How To Get a Small Business Loan: A Step-by-Step Guide

Before you can get a small business loan, you need to know details like how much funding you want and whether your current finances support that amount. Once you understand your needs, you can begin looking at lenders and the type of loans that fit your goals.

Small business loan requirements and terms vary by lender and loan type. Lenders typically evaluate business finances, credit history, and cash flow during the application process. These form the core of the underwriting process and shape the terms you receive.

Read on to learn more about lending for small businesses. We’ll show you how lenders evaluate applications, which loan types to consider, and what to expect from preparation to approval.

What Do You Need To Qualify for a Small Business Loan?

So, how easy is it to get a business loan? Approval depends on how well your business matches a lender’s basic standards. Here are the common factors lenders assess and how they could affect your chances of qualifying: 

• Personal and business credit: Most lenders check both personal and business credit reports. There’s usually a minimum credit score requirement to qualify, but it varies by loan type. 

• Business revenue and cash flow: Lenders review annual revenue and current cash flow to ensure you can handle monthly payments. Traditional banks and SBA loans have a minimum annual revenue requirement. 

• Time in business: Some loans require you to operate for a specific amount of time before qualifying. 

• Existing debt levels: If you already have extensive unpaid debt, lenders may hesitate to offer another loan because it could affect your ability to repay. 

• Potential collateral or personal guarantee options: Putting up high-value assets as collateral could increase your chances of qualifying for a loan. Some lenders may also require a personal guarantee, which means you promise to repay the loan using your personal finances if your business fails. 

What Type of Small Business Loan Should You Consider? 

Small businesses have several different lending options to choose from. These include: 

• Term loans: This is a traditional loan. You receive a lump sum, then pay it back with interest over a set period. Term loans are usually provided by traditional banks and credit unions. 

• Business lines of credit: This is a revolving loan that works similarly to business credit cards. You’re approved for a specific amount you can draw from as needed, and you only pay interest on the amount you use. 

• SBA loans: These loans are partially backed by the Small Business Administration. They tend to have more flexible requirements than traditional business loans, such as longer repayment terms and lower credit score requirements. They sometimes also have lower interest rates.

• Equipment financing: If your small business needs a specific type of vehicle, machinery, or technology, you can take out an equipment loan. It covers the cost of the equipment, which you own outright once you pay off the loan. 

• Online/alternative lending: These lenders have more flexible requirements. They’re a viable option for first-time business loans or microloans if you don’t qualify for a traditional loan. However, they often come with higher interest rates and processing fees. 

The right small business loan depends on a variety of factors, including the amount of money you need, repayment timeline, and financial qualifications. Be sure to compare several financing options before making a final decision, as the most cost-effective option isn’t always immediately obvious. 

How To Get a Small Business Loan in 6 Steps

Getting a small business loan requires some planning. Here’s a step-by-step guide to help you through the process.

1. Determine How Much Funding You Need

Look at your current expenses and the goals you want to reach with the new funding. Identify the specific costs you want the loan to cover, such as payroll growth, a new marketing push, or essential expenses when cash flow fluctuates. 

Choose an amount that aligns with your cash flow and repayment capacity. Borrowing more than you need can raise interest costs and strain your budget. 

1. Review Your Finances and Credit

Next, take a close look at your financial health to see if there’s anything that could slow down your loan application. Gather recent bank statements and tax returns. Make sure they’re accurate and easily accessible since lenders will want to see these documents.

Check both personal and business credit. If there are errors, contact the credit bureaus to dispute them before starting the loan applications. If you have debt, try consolidating or paying it off to help improve your credit score before applying for loans. 

1. Compare Loan Types and Lenders

After reviewing your finances, compare the different lenders and loan types available. Narrow your options down to several lenders and weigh the pros and cons of each. 

Consider the following factors as you assess your lending options: 

• Qualification requirements

• Funding speed

• Interest rate

• Repayment terms

• Additional fees

When comparing costs, don’t just look at the interest rate. Instead, consider the total cost of borrowing, including any origination fees or prepayment penalties.

In some cases, it may make sense to pay slightly more. Maybe you need fast funding to expand your team or want a longer repayment period to protect your monthly cash flow. 

1. Gather Your Application Documents

Small business lenders typically request several financial documents during the application process, including: 

• Business and personal tax returns

• Bank statements

• Profit and loss statements

• Cash flow projections

• Business license

• Business plans

Have these documents prepared ahead of time to speed up the application process.

1. Submit Your Loan Application

Once you’ve prepared your documents and chosen a lender, fill out and submit the application. Follow the lender’s instructions closely and make sure the information you provide is accurate. 

Expect to answer questions about how you’ll use and repay the funds. Your lender may also request extra documentation during the underwriting process. Respond quickly to any questions or requests to help move the application forward. 

1. Review the Offer Before Accepting

After you’re approved for a loan, your lender will send you a formal offer. Review all the details, including the interest rate, monthly payment amounts, and loan fees. Make sure you’re comfortable with any collateral or personal guarantee requirements. 

The best financing for small business is a loan that supports your budget and plans without overwhelming cash flow. If the offer doesn’t fit, consider other lenders.

How Can You Improve Your Chances of Getting a Small Business Loan? 

Getting a small business loan can be challenging, especially for people with bad credit or new startups without much operating history. While there are no guarantees, here are some things you can do to increase your chances of getting approved: 

• Create realistic financial projections: This builds trust with potential lenders and helps you calculate what you can afford to borrow. 

• Clearly explain why you need the funding and how you’ll use it: Be specific so lenders know where the money’s going.

• Be prepared to explain any potential concerns: If you have existing debt, revenue fluctuations, or a low credit score, provide context and show how you’re addressing it. Clear explanations help lenders understand your situation and may reduce hesitation during review.

Focus on Growing Your Business With Justworks

The right small business loan can help you hire people or expand your payroll. Those changes are often necessary to reach your goals, but they can create new administrative burdens that slow momentum if they’re not managed well. That’s where Justworks can help. 

Justworks helps keep your workload under control by placing core HR tasks in one system. Payroll runs on a predictable schedule and onboarding follows a clear workflow. With fewer administrative hurdles, you can use your loan funds more effectively and focus on business growth and development. 

Get started with Justworks today to see how we simplify payroll, benefits, and compliance tasks. 

FAQ

What Are Common Small Business Loan Mistakes To Avoid? 

Common mistakes small business owners make include:

• Borrowing without a clear goal

• Borrowing more than you need

• Applying before financial records are ready

• Only comparing interest rates instead of total borrowing terms

Can You Have More Than One Small Business Loan at a Time? 

Yes, you can have multiple business loans simultaneously, with each loan serving a different purpose. For example, a business owner might have a working capital loan and an equipment loan at the same time. However, taking out multiple loans increases your financial risk. Make sure you can comfortably manage all obligations before taking on a new loan.

Does Applying for a Business Loan Affect Your Personal Credit? 

Applying for a business loan can affect your personal credit. Many lenders run a personal credit check as part of the application process. This often results in a hard inquiry on your report.