Practical ways to prepare, qualify, and compare offers
How to Get a Business Loan: Steps to Improve Your Chances
Having enough funding is one of the keys to keeping your business alive. Business has ups and downs. When you hit a slow cycle and cash is tight, it can cause a lot of stress.
A business loan can help, but only if you choose the right type of loan and prepare properly. You do not want to borrow in a panic and end up with payments your business cannot handle.
In this guide, we will walk through simple, practical steps to get loan-ready, choose the right type of financing, and approach lenders with more confidence.
Note: This article is for general information only. Always speak with your accountant, lender, or other qualified professionals before making financial decisions.
1. Get Clear on Why You Need the Loan
Before you look at lenders, get clear on why you want the money. This sounds simple, but it is one of the most important steps.
Common reasons for a business loan include:
- Covering short-term cash flow gaps
- Buying equipment or vehicles
- Renovating or expanding a location
- Buying inventory for a busy season
- Launching a new product or service
Write down:
- The exact problem the money will solve
- How the loan will help you increase revenue or cut costs
- How you plan to make the payments month by month
Ask yourself a few simple questions:
- Is this loan for growth, or to cover losses?
- If sales drop for a few months, can I still make the payment?
- Is there a non-debt option to fix this problem?
When your purpose is clear, you will be able to explain it to the lender in a way that makes sense and shows you have thought things through.
2. Check If Your Business Is Loan-Ready
Next, take a hard look at your numbers. A lender wants to see that your business can handle the extra payment without falling apart.
Cash Flow
Look at your cash flow. Do you usually have more money coming in than going out? If you are not sure, talk to your bookkeeper or accountant, or review your reports. If your business is struggling with cash flow, it may be harder to qualify and harder to keep up with payments.
For more on improving cash flow, see Strategies to Improve Cash Flow.
Existing Debt
List all current loans, credit cards, and other obligations. Write down the balances and monthly payments. Lenders look at how much debt you already have compared to your income.
There is also a common measure called a debt service coverage ratio. In simple terms, it compares how much cash your business generates to how much you need to pay on your debts. The stronger your cash flow compared to your payments, the better your position looks to a lender.
Credit Profile
For many small businesses, lenders look at both business and personal credit. Get a copy of your credit reports and check for errors. If you find issues, work on fixing them before you apply. A clean and accurate credit report makes the process easier.
Payment History
Ask yourself if you have missed or been late on payments in the past. A history of late or missed payments makes lenders nervous. If there are problems in your history, be ready to explain what happened and what has changed.
3. Decide How Much You Can Safely Borrow
Now that you have looked at your numbers, you can estimate how much you can reasonably borrow.
Estimate What You Need
- List your project or startup costs (equipment, inventory, renovations, licenses, etc.).
- Add working capital for day-to-day expenses during a slow period or growth phase.
- Include one-time costs such as professional fees.
Do your best to use realistic numbers, not wishful thinking. You can use tools such as a startup cost worksheet or loan calculator to help with this step.
Add a Reasonable Cushion
Unexpected expenses always come up. Many owners choose to include a small cushion in their loan amount so they are not caught off guard. The key is to make sure the payment still fits comfortably in your budget.
Ask yourself:
- What happens if revenue is 20% lower than I expect?
- Can I still make this payment on time?
Test the Monthly Payment
Use a loan calculator to estimate your monthly payment at different loan amounts and interest rates. Try a few “what if” scenarios so you are not surprised later.
If the payment looks tight even in a good month, you may need to lower the loan amount, stretch out the repayment term, or rethink the project.
4. Choose the Right Type of Business Loan
Not all loans are the same. Choosing the right type of financing can save you money and stress.
Term Loans
A term loan gives you a lump sum up front and you repay it over a set period with regular payments. This option is often used for clear, one-time needs like buying equipment, renovating a location, or consolidating other debts.
Term loans work best when you know how much you need and how the project will pay for itself over time.
Business Line of Credit
A business line of credit works more like a credit limit. You draw money when you need it and pay interest only on what you use. You can repay and use it again, as long as you stay within the limit and follow the terms.
