Getting a small business loan might seem intimidating, especially if it’s your first time navigating the world of business financing. The good news? You can follow these seven steps to make the process smooth, informed, and even empowering.
Step 1: Make a Plan
Getting a small business loan starts with clearly defining your purpose. Where and how do you plan to use the money? This plan isn’t about convincing a lender. It’s about ensuring the funding aligns with your goals. Are you planning to invest in equipment, hire staff, increase inventory, or bridge a cash flow gap?
The next step is planning how much financing you need. Consider the total cost of your project, how much you can contribute from existing reserves, and what amount you can realistically repay based on your current revenue.
Let’s say you’re a café owner expanding into a second location. You estimate build-out and equipment costs at $60,000. If you have $20,000 in savings, a $40,000 business loan for expansion may cover the expansion without overextending your budget.
Step 2: Prepare Your Finances
Most lenders will look at financial and operational indicators, including your credit score, time in business, annual revenue, cash flow, and existing debt. Knowing how lenders evaluate your finances allows you to prepare and fix any issues in advance.
Review your finances personally to get a clear picture. A thorough evaluation ensures that you won’t have any surprises when you apply. It also allows you to organize your financial information. Make sure all your business accounts are separate from your personal ones and that you have clear record-keeping for all business transactions.
Then, identify a way to address a financial weakness. Improving one aspect of your finances will boost others. For example, if you pay down some existing debt, you reduce your debt load. You also improve your cash flow by lowering expenses and building credit history.
Consider the following options to prepare your finances:
- Pay down existing debt
- Restructure or refinance your debt
- Create a budget to identify and cut unnecessary expenses
- Pay bills on a regular schedule
- Negotiate better terms with vendors or landlords
- Reduce any credit card balances
- Add a source of income
- Boost sales
- Set aside money for a cash reserve
If your credit score is low or you have been in business for less than six months, consider waiting a few months to boost your financial profile. Any discipline you invest in your finances now will improve your chances of approval and secure more favorable loan terms.
Step 3: Shop Lenders and Loans
Not all lenders (and not all loans) are created equal. Depending on your business’s needs and financial profile, you’ll want to select a lender that matches your priorities and choose a compatible financing product.
Types of Lenders
Traditional banks and credit unions offer the lowest interest rates, but the approval process can take weeks and is more selective. SBA loans are backed by the government and offer favorable rates and repayment, but also require detailed paperwork and longer timelines. Consider these lenders if you are an established business and your funding needs are not urgent.
Alternative business lending, such as online lenders and fintech platforms can deliver funding in as little as 24 hours. They use streamlined applications that are less demanding than those of other lenders. They may be a good fit if your business needs quick working capital or has limited financial history. Be aware that they charge slightly higher rates for the convenience.
Find a lender with experience in your industry and a good customer service reputation. You need someone who will answer your questions and explain all the relevant details. The best lenders offer financing options that suit your needs and are more like advisors than financiers.
Types of Loans
Lenders offer many different kinds of loans, and figuring out the best option for your business can be overwhelming. Consider the funding speed, loan length, and repayment terms to explore relevant options.
You could secure funding within days, weeks, or months. If you need capital as quickly as possible, look at working capital loans, merchant cash advances, business lines of credit, and invoice financing options. But speed can mean higher rates. If you can wait for funding, consider traditional term loans to save on interest.
The loan length directly impacts how much you’ll repay and your loan amount. Small business loans can vary from three months for short-term loans to five years for long-term options, as well as constantly renewing options like credit cards or lines of credit. Make sure the repayment terms fit your cash flow model. A $50,000 loan with a 12-month term may seem helpful, but $5,000/month in repayments could become a burden.
Many small business lenders offer flexible repayment options to support your business’s cash flow. You repay revenue-based financing, for example, as a percentage of your weekly or monthly income. Term loans can have set payments on a weekly, monthly, or quarterly basis. A repayment plan that works for your business makes financing much more effective.
Since you rarely get a say in all the loan terms, decide which aspects of your loan are most important to prioritize. For example, loans with flexible repayment structures usually offer quick funding but have shorter terms. Knowing what is most important to you will guide your financing decisions.
Step 4: Organize Your Financial Documents
Most lenders will request several key records to evaluate your eligibility and determine your loan terms. Having these ready up front saves time and demonstrates that you’re a responsible borrower.
Pull together your:
- Profit and loss statements
- Balance sheets
- Recent business bank statements (often three to six months)
- Tax returns (business and possibly personal)
- Business licenses or formation documents
Some lenders may request a business plan if you are applying for a larger loan or starting a new venture. Make sure your numbers support your funding request. For example, if you’re asking for a $100,000 loan to expand operations, your business plan should show how you will use that investment to increase your revenue.
Step 5: Apply
Many applications can be completed online in under an hour, especially with alternative lenders. Fill every field accurately and double-check all financial figures before submitting your application. If you’re applying to multiple options, group your applications within 14 to 30 days to minimize any negative credit impact.
Be honest and transparent. Lenders appreciate proactive communication and detailed explanations. For instance, share the story about why your revenue temporarily dipped due to a supply chain delay but rebounded after changing vendors. Your lender will appreciate having the whole picture before investing money in your business.
Step 6: Review Carefully Before Accepting
If you receive one or more loan offers, don’t jump at the first one. You are still shopping for the best option for your business. Focus on the total cost of borrowing. Pay attention to:
- Loan amount and disbursement timeline
- APR (Annual Percentage Rate), not just the interest rate
- Repayment schedule (weekly, biweekly, monthly)
- Term length and any early repayment penalties
- Additional fees (origination, service, late payment, etc.)
- Collateral or personal guarantee
If you have any questions or concerns, consult a financial advisor, an accountant, and/or your lender before signing. Your financing decision is important enough to get it right the first time.
Step 7: Accept and Follow the Plan
Once you’ve chosen the right offer and signed the agreement, funds can hit your account quickly within 24–72 hours, depending on the lender. Use them exactly as planned. Avoid the temptation to dip into loan proceeds for non-essential spending or to cover unrelated gaps.
Set clear benchmarks for using the funds. If your goal is to increase sales through a marketing push, track campaign performance. If you’re investing in new equipment, monitor how it impacts productivity or revenue. Following the plan will keep your business on track and strengthen your case for additional funding in the future.
Funding to Grow
Business financing is the lifeblood of small and growing businesses. Since most entrepreneurs don’t have the capital to finance their company from a new start-up to a successful corporation, it is necessary. Mastering the application process to ensure you have the funding you need when you need it is achievable. Understanding how it works is the first crucial step.
