How to apply for a small business loan

Young Asian business woman discussing about financial planning with small business owner at cafe coffee shop.

Whether you are starting a new company, expanding your existing creative agency, or in need of funds for new tech to go live with your ecommerce site, a small business loan can help you realize your goals.

There are many financing options available — from bank loans to angel investors — but small business loans are usually more readily available and provide varied options, especially for entrepreneurs who are just starting out and building their companies. This begs the question of how to prepare, apply for, and secure a small business loan. With so many options available, you need to understand the steps involved in applying for a loan and which type of loan is best for you.

Here, we outline the most common types of small business loans to help you choose wisely and prepare the strongest application possible.

Types of small business loans

There are countless types of small business loans, with specific loan structures covering everything from new technology financing to temporary staffing needs. While not exhaustive, the following list covers the most common types of small business loans, with descriptions and tips on how to qualify for each.

Term loans

Startup loan

SBA loans

Business line of credit

Business credit cards

Merchant Cash Advance

Personal Loans

Commercial Mortgage

Equipment Loans

Small business loan application process

Here are the six steps involved in a loan application process. And it starts with a self-assessment:

Step 1 - Determine What Kind of Loan You Qualify For

Are you starting a new business? Growing your existing company? Modernizing with new digital technologies? Each of these goals has different implications, and lenders will scrutinize your plans closely to determine whether you qualify for financing. It’s imperative that you apply for the right kind of loan and ensure you meet all the requirements with regards to credit score, business history, collateral, and any other lender asks specific to your application.

Step 2 - Check Your Business Credit Score

Your credit score is the first-place lenders look when deciding whether to approve your small business loan application. Scores range from 300 to 850 and indicate your creditworthiness, with a higher score implying you are better positioned to repay on time.

You can check your credit score with a top credit bureau like Experian Equifax, and TransUnion, or with a credit card issuer. The service is free in all cases. There is no rule of thumb for a minimum score, but lenders are more likely to approve applications if your credit score is over 680, especially banks.

Step 3 - Determine How Much You Want to Borrow

It might be tempting to apply for a bigger loan than you need, but there are many factors to consider before asking for too wide a buffer. Start by doing a full assessment of your company’s finances, with a focus on cash flow and liquidity. These are good measures of how much you can afford to repay each day, week or month, depending on the terms of your loan agreement.

As a rule of thumb, you want your revenues to be 20-30 percent higher than your expenses. You should also consider the interest rates and collateral you will need to put up for a loan before finalizing the amount. High interest rates of 15-20 percent can add up quickly after a few missed payments on your business credit card, for example.

Step 4 - Gather the Necessary Paperwork

A successful small business loan application lies in the details, and that means ensuring you have all the necessary documentation prepared before applying. These include your business’ tax returns, bank statements, and financial statements, or the equivalent personal statements for a startup.

Lenders will also request legal documentation tied to your business, including proof of registration, lease contracts, and any other legally binding agreements. Finally, you will need a fully formed business proposal and business plan. A business proposal covers the products or services your company provides and why customers will want them, while a business plan focuses on how your company will operate and turn a profit.

Step 5 - Review Your Lending Profile

A lending profile includes every factor a bank or lender scrutinizes when assessing your small business loan application. Some are qualitative measures, like your credit score, while others are subjective indicators, like your work experience.

For consistency, lenders often break your lending profile down into the so-called “5 C’s” of credit. As you prepare your application and review your lending profile, make sure to focus on these:

Step 6 - Research Lenders

Once you settle on the type of small business loan you need and prepare your application, you need to find the right lender. The three main lender categories: banks, online, and non-profits (sometimes referred to as micro-lenders).

Banks offer the best interest rates and terms, but they also demand more experience and a higher credit score. As a start-up or new business owner, your chances of securing a loan are higher from an online lender or non-profit micro-lender, not that you should not apply for a bank loan as well.

Before signing your loan contract, make sure to agree with your lender on the specific terms of your contract and any contingencies that need to be included. A loan agreement is a legally binding contract that sets concrete expectations about your obligations as a borrower and your lender’s obligations as your financer. This relationship could last years in the case of an SBA or term contract, shaping your operations throughout that period.

Digital loan agreements made easy

For more insight on how to write loan agreements, check out this step-by-step primer, complete with a breakdown of what to include in your contract and how to ensure the best outcome for both parties whether working with paper-based or digital documents.

When you are ready to sign, Acrobat Pro DC with e-sign makes the process easy. Start by sourcing the necessary legal advice and coming to an agreement with your lender. Adobe Pro DC will then allow you to review, sign, and crystallize your loan agreement, setting you up to take your small business to the next level.