Pursuing a loan can pave the way to starting or expanding a business. But the question of how to get a business loan requires a thorough answer before you approach a lender. You’ll need to learn about the requirements for business loans. But you’ll also need a well-rounded view of your business to keep you from acquiring too much debt and to increase your chances of gaining approval for a loan.
This guide explains what lenders look for when deciding whom to lend to, what information and documentation you will need to apply, what type of loan to look for and how the funding process works. Banks evaluate factors such as credit history, how long you’ve been in business, cash flow and available collateral. These requirements typically apply even to loans through Small Business Administration (SBA) programs, as those are issued by banks and other lenders, not by the SBA, which guarantees them.
Before you apply, understand your business from top to bottom and parse your financials so you don’t borrow more than you need.
To prepare a strong application and improve your odds of approval, understand business loan requirements before you apply so you can strengthen your profile wherever possible.
Personal and business credit history. Lenders typically review both your personal and business credit reports and scores, looking for patterns of late or missed payments, collections, defaults or bankruptcies. All of these mistakes can affect approval decisions. Check both business and personal credit histories, and prepare explanations for any negative entries.
Time in business and revenue. Many business lenders require you to have been in business for a minimum number of years and to have shown consistent revenue trends. Lenders look for profitability, recurring income, healthy cash flow and general stability. They may evaluate your debt service coverage ratio (DSCR), which is the extent to which your cash flow can comfortably cover the loan payments you will owe if they lend to you. SBA programs add specific guidelines about business size and what the loan will fund.
Collateral and guarantees. Some loans require collateral such as equipment, inventory or real estate. Others may allow for personal guarantees. What is used to secure or guarantee the loan may influence its approval, terms and fee structure. Know your assets and liabilities; the bank will want several years of financial data.
Gathering the required information and documents in advance speeds up underwriting and approval decision-making. A banker can tell you which documents you’ll need: balance sheet, recent bank statements, receivables list and the past three years’ tax returns. Importantly, meet with your accountant to make sure your business’s books are in order before you apply.
Use this checklist to prepare:
There are several types of business loans, and choosing the right structure can both help you qualify and ensure the loan is a good fit for your company.
A term loan is a lump sum you receive with fixed, amortized payments due over a set term of months or years. Small business loans are ideal for one-time purchases like expansions, renovations or major investments, while lines of credit are better suited to paying for ongoing costs.
A business line of credit is a revolving credit facility that allows you to draw funds as needed and pay interest only on the amount you use, similar to how a credit card works. This type of lending is ideal for covering seasonal cash flow gaps or smoothing out variable working capital needs.
The SBA runs a number of loan programs, the most popular of which are the 7(a), 504 and microloan programs. These loans, which are guaranteed by the SBA and issued by participating lenders, tend to involve longer repayment terms and lower down payments than traditional loans. They usually benefit businesses that need added flexibility.
Equipment financing loans are designed to finance investments in machinery, vehicles or specialized equipment that are used to secure the loan. These loans are likely to have specific uses, so they often support defined growth goals. Matching the term to the asset’s useful life can help keep payments manageable.
(For a broader breakdown of structures, see our Funding Options comparison page.)
Asking for too much or too little funding can present problems, so start by identifying a clear, narrow purpose for the loan and the exact amount you need for that purpose. Quantify costs carefully, and map projected payments to your cash flow.
Research lenders and schedule meetings with business bankers to evaluate your options, rather than selecting a lender at random. If an SBA program is a good fit for you, look for an SBA-preferred lender. But note that conventional lending, which is more available to those with strong credit and financials, is likely to be faster to secure.
Meet with your accountant to ensure you have up-to-date numbers. Gather all the documents listed in the checklist above, as a complete application is likely to lead to quicker decisions and faster funding.
Be ready to verify income, assets, liabilities and collateral. Respond promptly to questions and requests for further documentation, as this process can bog down the pace of approval if the underwriters aren’t able to get everything they need.
If the lender approves your application, you will learn your proposed interest rate, loan term, repayment schedule and any fees. The same is true for SBA loans, which are issued by lenders just as conventional loans are. Once you sign the loan documents, the lender will disburse the funds in accordance with the agreed structure.
One of the best things you can do to improve your odds of approval is to prepare thoroughly
before applying for a loan.
Start by pulling your credit reports from the major agencies, Equifax, Experian and TransUnion, and correcting errors. Pay down credit cards quickly, use less credit right before applying and avoid closing long-standing accounts, which benefit your credit score. You can access your reports through AnnualCreditReport.com.
Strengthen your loan proposal by documenting how you will use the funds and forecasting how you will service the debt. Consider whether you can use collateral to improve the loan’s terms or pricing.
Remember that if conventional approval feels tight, SBA programs may offer longer amortization or lower equity requirements, making them more within reach for you.
When to choose SBA loans: Choose SBA loans if you need longer terms and/or lower equity, or if the SBA guarantee is likely to improve your chances of approval. Popular SBA programs include 7(a) loans, 504 loans and microloans.
When to choose conventional loans: Choose conventional loans for faster approval when you have strong credit, cash flow and collateral. Working with a lender with whom you have a pre-existing relationship may result in better terms or pricing.
Approval timelines vary by loan product, loan size, the complexity of your business and the completeness of your documentation. Conventional loans for small amounts may receive quick approval, while SBA loans can take longer due to additional requirements.
After you’ve gotten funding, make payments on time, avoid commingling funds, maintain updated financials and keep in open communication with your lender. Strong post-funding discipline will help you secure more future borrowing opportunities.
Ready to move forward? Book an appointment with a Seacoast Business Banker to discuss your goals. Download our Loan Readiness Checklist to prepare your documents. And don’t forget to explore both SBA and conventional financing options. Getting the right loan will help position your business for confident growth.
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