How to apply for a small business loan

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

• A term loan is when your lender provides a lump sum of funding that you need to repay with interest over a set timeframe. This classic loan structure is well suited to companies eyeing growth. You can also set a short or long term for repayment, though interest rates will vary based on this timeframe.
• To qualify, you’ll need a strong credit score (over 680, as a general rule). Some lenders also require you to put up collateral, such as a car or property title, in case you default on a payment. Note that non-bank lenders tend to charge higher interest rates than financial institutions, and that’s generally the case for all types of small business loans.

Startup loan

• Startup loans are designed for new business owners and come with the advantage of being able to access your funds quickly, usually within weeks. Most loan types require some form of business history and proof of revenue when applying, but startup loan lenders understand that you don’t have this information as a small business owner.
• To assess your application, lenders may ask for proof of experience in your chosen industry, and you’ll once again need a strong credit score.

SBA loans

• The United States Small Business Administration is a government organization that supports small businesses and entrepreneurs. SBA loans are available from different types of lenders, including banks. Values range from tens of thousands to $5 million, with terms and interest rates depending on how you plan to use the funds.
• The application process is notoriously long, and SBA loans are among the most difficult to secure, especially when your credit score isn’t high enough, you don’t have enough collateral or business revenues to pay the debt. If you need funds right away, it would be advantageous to apply for another form of financing in addition to an SBA loan.

Business line of credit

• Like a personal line of credit, a business line of credit allows you to access financing up to a predetermined credit limit. Borrowers only need to pay interest on money they withdraw from their line of credit, which makes this a highly flexible financing option.
• To qualify, you’ll need to prove to a lender that your company brings in regular revenue and has been in operation for at least half a year, though longer is better. This line of credit might require you to pay carry fees, where a portion of your profit will go to your lending partner.

Business credit cards

• Business credit cards can be used indefinitely to make any purchases your business needs as long as you pay your bills on time and don’t exceed your credit limit. As with a personal card, failing to pay statements on time will incur high interest fees.
• There are usually low barriers to qualify, though premium cards that offer points, cash-back, and other perks tend to come with an annual fee and higher interest rates. Use business credit cards for regular expenses, like monthly bills and travel, and consider taking out a more structured loan for long-term projects or major investment needs.

Merchant Cash Advance

• A cash advance is a lump sum of liquidity (cash) that you can use immediately. Instead of paying off a merchant cash advance via fixed payments, you’ll pay by retaining a percentage of your revenue or allowing lenders to make fixed withdrawals from your company’s bank account.
• The flexibility of merchant cash advances comes at a cost. Borrowing costs are exceptionally high at three to four times the amount of financing you apply for. Use merchant cash advances sparingly and be sure you have enough sales or liquidity to pay your lender back in time.

Personal Loans

• If you can’t secure a startup loan but want to get a small business off the ground, you can always apply for a personal loan. As opposed to a business loan, a personal loan application is based on your personal credit score.
• Personal loan limits are lower than those for business loans, generally capping out at $50,000. Naturally, failure to pay is reflected in your personal credit score, which can affect your financial standing when applying for other financing, such as a new house or car loan.

Commercial Mortgage

• A commercial mortgage helps your small business pay for property, covering either purchase or monthly rent. Commercial mortgages are attractive to retailers and restaurants, who need a physical space to sell their products, but also for businesses who need an office to work from or a warehouse to store their inventory.
• To qualify, lenders will require you to share a clear strategy for how you’ll use the loan and how it will deliver value to your business. For example, if you’re building a second warehouse for retail inventory, they’ll want proof that your chosen space is appropriately sized and located, and that your demand projections merit the additional square footage.

Equipment Loans

• Equipment loans help you cover the cost of critical business equipment, like additional trucks for a small moving company. Lenders often require you to put the equipment itself up as collateral.
• You’ll need a clear business plan to qualify, with assurance that the investment will directly help with expansion and drive revenue. More often than not, the term for equipment loans is equal to the equipment’s expected lifespan.

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:

• Capacity – A company’s capacity is its ability to repay a loan. This “C” is the first port of call for lenders, starting with your credit score but also including your cash flow, revenue, expenses, and previous history of loan repayments.
• Capital – Lenders prefer borrowers who have already invested in their business, as this indicates they are also invested in its success. Capital is the term given to any up-front investments you make directly into your company.
• Collateral – Collateral gives lenders peace of mind that they can collect on your debt if you are unable to repay a loan. The type of collateral varies depending on the type of loan you choose — for example, collateral for a commercial mortgage on a new warehouse might be a portion of your inventory.
• Conditions - Market conditions determine your business’ success. You will need to demonstrate to lenders that customers want your products and services. Many also require you to specify how a loan will concretely help in today’s market environment, so draw on your work experience and expertise to prepare a strong case based on hard figures and economic indicators.
• Character – Lenders understand that your company’s success depends on your character as a human being. They will check details on your education, work experience, personal credit history, and more. Think of this piece of your lender profile as a combined cover letter and resume, covering everything from your skills to your reputation in the market.

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.