Whether at the beginning of their business venture or well down the line, at some point, most entrepreneurs and small business owners will find themselves in need of financing. Some entrepreneurs are looking for help getting their dreams off the ground, and others need help growing, expanding, or keeping things moving.
Whatever the reason, a small business loan is often the solution many entrepreneurs need. But different loans require different steps, paperwork, and lead time—so there’s no universal borrowing experience. There are, however, certain things you can expect from almost all business loan application processes, and it’s helpful to be prepared for what’s to come if you plan to apply. Here’s what you should expect when you apply for and (hopefully!) secure a small business loan for your company.
A Review of Your Personal Credit History—and Business Credit (If You Have It)
The most important thing to remember when applying for a small business loan is that every lender is always trying to mitigate their risk. Accordingly, lenders will be evaluating your application based on how much risk they’re taking when lending you money as the owner of your business.
Initially, most lenders, whether traditional banking institutions or alternative lenders, will look at your personal credit score, since it serves as a standardized numerical score of your history with debt. Your company also might have a business credit score—which is different than your personal score. That’ll depend on your length of time in business, and whether or not you have other business credit history, like a business credit card, for instance. (It’s not required to apply for a loan, though—your personal credit score will do.)
Lenders won’t require you to have perfect credit in order to get approved for a loan—and there are loan products available for business owners with less-than-stellar credit at that. But, as you might expect, the better your credit score is, the greater your chances are for approval. Plus, the more options you’ll have for different types of loan products, with higher amounts and better repayment terms, too.
A Deep Dive Into Your Business (and Maybe Personal) Financials
Lenders will generally also scrutinize your business’s financial health—especially in the case of term loans with longer repayment periods. Your company’s ability to generate revenue and sustain consistent cash flow will have a bearing on whether or not you can repay your loan—so it’s very much a lender’s business.
You’ll want to have comprehensive, accurate bookkeeping to be able to secure your small business loan. That way, your lenders will have a definitive snapshot of how well your company is doing—and whether or not you’ll be able to repay that loan they’ll extend you (remember, it’s all about risk).
For some types of loans—particularly SBA loans—lenders will want to dig into personal finance information for you and any co-owners of the business. In that case, you don’t want to be caught off guard. Get organized in advance by knowing how to fetch bank statements and tax returns, and expecting to do a bit of paperwork.
A Thorough Assessment of Your Business Case
Sure, we’d all like more money—but what, exactly, are you going to use this money for? That’s what your lender will ask, so make sure you have an air-tight case for why a bank should lend you and your small business thousands of dollars.
Your lender will ask you for a use case during the loan application process. Some loans come with specific usage rules attached to them, so understanding whether or not you want to finance a specific purchase versus having an available line of credit, for instance, will help you also figure out which loan to apply for.
SBA Loans and some bank loans require specific business proposals among their requirements. The depth with which you’ll need to outline your use case will vary with the type of loan you’re applying for—but it’s good business sense to know exactly why you’re applying, regardless.
A Vetting Process—and a Lot of Paperwork
If your lender approves you for a loan, you’ll go through the underwriting process. This is how banks ensure you’re ready to take on the loan—and able to repay it based on your financials. Underwriting can be an overnight process (like a line of credit) or even months (like an SBA loan) depending on the amount you’re borrowing, what kind of loan product you’re getting, and how organized you are with your documentation.
Each loan requires different documentation for underwriting. In general, if you want to prep some paperwork in advance, you can start pulling:
- The two years of personal and business income tax returns
- 3 to 6 months of bank statements for your business
- Business organization documents to prove ownership (articles of incorporation, LLC agreement, or partnership agreement)
- Business Profit & Loss (also known as an income statement)
- Business balance sheet
SBA loans will involve a lot more paperwork—one of the reasons why their underwriting periods are generally longer. For these highly coveted loans, be prepared to provide more details about your company, plus yourself and any co-owners, too.
A Business Loan Can Get You on a Path to Growth
One final word of advice: Before you sign documents, it’s a good idea to make sure you feel comfortable with your repayment plan. As a savvy business owner, you’ll want to feel confident about your ability to pay back your loan.
After all, you’ve gone through the tough process of applying for a small business loan—you want to make sure it’s the perfect product for you with terms that suit your business. And once that cash is in hand, you’ll be on your way to accomplishing your business ambitions.
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