How to Apply for Small Business Loans

As a small business owner, securing funding can be a game-changer for your business. Whether you need cash flow to expand, hire more employees or cover unexpected expenses, a small business loan can help you get there. But navigating the loan process can feel daunting if you’re not sure where to start.

In this guide, we’ll walk you through everything you need to know about applying for a small business loan, from understanding the types of loans available to preparing your application and securing the best deal for your business.

Understanding Small Business Loans

Small business loans are designed to give your business a financial boost when you need it most. The right loan can provide the capital needed to scale your operations or weather a rough patch without straining your personal finances or draining your business accounts. Plus, borrowing responsibly and paying off your loan can help build your business credit, which is important for future financing opportunities.

Why Consider a Small Business Loan?

You might consider a loan if you’re looking to grow your business, invest in new technology or equipment, manage seasonal fluctuations, or simply need extra cash to cover day-to-day expenses.

Types of Small Business Loans

There are several types of small business loans available, each with its own pros and cons. Here are the most common ones:

• Term Loans: These are traditional loans where you borrow a set amount of money and pay it back over a specified period, with interest. Term loans can be used for various purposes, like purchasing equipment, expanding your location, or even covering large one-time expenses.

• Line of Credit: A business line of credit gives you access to a pool of funds that you can dip into as needed. It’s flexible because you only pay interest on the money you actually borrow, making it a good option for managing cash flow or handling unexpected expenses.

• SBA Loan Programs: The U.S. Small Business Administration (SBA) offers several loan programs designed specifically for small businesses. SBA loans typically have lower interest rates and more favorable terms than traditional loans, but they can take longer to process due to government involvement. 

  • SBA 7(a) Loan: This is the most common SBA loan and can be used for various purposes, including working capital, equipment purchases, and debt refinancing.

  • SBA 504 Loan: This loan is specifically designed for real estate or equipment purchases, allowing you to finance large fixed assets.

  • SBA Microloans: For smaller amounts (up to $50,000), SBA microloans help start-ups or businesses looking for smaller-scale funding.

• Equipment Financing: If you need to purchase new equipment for your business, equipment financing allows you to use the equipment itself as collateral for the loan. This type of loan usually comes with favorable terms since the lender can recover the equipment if you default.

• Merchant Cash Advances: If you need quick access to cash, a merchant cash advance allows you to borrow against future sales. The lender advances funds, and you repay the loan as a percentage of your daily credit card sales. Be cautious, as this option often comes with high fees and interest rates.

Preparing to Apply for a Small Business Loan

Before you start filling out loan applications, it’s important to prepare and get your financial ducks in a row. Here’s how:

1. Evaluate Your Needs: First, figure out exactly why you need the loan and how much money you’re looking to borrow. Are you expanding your business, covering operational costs, or buying new equipment? Having a clear understanding of your goals will help you choose the right type of loan and lender.

2. Check Your Credit Score: Lenders will take a close look at both your personal and business credit scores. A higher credit score increases your chances of getting approved for a loan with better terms. If your score isn’t where you want it to be, consider improving it before applying by paying down debts or addressing any errors on your credit report.

3. Gather Necessary Documents: Lenders will want to see detailed financial information about your business. Common documents you’ll need include:

   • Business plan

   • Business and personal tax returns

   • Profit and loss statements

   • Bank statements

   • Business license

   • Articles of incorporation (if applicable)

4. Create a Strong Business Plan: A well-crafted business plan can significantly boost your chances of getting approved for a loan. It should include: 

   • Executive summary

   • Business description

   • Market analysis

   • Organizational structure

   • Product line or services

   • Marketing and sales strategies

   • Funding request

   • Financial projections

Lenders want to see that your business is stable and that you have a solid plan for paying back the loan.

Applying for a Small Business Loan

Once you’re prepared, it’s time to apply. Here’s how to approach the process:

1. Choose the Right Lender: There are many different lenders out there, including traditional banks, online lenders, credit unions, and SBA-approved lenders. Each has its own requirements, interest rates, and loan terms. Research your options and find a lender that suits your business’s needs.

   • Banks: Banks typically offer more competitive interest rates but may have stricter lending requirements. Small business owners with good credit and a solid financial history may find better rates at banks.

   • Online Lenders: These lenders often have faster approval processes and more lenient requirements than traditional banks. However, they may charge higher interest rates. Online lenders can be a great option for businesses in need of quick capital or those who don't meet bank requirements.

   • Credit Unions: Credit unions sometimes offer lower interest rates and more personal customer service than traditional banks. They often prioritize local businesses and may have a more flexible approach to lending.

   • Alternative Lenders: These include microlenders, crowdfunding platforms, or peer-to-peer lending. Alternative lenders may offer more flexible criteria but could charge higher fees or interest.

