How to Apply for a Business Loan: A Step-By-Step Guide
While business credit cards are handy in a pinch, there may come a time when they no longer meet your company’s needs. If you are an entrepreneur at this crossroads, you’re likely seriously researching how to apply for a small business loan.
According to the 2024 Small Business Credit Survey, 37% of small businesses applied for loans in 2023. But with so many factors to consider, how do you even start the application process?
Don’t worry! This article will be your step-by-step guide ー from choosing the right loan product and lender to gathering all the paperwork for a smooth application.
How to Apply for a Business Loan in 6 Steps
Ready to get the funding you need? These six steps will help you identify the type of financing that would best suit your business strategies and prepare for the application process.
1. Identify Your Business Needs
Knowing the primary goal or purpose for this funding will help you determine the loan amount and what the return on investment would look like. For example, do you need it to buy additional equipment or vehicles? You can then calculate the potential costs and increase in earnings from these investments. This will help you determine if you can comfortably pay off the loan while hitting your revenue targets.
These kinds of details are included in business plans, which banks typically require from loan applicants. These documents help lenders evaluate whether the borrower has a concrete strategy to reach their business goals. More importantly, applicants can use their business plans to stay on track and be accountable for how they use funds.
2. Choose the Right Funding
Once you’ve established why you need the extra money, it’s easier to narrow down the loan program or financing option. Here are some of the most common types of business loans and alternative funding opportunities.
Traditional Bank Loans
Traditional bank loans are term loans and are often the most difficult to get because of the strict underwriting requirements. These requirements include a personal credit score of at least 670 (if you want favorable interest rates and higher amounts), financial statements, business plans, collateral, and a down payment. This is why this loan type is not ideal for new businesses.
However, these loans can be great for relatively established small businesses or startups (at least two years of operations) with a good credit history and solid financial performance.
They’re also a good choice if you’re already a customer of the bank and want convenience and more loan options. However, if you need the money immediately, the lengthy application process (up to six months in some cases) is not ideal.
Credit Union Loans
These loans are pretty similar to bank term loans. However, since credit unions are nonprofits, they typically offer lower interest rates and fees. They may also consider lower credit scores and have a faster application process. Credit unions even have financing options (like microloans) for first-time borrowers or those with bad credit.
However, they don’t have the extensive options and networks that major banks have. That said, being a member-centric institution means you could receive more tailored advice and guidance from them.
Credit union loans can be a good option for those who don’t have a high credit score or are looking for more localized/personalized services.
SBA Loans
These loans, partly backed by the U.S. Small Business Administration (SBA), are available from banks, credit unions, and private lenders. The SBA 7(a) program is specifically for small businesses that need funding for various use cases, such as real estate loans and working capital.
SBA loans have some of the lowest interest rates and longest repayment periods in the market. Because of these advantages, they are ideal for any small business, provided they’re not on the ineligible list.
Business Lines of Credit
This funding type is similar to a business credit card but with more flexible credit limits to accommodate much higher purchases. For example, Backd’s Business Line of Credit has a limit of up to $750,000, while business credit cards have an average limit of around $56,000.
Since a business line of credit is a revolving fund, you won’t receive a one-time lump sum like you would with a term loan. Instead, the funds are available to be withdrawn when you need them, and the interest rate only applies to the amount you withdraw.
This option is best for emergencies, short-term expenses, or cash flow gaps. While the interest rates tend to be higher than traditional bank loans, the application process is easier and faster, and some online lenders accept lower credit scores.
For example, Backd’s Business Line of Credit accepts a minimum FICO Score of 625. Plus, applications can be approved within 24 hours.
Working Capital Funding
This type of financing is mainly used to fund daily operational expenses like rent and utilities. Working capital funding is not suitable for long-term assets like real estate purchases because of its short repayment terms (usually 6-12 months). For example, Backd’s Working Capital Advance offers funding of up to $2 million with a term length of up to 16 months. Payments can be semi-monthly, weekly, or even daily.
This option is best for established businesses that have foreseeable short-term needs or expenses. For example, ensuring a steady cash flow against potential disruptions like a slow sale period.
3. Choose the Right Lender
Once you’ve narrowed down your financing options, it’s time to evaluate and compare potential lenders. Make a shortlist of providers that offer these loan products. Then, compare their application processes, eligibility requirements, and annual percentage rates (APRs). For example, online lenders often have quicker approval times but may charge higher APRs.
It’s also important to carefully study their loan terms and disclosures. Check the repayment terms and one-time fees to see which lender saves you the most money.
Make sure you understand all possible penalties for early repayment, additional underwriting fees, or any add-on services. Finally, see if there are special requirements like a personal guarantee based on your credit history or business assets.
4. Review Your Credit and Financial Standing
Now that you have chosen your funding and lender, the next step is to prepare for the application process. Most lenders will check either your personal or business credit score (or both) to determine your creditworthiness. A good credit history results in more competitive interest rates.
To review your credit history, you can request credit reports from the main bureaus (Equifax, Experian, and TransUnion) so you can identify any errors or existing issues. The Annual Credit Report website is a good place to start.
Lenders are also checking to see that you can handle monthly payments. Review your cash flow, annual revenue, and balance sheet to see if they support your target loan programs. You may also need a business checking account that is in good standing.
5. Prepare a Strong Business Plan
If you decide to go the traditional bank loan route, you might need a comprehensive business plan that shows how you will allocate the funds. Don’t forget to highlight your competitive edge and why your business is worth the risk.
Include market research, strategies for growth, and proof of long-term sustainability. The more detailed your profitability plan is, the higher your chances of approval.
6. Complete the Business Loan Application
The first step is to create a checklist of the documents you need. Depending on the lender and the loan program, you might be required to submit proof of annual revenue, financial statements, tax returns, and bank statements from your business checking account.
The good news is that most lenders, even banks, have online applications. That said, in-person applications might have perks, like faster processing time, especially if you’re an existing bank customer.
Double-check that you’ve filled in every section of the loan application accurately, including any collateral details (especially if you’re applying for real estate loans). If you have any questions about the application form or requirements, contact the lender for further guidance.
Once you've submitted your application, keep track of the estimated timeline for approval. Feel free to follow up with the lender as necessary.
Get Fast and Stress-Free Funding Through Backd
Now that you know how to apply for a business loan, it’s time to take your business to the next stage of growth.
At Backd, we have made it our mission to make funding accessible and stress-free for small business owners. What’s more, we do a soft credit pull, so it doesn’t affect your credit score.
Our requirements for our Business Line of Credit and Working Capital Advance options are:
$100,000 in monthly revenue
A 625+ credit score
Established business credit
A brick-and-mortar address in the U.S.
One year of operation for the Working Capital Advance and two years for the Business Line of Credit
Apply now and get the funding you need for success.
