1. Solidify your business plan
Before you apply for a loan, make sure you actually need the money you want to borrow. Creating a business plan can help give you a good idea of where your business is headed and whether a small-business loan could help you take it there.
Your business plan should help you determine what kind of loan you want and how much you want to borrow. A loan to finance your day-to-day operations may have different terms and eligibility criteria than a microloan (generally less than $50,000) or a loan to acquire equipment or real estate.
Your plan helps you show lenders that the money you want to borrow will be put to good use. Don’t be afraid to think big.
The U.S. Small Business Administration offers examples and step-by-step instructions to help you create a business plan.
2. Evaluate the current financial health of your business
Before your application can be approved, the lender needs to know you have the capacity to repay the loan. Lenders may evaluate this capacity in several ways.
Lenders may review both your credit history and that of your business. Before you apply for a loan, request your personal credit reports and try to clean up any errors. If your credit could use some work, you might want to wait to apply for a business loan until you’ve improved it.
How to build business credit
If you’re applying for a loan for your existing business, lenders will want to see that you have a sufficient cash flow to be able to repay the loan. If it’s a new business, however, lenders may instead consider your experience: Have you run a profitable business before?
You may need assets to secure your business loan. Your assets serve as collateral that the lender could confiscate if you don’t repay the loan. If your assets aren’t enough to back the loan you want, you may be able to ask a cosigner to put up collateral for you.
If you don’t have a ton of experience in your industry yet, lenders may review your job history and experience to help them assess whether you can effectively manage your company. A well-managed business is more likely to be successful, which means you’ll likely be more able to repay a loan.
3. Search for a small-business lender
It may be difficult to qualify for a business loan from a large commercial bank. Other options to consider include community banks and some credit unions. These institutions may be more eager to establish and nurture a banking relationship with a local business and more likely to consider how providing that business with a loan could support the local economy.
Another possible option is a loan guaranteed by the Small Business Association. The SBA helps lenders make loans to small businesses that otherwise wouldn’t qualify for financing. These loans are guaranteed by the SBA, so lenders may offer financing that they would have considered too risky otherwise.
The U.S. Department of Agriculture also offers government guarantees for small-business loans for rural businesses.
4. Prepare your paperwork
Pulling together a loan application can be time consuming. If you’re applying for an SBA or USDA loan, you may need to fill out paperwork for both the lender and the U.S. government.
Applications vary, but typically you’ll need to supply a business plan, cash flow projections, and current and projected financial statements.
Provide as much detail as you can. The more lenders know about you and your business, the better they can assess your situation and determine whether you qualify for the loan you want.
The small-business loan application process can be much easier if you think carefully about your business plan and whether you’re well-positioned to meet your goals.
If your small-business loan application is rejected, don’t give up. Ask the lender for feedback and review your application for opportunities to improve it — qualified borrowers can get turned down because their application is vague or incomplete.