2. Submit Your Application: Once you’ve chosen a lender, you’ll need to submit your loan application. This typically includes personal and business information, financial documents, and your business plan. Be sure to fill out the application carefully and double-check for any errors before submitting.

   • Collateral or Personal Guarantees: Note, when applying for a small business loan, some lenders may require collateral—assets like property, equipment, or inventory that they can seize if you fail to repay the loan. Collateral minimizes the lender’s risk, but it puts your business assets on the line. Similarly, lenders may ask for a personal guarantee, which holds you personally responsible for the loan if your business can’t make the payments. This means your personal assets, like your home or savings, could be at risk. It’s important to understand these requirements and carefully weigh the risks before accepting a loan that requires collateral or a personal guarantee.

3. Review Loan Offers: If you’re approved, you might receive multiple loan offers, each with different terms and interest rates. Don’t just accept the first offer—take time to compare your options. Look at the interest rates, repayment terms, and any additional fees or conditions.

   • Interest Rates: Interest rates and fees are crucial components of any small business loan, as they affect the total cost of borrowing. Interest rates can be either fixed or variable, with fixed rates staying the same throughout the loan term and variable rates fluctuating based on market conditions. In addition to interest, loans may come with various fees such as origination fees, prepayment penalties, and closing costs. These fees can significantly increase the cost of the loan, so it's important to read the fine print and compare Annual Percentage Rates (APRs) across lenders, which give a more complete picture of the loan's true cost.

4. Understand the Terms: Before accepting any loan, make sure you fully understand the repayment terms. How much will you be required to pay each month? Is the interest rate fixed or variable? Are there any penalties for early repayment? Understanding the terms upfront will prevent surprises down the road.

   • Loan Covenants: Some lenders may impose loan covenants, which are conditions or restrictions that you must adhere to throughout the loan term. These might include maintaining a certain cash flow level, limiting additional borrowing, or meeting specific revenue targets. Loan covenants are designed to protect the lender by ensuring your business remains financially stable, but failing to meet these conditions could result in penalties, higher interest rates, or even loan default. Understanding the covenants attached to your loan and ensuring you can comply with them is crucial for maintaining a healthy relationship with your lender.

   • Repayment: Once you’ve secured a small business loan, it’s crucial to have a solid repayment strategy in place to avoid any disruptions to your cash flow. Sticking to a consistent payment schedule is key, and automating payments can help ensure you never miss a due date. If your business starts generating more revenue or interest rates drop, refinancing the loan might be a smart option.

     • Refinancing: Refinancing allows you to replace your current loan with a new one—ideally with better terms, such as a lower interest rate or longer repayment period. However, it’s important to weigh any potential fees or prepayment penalties to ensure refinancing will truly benefit your business in the long run.

Special Loan Programs

Certain loan programs are designed specifically to help women, minorities, and other underserved small business owners. If you qualify, these programs can offer favorable terms and additional resources to help your business succeed:

• SBA Loans for Women: The SBA’s Women’s Business Centers provide access to capital and business counseling specifically for women entrepreneurs.

• Minority Business Loans: Some lenders, along with the Minority Business Development Agency (MBDA), offer specialized loans and support for minority-owned businesses.

• Veteran-Owned Business Loans: The SBA’s Veteran Advantage program offers reduced fees and flexible terms for veteran-owned small businesses.

• Small Business Grants: In addition to loans, you might consider applying for small business grants. Unlike loans, grants do not need to be repaid. They can be a great source of funding, but they are often competitive.

Tips for Success

Here are some final tips to keep in mind when applying for a small business loan:

• Know Your Numbers: Lenders want to see that you have a clear understanding of your business’s financial health. Be prepared to explain how much money you need, why you need it, and how you plan to repay it.

• Don’t Borrow More Than You Need: While it may be tempting to borrow a larger amount “just in case,” keep in mind that loans have to be repaid, with interest. Only borrow what you actually need for your business goals.

• Keep Communication Open: Maintain a good relationship with your lender, especially if your business hits a rough patch. Lenders are often willing to work with you if you communicate any challenges upfront. Maintain open communication and demonstrate your commitment to repaying the loan.

• Seek Professional Advice: If you're unsure about any part of the loan application process, consider seeking advice from a financial advisor or business consultant.

How Justworks Can Help

Applying for a small business loan can seem intimidating, but with the right preparation and knowledge, you’ll be well-equipped to secure the funding your business needs. If the process of applying for a loan feels overwhelming, Justworks might be able to help. By leveraging the expertise of an organization like Justworks to handle your administrative burdens, you can allocate your time to creating a stronger business plan, improving your credit, or preparing for a loan application. Get started with Justworks today!