A small business loan is a financial arrangement where a lender provides capital to a business owner, who then repays the amount and interest over a specified period. Understanding the steps to apply for a small business loan can help you secure the additional finances you need to help your organization thrive. MoneyGeek explored the process of obtaining a small business loan and some of the pros and cons involved to help you make the best decision for your business.

What Is a Small Business Loan?

Small business loans are financial tools designed to give entrepreneurs and business owners the capital they need to grow, sustain or improve their operations. Unlike personal loans, these are specifically tailored for business expenses and usually offer terms and conditions that align with business needs.

According to the U.S. Small Business Administration, small business loans can range from a few thousand dollars to as much as $5 million, depending on various factors like the lender, the borrower's creditworthiness and the nature of the business.

To take out a small business loan, you'll start by applying through a bank, credit union or online lender. The lender will assess your business's financial health, your credit score and other relevant factors. Interest rates can vary widely, so it's essential to shop around. Once approved, you'll receive the loan funds and will be required to pay them back over a specified period, usually with interest.

4 Steps to Apply for a Small Business Loan

Whether you're a seasoned entrepreneur or a startup founder, understanding how to apply for a small business loan can demystify the process and set you on a clear path to financial growth. Below is a simple four-step process to help you get started.

1. Determine How Much You Need

Determining how much capital you need to borrow is the cornerstone of your small business loan application process. Aligning the loan amount with your business objectives and ensuring you can manage repayment without straining your finances is essential during this first step; do so by finding the right loan type, researching fees and evaluating your business needs.


2. Find Out if You Qualify

To determine if you qualify for a small business loan, you need to do a deep dive into various factors that lenders scrutinize, such as your credit score, the length of time your business has been operational and your revenue. Understanding these qualifiers prepares you for the application and helps you target lenders more likely to approve your loan.


3. Shop Around for Lenders

Shopping around for lenders isn't just about finding someone willing to lend you money; it's about finding the right fit for your business needs and financial situation. Different lenders come with their own sets of requirements, terms and benefits. Knowing your options can help you make an informed decision about the best lender for you. The three most common types of lenders are online lenders, traditional banks and credit unions.


4. Apply for a Small Business Loan

To secure a small business loan, you must submit an application. In this phase, you present a compelling case for why your business deserves funding and provide a comprehensive picture of your business's financial health and growth potential.


Pros and Cons of Small Business Loans

Securing a small business loan can be a game-changer, offering the financial boost you need to grow and thrive in your business. However, these loans aren't a one-size-fits-all solution and their benefits come with some drawbacks. Understanding the pros and cons of taking out a small business loan can help you make an informed decision that aligns with your business goals and financial situation.

Pros of a Small Business Loan

  • Quick access to capital: A small business loan can provide a lump sum of money upfront, allowing you to make significant investments in your business. This money can be invaluable for time-sensitive opportunities, like purchasing discounted inventory or capitalizing on a new market.
  • Cash flow management: Loans can add more predictability to your cash flow, especially for businesses with seasonal revenue streams. Having extra capital can help you cover operational costs during slow periods, ensuring business continuity.
  • Builds business credit: Repaying a small business loan can improve your business credit score. A higher credit score can open doors to more financing options with better terms in the future.
  • Tax benefits: Interest payments on a business loan are generally tax deductible, effectively reducing the cost of borrowing. This can be a significant financial advantage come tax season.
  • Retain business ownership: Unlike equity financing, where you give up a share of your business, a loan allows you to retain full ownership. This means you maintain control over business decisions and enjoy the full benefits of any increase in valuation.

Cons of a Small Business Loan

  • Interest and fees: While loans provide immediate capital, they come at a cost, often in the form of interest and fees. Over time, these can add up, making the loan more expensive than initially anticipated.
  • Collateral risk: Many small business loans require collateral, such as property or equipment. If you default on the loan, you risk losing these valuable assets, which can be devastating for your business.
  • Debt burden: Taking on a loan means committing to regular repayments, which can strain your cash flow. If your business hits a rough patch, meeting these obligations can become challenging and lead to financial stress.
  • Complex application process: Applying for a small business loan can be time-consuming and requires extensive documentation. This can divert your attention from day-to-day operations, impacting productivity.

Frequently Asked Questions

Navigating the application process for a small business loan can be tricky. Whether you're a first-time applicant or a seasoned business owner looking for additional funding, you likely have questions beyond the basics. MoneyGeek answered some of them below to provide valuable insights.

Lenders look at a variety of factors to assess the risk associated with lending to your business. These include your credit score, business history, revenue and DSCR. They may also evaluate your industry, as some sectors are considered riskier than others. Your business plan and cash flow projections can also significantly influence your approval, especially if you're a startup or a younger business.

The timeline can vary widely depending on the lender and the type of loan. Online lenders often have a quicker turnaround time, sometimes within 24 hours. Traditional banks, on the other hand, may take several weeks to a couple of months, especially if they require extensive documentation and due diligence. If you're applying for a government-backed loan, such as an SBA loan, the process can take even longer, sometimes several months.

Technically, you can apply for multiple loans simultaneously, but it's generally not advisable. Each loan application can result in a hard inquiry on your credit report, which can lower your credit score. Multiple applications can also make you appear desperate for funds, which could make lenders hesitant to approve your loan.

Always read the fine print. Some lenders charge origination fees, service fees or prepayment penalties that can significantly increase the cost of the loan. These fees should be factored into your overall cost calculations and could be a deciding factor when choosing between different lenders.

If your application is rejected, the first step is to find out why. Lenders are required to provide a reason for denial. This information can guide you in improving your application for future attempts. You can also consider alternative funding options, such as looking for a co-signer with a more robust financial profile, opting for a smaller loan amount or seeking out lenders specializing in high-risk businesses.

About Christopher Boston

Christopher Boston headshot

Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.

  • U.S. Small Business Administration. "Loans." Accessed September 8, 2023.
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