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6 Step Guide- How to Get a Business Loan

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6 Step Guide- How to Get a Business Loan

By ngoriel, SBA Official
Published: September 4, 2013 Updated: September 4, 2013

Money is the lifeline of any business, so whether you’re starting a business or running an existing one, securing financing is a major factor, especially for small businesses.  Many budding entrepreneurs find the task daunting and don’t even know where to begin.

Here’s a simple yet practical guide on how to go about preparing to apply for a small business loan.

1.    What criteria do banks look for in making small business loans?

Different banks or lending institutions may have different standards, but in general, in order to consider your application for a small business loan, banks will require:

  • The loan must be for a sound business purpose. For SBA-guaranteed loans, the business must be eligible based on size, use of loan proceeds and the nature of the business (no lending, speculating, passive investment, pyramid sales, gambling, etc.)
  • You and your partner(s) are of good character, have experience and good personal and/or business credit history
  • Ability to pay back the loan- reasonable to strong collateral (personal and business assets) is very important. SBA expects the loan to be fully secured, but we will not decline a request to guaranty a loan if the only unfavorable factor is insufficient collateral. And of course, owners must have personal equity investment in the business/skin in the game.

2.    What information will you need?

Different lenders may require more or fewer documents, but in general, you will need:

  • Personal and business credit history
  • Personal and business financial statements for existing and startup businesses and as well as a projected financial statements
  • Strong, detailed business plan (including personal information such as bios, education, etc.)
  • Cash flow projections for at least a year, and
  • Personal guaranties from all principal owners of the business

3.    How can you set yourself up from the beginning to make the process easier? (i.e. accounting systems, etc.)

Be prepared; be thorough; be truthful.

  • Choose your lending institution carefully. Larger banks tend to shy away from small loans as they are less profitable and take the same amount of underwriting and servicing. That doesn’t mean large banks do not make small loans; it is just more difficult.
  • Approach banks or lending institutions you have worked with or are a customer of
  • Explore community banks and Credit Unions
  • Talk to a lending officer and find out exactly what documentation they require
  • Be thorough, bring everything they ask. Many loan applications are denied or face unnecessary hurdles because of incomplete applications.

Even before you start gathering and organizing the information required by lenders to consider your application, you should educate yourself regarding business loans so you can understand and discuss intelligently with the lending officers when the time comes.

4.    What is the typical size of a small business loan?

Small businesses come in many sizes, from a start-up of a one-person company to hundreds of employees, and their financial needs vary accordingly, so “typical” also varies. That said, in the banking industry the median small business loan is about $130,000 - $140,000 with highest around $250,000. SBA small business loans range from about $5,000 (microloans) to $5 million (largest guaranteed) with the average loan around $371,000.

5.    How can you get financing to start a business since many banks want to fund growth?

Start-ups are probably the most difficult ventures when it comes to securing financing. Many start-up businesses seek financing from family, friends and credit cards.  If the credit is sound, the business plan strong and you have enough personal resources to invest and collateral to guarantee, smaller, community banks and  other community financial institutions and Credit Unions may consider lending you money.

Your best bet by far is SBA assistance. Begin by visiting SBA's website , where you will find a wealth of information not only on how to secure a small business loan but equally importantly, other services and training opportunities to help you succeed.

6.    Are there associations that can help?

SBA works closely with a large network of partners that leverage SBA resources and are just one phone call away and ready to provide extensive help.

  • SBA District/Branch Offices– at least one in every state
  • SCORE– (approximately 300 chapters nationwide)
  • SBDCs – Small Business Development Centers; (approximately 900 locations nationwide; associated with higher education institutions (colleges and universities)
  • WBCs- Women’s Business Centers (approximately 100 educational centers nationwide)

About the Author:

Natale Goriel

SBA Official

Hi, my name is Natale and I'm serving as a Moderator for the SBA Community. Our goal is to continually improve this site to meet your needs, so we appreciate your feedback and participation.

Comments:

In many cases, using some type of asset as a form of collateral may be the best method available. Collateral can often mean anything of great value that isn’t likely to depreciate quickly. Prime examples include real estate, equipment, inventory for your business, etc.
Business owners should know that their business is capable of having a credit score of its own. This business credit score can help in securing new equipment, additional inventory, etc. Business loans aren't the only option.
Can personal assets be used as collateral?
There is a lot of great information in this article. I especially like that the criteria which banks look for is mentioned. Questions about that are asked so often and some of the information I’ve seen elsewhere is far less accurate. It’s nice to see such information written by a credible source. Business owners who are already spending money with vendors can keep in mind that freeing up operating capital doesn’t always require a business loan. Many vendors are willing to extend credit to businesses and that could free up operating capital as well as build business credit history for when a loan is needed.
Great tips! While not all lenders need the same information, this is a great resource to get people started!
The reality is that the traditional financial service providers make it very difficult for true (less than 1m turnover) businesses to get access to credit. SBA plays a really important role but equally important is the non traditional lenders that have filled the gap left by the banks. These players range from Merchant Cash Advance providers, to factoring and discount providers. Id be keen to see an article (with all the appropriate pros and cons) detailing these options.
When this year I get a business loan, I was very surprised that my personal credit history has a big impact on it. Although I was afraid to meet a refusal, I get it (even on a very good conditions). Bank officer explained me, that my personal credit history had a big impact on the favorable estimation – I always paid off on time all previous loans. My company is made up of several people and such a small loan made my business developing.
So a clear and professional business plan is very important before approaching a bank. You should also have a thorough knowledge about the market of your products and how you are going to operate. Good luck!
Start-up businesses don’t always get lucky when it comes to loans. In addition to these tips that have been proven effective, it would be helpful if we have secondary source of income. And, we should also be transparent with our assets if we want banks to trust us.
It's ture that money is the lifeline of any business,everyone who do business is to earn money. I studied Economics and Management at that time, the manager said :" big business can not do without loans ".

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