributions, which can be difficult if your request doesn’t gain traction, but they can be successful for some businesses.

Step 2: Prepare for a successful application

Get organized. Digital tools like QuickBooks® or Freshbooks® can help you manage your finances in preparation for applying for capital to help get your finances in order. 

Separate personal and business finances. At a minimum, if you’re paying invoices with your personal credit card or putting your profit in your family savings account, you should stop doing so immediately. Your business should have its own business bank accounts and credit card, which is best practice and will keep your business and personal credit histories separate. Also make sure your business is officially registered and has a Tax ID. 

Improve your credit score. Make sure your finances are all up to date. A great credit score doesn’t just help you qualify for a loan, it also opens you up to better rates and term offers.

Once you’ve got a handle on your credit score, it’s easier to prove you’re a valid candidate for a loan. Lenders want to see a history of on-time payments on loans, credit cards and vendor contracts. 

Prepare the documents you’ll need to apply. Finally, you’ll want to gather and organize a list of documents your lender will need. These typically include but are not limited to, your personal financial statement, borrower information, statement of personal history, federal personal tax returns, business plan, financial projections, your personal identification card, and management resume. Organizing all necessary documents in preparation for the application process will prevent any scrambling at the last minute. If you’re applying online, make sure to scan everything so it’s ready for your application. Having your documentation ready to go before applying will make applying faster, easier and less anxiety inducing. Essentially, this will show you’re not only organized, but also that you take the application process seriously; this presents you as a desirable candidate for a loan.

Step 3: Clearly define your need

Be clear with yourself about why you need the loan. What are you going to use the loan for, and how much money will you need? Are you smoothing out cash flow, buying equipment or investing in marketing? Base the request on your specific needs, not a ballpark estimate. If you borrow too little, you can’t cover your expenses. If you borrow too much, you’ll end up paying more interest than you actually need. Figure out how much you can pay back over the time-frame, how long it will take to pay off your loan, and don’t forget to take seasonal trends into account.

It’s smart to have a well-founded business plan, even if your lender doesn’t ask for one. Constructing a business plan will help you organize your ideas, better understand the market, and lay out strategies for growth and success. It will also give you a better understanding of your expenses and cash flow, which will show how much you need to borrow and how you’ll be able to comfortably pay it back.

Step 4: Narrow down your options

Be clear with yourself about why you need the loan. What are you going to use the loan for, and how much money will you need? Are you smoothing out cash flow, buying equipment or investing in marketing? Base the request on your specific needs, not a ballpark estimate. If you borrow too little, you can’t cover your expenses. If you borrow too much, you’ll end up paying more interest than you actually need. Figure out how much you can pay back over the time-frame, how long it will take to pay off your loan, and don’t forget to take seasonal trends into account.

It’s smart to have a well-founded business plan, even if your lender doesn’t ask for one. Constructing a business plan will help you organize your ideas, better understand the market, and lay out strategies for growth and success. It will also give you a better understanding of your expenses and cash flow, which will show how much you need to borrow and how you’ll be able to comfortably pay it back.

Step 5: Applying for a loan

Once you’ve narrowed it down, apply only to your top choices — not to every lender available, because every time a lender checks your credit score, your rating takes a tiny hit. This adds up, so make sure to only select a few lenders that work best for you. 

Apply to 3-5 options and carefully compare their offers. If there’s a lender you prefer, but they’re slightly less competitive than another offer, ask them if they can match it – sometimes but not always, there is room for negotiation. Just make sure you’re really comparing apples to apples – and if you’re not sure, don’t be afraid to ask all the questions!

Getting a business loan takes some work, but once you have a foundation for success, financing options will be available and your business will experience growth.

Looking for more financing resources? Check us out at FightingForSmall.com.

BFS has a 20+ year history in the small and medium business lending space. We’ve provided over $2BB in financing to over 24,000 small businesses. Now, we’re building a transformative fintech company that will revolutionize the small business lending space with both AI-driven automation and financial product innovation. Our goal: deliver funding that is quick, painless and transparent to the next generation of small business owners, while supporting the daily success of their business with critical tools and content.

Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.

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