How to Apply (and Get Approved) for a Business Loan

How to apply for a business loan, in 7 steps

Every lender’s application process is a little different, but these are the common steps in applying for a small business loan.

1. Prepare documentation.

“Applying for a conventional small business loan can be challenging,” said Rob Misheloff, founder of Smarter Finance USA. “Many providers, particularly banks and SBA [Small Business Administration] lenders, don’t specify their requirements for qualification. Consequently, many small business owners spend hours preparing documents for conventional loans, only to be denied, which can be a daunting and frustrating process.”

Misheloff recommended that businesses prepare the following documents before applying for a loan:

• Two to three years of financial statements and/or tax returns
• Accounts receivable reports
• At least three months’ worth of bank statements
• A business plan
• Proof of ownership

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2. Review your credit score.

For an unsecured business loan, a lender will examine your personal finances, including your credit history. In this case, you’ll be the individual guaranteeing the small business loan, so your personal finances matter to lenders.

“Maintain a good personal credit score,” said Rob Stephens, founder of CFO Perspective. “Banks will require a personal guarantee on the debt, so good personal finances improve the odds of getting a loan.”

3. Gather financial documents.

If your business is already established, your cash flow is an important consideration for a lender. The loan provider will examine your sales, revenue and expenses to determine whether you’ll have sufficient liquid capital each month to meet your repayment obligations.

“You need to gather cash flow statements for at least the last year,” said Jesse Silkoff, founder of MyRoofingPal and co-founder of MyTennisLessons. “Have them looked at by a professional so you can make sure everything is in order.”

You should also prepare other financial statements, such as your balance sheet and income statement. Lenders will use your balance sheet to decide whether your assets, liabilities and shareholder equity make you likely or unlikely to repay your loan. Your income statement will show lenders your profits or losses during a quarter or year, providing insight into your risk level as a borrower.

A lender will also be interested in your debt-to-income ratio, which shows how much you’ve leveraged your business already. If you have a significant amount of debt on the books, it will be harder to secure another loan. When issuing a new small business loan, lenders usually prefer to see a debt-to-income ratio of less than 30 percent.

4. Create a business plan.

Before you’re approved for a small business loan, the lender will likely want to know your plans for the money. After all, their interest will depend on your company’s continued success. Bring a detailed business plan to help convince the loan provider that you’re a safe bet.

“Once you have your documentation and reports assembled, you need to write up a business plan,” Silkoff said. “Keep in mind, the goal here is to show your company is financially stable and to define a use for the funds you hope to receive.”

A business plan is vital, Stephens added, especially if you don’t have an adequate history of solid cash flow to persuade a lender.

“Be ready to show a history of steady, strong cash flow, or a business plan with a strong likelihood of sufficient cash flow to repay the debt,” Stephens said.

5. Consider your collateral.

Sometimes, a lender will require you to put up collateral to guarantee a loan. Collateral is some asset of value that a lender can fall back on if you default. For example, when you take out a mortgage to buy real estate, that real estate becomes the collateral. Foreclosure occurs when a borrower defaults on a mortgage and the lender claims the property as recompense.

6. Consider which loan to apply for.

SBA 7(a) loans are the most common type of small business loan, but there are several other options. You can also pursue business lines of credit, microloans, short-term loans and equipment financing.

7. Assemble and submit your application.

Prepare all of your verification documents, including your tax returns, cash flow statements and bank statements. Depending on the size of your business and the type of loan you’re applying for, you may need to provide these documents for your business and your personal finances.

With a bank, you’ll likely have to apply in person. With an alternative lender, however, the application is usually online, requiring you to upload your documentation. Once you’ve applied for the loan and submitted the necessary documents, the decision lies with the loan provider. The lender will review your application and documentation and determine whether you should be approved or denied for the loan.

Applying for a business loan responsibly

The small business loan application process can be very involved, but when handled correctly, it can be well worth it to get your business off the ground or to the next growth stage. If you carefully consider the best business loan providers, identify the right loan type for your needs and submit the required documentation, you should be well on your way to receiving funding. 

Of course, that’s really only half the battle. Once you obtain a loan offer, make sure you carefully review the terms and have a sustainable repayment plan. If you keep these aspects of borrowing in mind, you should be able to make a small business loan work for you.

Mike Berner and Max Freedman contributed to this article. Source interviews were conducted for a previous version.