How to apply for a small business loan

Monday, November 15, 2021

If you’re wondering how to apply for a small business loan, you may also wonder if it’s going to be a hassle. The amount of small business loan options out there can be intimidating, and wading through eligibility requirements to see if they’re right for you is a daunting task. Here’s how to find and apply for a small business loan that’s right for you in less time, with fewer headaches.

Why do you need a small business loan?

First things first: What goals are you trying to achieve and how much financing do you need? Identifying your business needs can help you down the road because many small business loan applications ask how the funds will be used. There are many reasons why small business owners need access to funding, such as:

  • Investing in new equipment

  • Covering payroll

  • Hiring new employees

  • Purchasing inventory

  • Fulfilling existing orders

  • Creating cash flow

  • Paying bills

  • Launching a new product or marketing campaign

  • Creating or upgrading your website

  • Navigating seasonal challenges

  • Building a new location

  • Expanding or renovating your existing building

  • Paying for a health care plan

By defining your “why,” you can also help identify a potential loan type that you may want to pursue.

Certain loan types allow small business owners to use funds at their discretion, whereas others restrict how the funds can be used.

Types of small business loans

People often think of their banks or credit unions when it’s time to get a loan. But there are a lot of additional options worth considering, and you may find better rates and terms from non-traditional sources, such as a marketplace online lender. Marketplace lending uses online “platforms” to connect individuals or businesses seeking to borrow money with lenders willing to buy or invest in the loan. In most cases, once a loan is made the platform collects principal and interest payments from borrowers and sends the payments, less certain fees that the platform keeps, to lenders.

Knowing the different loan types available and how they work can help keep you from being caught off-guard during the application process. There are many types of small business loans available, including:

  • Small Business Association (SBA) 7(a) small business loan: An SBA 7(a) small business loan is a loan type guaranteed by the U.S. Small Business Administration. These loans can be suitable for businesses with less established business credit that need capital to grow. SBA loan requirements can include being a for-profit business operating in the U.S. and demonstrating need, using other financial resources such as personal assets before seeking an SBA loan, invested equity requirements and more.

  • Working capital loans: A working capital loan is a revolving credit line usually extended through a bank or online lender. The funds can typically be used for any business purpose. The business only pays interest on the amount of money used, not the total borrowed amount. Working capital loans can be used to help businesses handle issues such as cash flow or whatever a business owner deems necessary. Additionally, small business owners can usually avoid putting up collateral value or selling a stake or shares of the business with this loan. Working capital loans can generally be accessed quickly and repaid in a short period depending on the need.

  • Business term loans: This is a traditional type of loan, where a business borrows money from a lender, usually a traditional bank. With a business term loan, a lender provides a lump sum set with a repayment schedule. These loans can offer predictable monthly payments, a credit-building opportunity, as well as being able to use the funds how you like.

Business term loans may be used for things such as day-to-day operations, expenditures and expanding your business.

  • Business factoring loans: With a business factoring loan, a small business owner sells a valuable asset, such as unpaid accounts receivable. The outstanding receivables are sold to a factoring company, they provide paperwork and soon after, the business receives money. This type of loan can come with fees, plus the difference between the agreed amount paid and the debt owed to you from the factoring company. This loan type offers benefits such as quick funding, flexibility in the use of funds, no credit requirements and the business’s credit remains unaffected as debt is not added to the balance sheet. While this type can offer you money quickly, you’ll have to give up personal or business assets to do so.

  • Microloans: A business microloan is a loan for smaller amounts, usually between $5,000 to $50,000. Banks often prefer not to lend such small amounts, so small businesses can access these amounts through online lenders, such as marketplace lenders, or nonprofit or government agencies such as the SBA. Business owners may not face strict requirements to access this loan type. Microloans are term loans with set repayment schedules which make them easy to plan around. Depending on the lender, there may be restrictions on how you can use funds. For example, the SBA offers microloans but a business cannot purchase real estate or use the loan to refinance debt. Marketplace lending platforms generally market both new loans and loans that can be used to refinance existing debt.

  • Merchant cash advance loans: This loan type is set up through a merchant cash advance lender who offers a loan to a small business in exchange for a percentage of future credit card sales transactions. Repayment terms usually include a daily percentage of credit card transactions, so the amount the business pays back will vary depending on the number of transactions and the transaction value. Merchant cash advance loans can take a longer time to repay and they usually have higher interest rates. Credit checks aren’t usually required, so these loans may be options for businesses without the best credit and/or to solve a short-term cash shortage.

Small business loan qualifications and borrower application materials

Small business lenders have different minimum requirements and paperwork required from loan applicants.

Gathering information and doing some prep work can help save you time when applying with a potential lender. Before applying for a loan, it may be good to:

  • Know your personal credit score: The personal credit score of a small business owner is part of the equation for creditworthiness for many lenders. Knowing and maintaining a higher credit score can generally help you qualify for better loan terms and better loan options. There are many ways to access your credit report for free online. If you have bad credit, it doesn't mean you can't find financing options. Plus, a bad personal credit score now doesn't doom your business forever. As a business grows and builds up its credit history, lenders may rely less on a small business owner’s credit score.

