Six Steps to Applying for a Small Business Loan

At some point in the life of your small business, you’ll probably need a loan. The process needn’t be difficult, but it takes time. Here’s a six-step loan application checklist that will put you in the best position to get approved relatively quickly and efficiently.

 

1) Ask “What exactly do I need the money for?”

The purpose of your loan often drives the type of lender you’ll need. Before you ask for money, ask yourself why you need it.

For example, when you’re launching your business, you may simply need business credit cards and personal business loans.

If you’re growing and need a large piece of equipment or want to expand your operation, you may look for a traditional term loan that you’ll pay back over time with interest.

Looking for help with everyday operations? Your best option is likely a business line of credit, which you can use to help cover payroll, equipment repairs, and other costs.

 

2) Find out if you’re eligible. 

Once you’ve defined your loan’s purpose, take a financial inventory.

Start by getting a free personal credit report from any of the three major credit bureaus: Equifax, Experian and TransUnion. You can also check your credit score for free through credit card issuers and personal finance websites. 

Even if your credit rating is excellent, keep in mind that most online lenders only approve loans to businesses that have operated between six months and a year. Most banks require at least two years of operation. For business loans and lines of credit, many lenders require a minimum annual revenue of  $50,000 to $250,000. 

If your revenue isn’t high enough to qualify or you simply haven’t generated revenue, business credit cards or SBA microloans may be your best option.

 

3) Compare lenders.

Look for the lender that meets all your needs, not just the one with the best terms.

Traditional banks offer term loans, lines of credit, and commercial real estate loans to buy or refinance properties. Banks typically will loan large amounts at competitive rates and relatively long repayment terms. 

SBA loans have strict requirements, but may be slightly easier to qualify for than loans from banks and credit unions. 

There are also an array of other government business loans. The U.S. Department of Agriculture, for example, offers loans for small businesses in rural areas. Explore the options and you may find one that fits your business.

If you need a loan for less than $50,000, consider microlenders; they can be ideal for small businesses with a limited operating history, poor personal credit or insufficient collateral.

Another option: crowdfunding. The Michigan Invests Locally Exemption (MILE) allows small businesses to raise capital by inviting Michigan residents to invest in their companies. Of course, there are specific regulations governing such funding. For more information, visit the State of Michigan’s website at michigan.gov and search for “MILE crowdfunding.”

There are also online lenders that offer loans and lines of credit of up to $500,000, but the  average annual percentage rate on online loans can vary widely. The upside: approval rates are higher and funding is faster, sometimes as quickly as the same day.

 

4) Get your materials together.

In addition to basic information—business name, address and employer identification number—here are some of the things your lender will probably want to see (the Michigan SBDC can help here, too – frankly, it’s our sweet spot):

• Your business plan and/or a proposal for how you’ll use the loan.
• Financial statements for you and your business. 
• Personal information about all of your business partners.
• Details on the collateral you plan to use to secure your loan.

In addition, most lenders will require you, and in some cases your business partners, to sign personal guarantees that you’ll pay back the loan with personal assets if your business defaults. 

If you’re not sure about all the paperwork you’ll need, start with the SBA loan application requirements. Since the SBA often requires more paperwork than other lenders, you’ll be well prepared.

 

5) Apply. After a double-check.

Once you’ve completed your planning, it’s a good idea to have the experts at the Michigan SBDC review your materials. We can not only help ensure you’ve included everything the lender needs, but that’s it’s all in the right format. By double-checking everything, we can reduce the chance of unnecessary delays, so you get an answer as quickly as possibly.

 

6) Review your agreement. Get your funds.

Once your business loan application is approved, you’ll receive a loan agreement from your lender detailing your loan amount, repayment terms and schedule, interest rates, fees, and other details. Before you sign it, look it over. If you can, have a business attorney review it. Make sure to ask your lender about anything that’s unclear or that you don’t understand. 

When you’ve signed the agreement, your lender will disburse your funds, usually by transferring them directly to your business bank account. Then, you’ll be on your way.

With the funding you need in hand, you’re read to take your business to the next level.

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