  • Know your business credit profile: Establishing and maintaining a business credit profile so your business’s credit gets reported is critical. The business credit profile is built up by paying credit obligations on time, such as leases, utility bills, business credit cards, and other expenses. This score can be a good indicator of your business’s fiscal responsibility. Maintaining a good business credit profile can help secure small business loans.

  • Create a business plan: Traditional lenders such as banks, credit unions and the SBA may require a business plan that provides information about why you need funds, how funds will be used and how you will pay it back. While it may not be a requirement for some loan types, it’s not a bad idea to write a business plan anyway. Going through writing a business plan can help you understand if your business is ready to take on a loan. A business plan can also act as a road map to help you achieve your business goals.

  • Get your legal documents and financial statements in order: Lenders may ask for monthly bank account balance sheets, income or cash flow statements, annual revenue documentation, profit and loss statements and tax returns for both the business and business owner. Additionally, getting copies of business licenses, registrations, articles of incorporation, third-party contracts, franchise agreements, commercial leases, and business owner Social Security numbers and driver’s licenses and having them available can help you be ready for just about any loan application.

  • Decide on your collateral – and know its worth: Depending on the loan type, lenders may ask borrowers for collateral before extending a loan. Taking steps to figure out your collateral and its true value can help you get ahead of the game. Taking stock of tangible and intangible assets (both personal and business assets) and getting estimates from multiple sources can help you get to the total value of your collateral. This assessment can be a part of your business plan as an appendix that can make it easier when applying for certain loans.

Gathering documents on the SBA loan checklist is a good starting point before researching loans since government small business loans usually require more paperwork than other lending options.

Shop around to find the best lender and small business loan

Once you have gathered crucial information and generally know the small business financing types you may qualify for, it’s time to shop around.

Shopping around for the best terms available could help save your business thousands of dollars over the course of the loan – money that’s best spent to grow and strengthen your business.

Here’s some tips for shopping around:

  • Estimate how long you’ll need to pay off the loan: Give yourself some leeway on your time estimate – it’s better to give yourself more time than you think. You want to avoid being cash strapped to be ready for the unexpected over the life of the loan.

  • Know how fast you need the cash: Traditional small business lenders and loan types may have lengthier processes before receiving funding. If you need the cash fast, marketplace online lenders have processes that support fast application reviews and funding.

  • Convert the interest rate into annual percentage rate (APR): APR takes into account fees and how costs will be calculated year to year and can let you know how expensive the loan will be for you. One lender may offer a better interest rate, but it could still end up being more expensive over time.

  • Check around – and know your lenders: Giving yourself time to research and compare potential lenders and terms can only benefit you. Banks and the SBA may offer more competitive rates, but they may come with stricter requirements to qualify should you have bad credit or limited operating history. Your preferred lender may not offer the loan type you’re seeking. Research lender policies regarding missing a payment or the inability to repay the loan as agreed. Some lenders may be understanding and work with you and others may have punitive policies that may hurt your business and its credit.

Apply for a small business loan

The loan application may feel like the easiest part of this process after creating a business plan, building up your business and/or personal credit and getting all of your documentation ready. Applying for a loan can come down to filling out paperwork, making a phone call or submitting an online application. Once you’ve applied, all there is to do is wait to hear back. Important things to remember when applying for a small business loan include:

  • Lenders with stricter standards take more time: Traditional lenders such as banks and credit unions may take longer to approve a loan. There may be other requirements, such as in-person applications or presentations. However, approval rates for marketplace online lenders are higher and funding is typically faster than traditional lenders — as fast as 24 hours.

  • It’s OK to ask questions: Asking questions to ease your nerves or confirm something that doesn’t make sense to you is OK. After all of the work you put in trying to find the right loan, you might forget things. Additionally, you want to make sure you have all the information you need to take out this loan. Giving yourself grace during this process is important.

Have lenders compete to offer you a loan

What if one loan application was able to canvas 75+ active banks, credit unions and alternative lenders to offer you some of the most competitive rates available? It’s possible with Heartland Capital, powered by Lendio. Heartland Capital is an easier and faster way for small businesses to secure the funding they need to operate and grow. Our business loan marketplace enables business owners to apply for loan amounts up to $5M and access a line of credit up to $250K. Business owners can get secure, easy access to the financial boost they need to focus on what they do best: running their business.

With Lendio, the entire lending process is streamlined – from an easy, online application to funding approval. The marketplace canvasses the lending marketplace to provide entrepreneurs with competitive loan options, rates and terms.

The application-to-funding process is easy and the entire process typically takes about a week. Small business owners just need to follow these steps:

  • 1. Apply for financing directly on the Heartland Capital website

  • 2. Work with a dedicated funding advisor to discuss your business needs and loan options

  • 3. Receive an email notification with competitive funding offers for your business

  • 4. Sign and accept your electronic loan documents

  • 5. Get your money as fast as 24 hours from selecting an offer

Contact us to learn more about how Heartland Capital can help you secure the loan you need today.