A line of credit can help with short-term cash flow gaps, seasonal inventory, or unexpected expenses. Many owners like to have a line of credit in place before they need it, so they are not scrambling during a crunch.
For example, you may use a line of credit to cover payroll during a slow month, then pay it down when sales pick up.
SBA-Backed Loans and Microloans
Small Business Administration (SBA)–backed loans are made by lenders but partially guaranteed by the government. The guarantee can make it easier for some businesses to qualify compared to a standard bank loan.
SBA loans are used for many purposes, such as working capital, buying equipment, or purchasing real estate. They often have longer terms than some other loan types, which can reduce the monthly payment.
There are also SBA microloans, which are smaller loans offered through nonprofit lenders. These are often used by newer or smaller businesses that may not yet qualify for a larger traditional loan.
You still need a solid plan and the ability to repay. An SBA guarantee helps the lender manage risk, but it does not replace sound business fundamentals.
Equipment Financing
Equipment financing focuses on items like machinery, vehicles, or other tools you need to operate. The equipment often serves as collateral.
This type of loan can be useful when:
- You want to spread the cost of equipment over time instead of paying cash up front.
- You need to keep more working capital in the business.
You still need to show that your business can afford the payment and that the equipment supports your revenue.
Commercial Real Estate Loans
Commercial real estate loans are used to buy, build, or refinance property used by your business. The property itself usually secures the loan.
These loans can have longer terms and may involve more detailed reviews, appraisals, and documentation. They can be powerful tools if you are ready to own or expand your space and have the numbers to support it.
Invoice Financing
Invoice financing lets you borrow against your unpaid customer invoices. You receive cash now and repay when your customers pay.
This can help with short-term cash flow, especially if your customers take a long time to pay. However, the fees and costs can add up quickly, so it is important to understand the total cost and compare it with other options.
Merchant Cash Advances
A merchant cash advance gives you money in exchange for a portion of your future sales. Payments are often taken daily or weekly based on your card or bank deposits.
These advances are usually fast and easier to qualify for, but they can be very expensive and put pressure on your cash flow. They are often a last resort rather than a first choice.
Using Personal Loans for Business Purposes
Some owners use a personal loan or credit card to fund a business, especially in the early stages. This can be easier to get approved for, but it also puts your personal finances at risk and can blur the line between personal and business expenses.
If you take this route, be very careful. Make sure you understand the interest rate, the impact on your personal credit, and what happens if the business cannot pay you back.
5. Prepare Your Documents and Your Story
Once you know why you need the loan, how much you need, and what type of loan fits, it is time to prepare your documents.
Financial Snapshot
Lenders want to see a clear picture of your business finances. Common documents include:
- Profit and loss (income) statements
- Balance sheets
- Business tax returns for the last few years (if available)
- Bank statements
Work with your bookkeeper or accountant to prepare clean, up-to-date reports. They can help present your numbers in a format lenders expect to see.
Business Plan
An updated business plan shows how your business works, who you serve, and how you make money. It also explains how the loan fits into your plans.
Include sections on your market, competition, marketing strategy, operations, and financial projections. For help, see How to Write a Business Plan.
Business Structure and Registration
Have your business registration documents ready, such as incorporation or LLC paperwork, partnership agreements, and any licenses or permits you need to operate.
If you have partners, you may also need documents that show ownership percentages and roles. For more on this topic, see How to Register a Business.
Collateral and Supporting Information
If you are offering collateral, prepare a simple list that describes the assets and their estimated values. Be ready to provide purchase documents, titles, or appraisals if needed.
Your Story
Numbers matter, but lenders also listen to your story. Be ready to explain:
- How you started the business
- What is working and what you want to change
- Exactly how the loan will help the business grow or stabilize
- How you will make the payments, even if things are slower than expected
When your documents and your story line up, you make it easier for a lender to say yes.
6. Shop Lenders and Compare Offers
You do not have to accept the first offer you see. Different lenders have different products, requirements, and styles of working with small businesses.
Common options include:
- Local banks
- Credit unions
- Community development lenders
- Online small business lenders
Start by having conversations rather than filling out a lot of formal applications right away. Ask lenders what types of loans they offer, what they look for, and whether your situation fits their typical customer.
Key Points to Compare
- Interest rate and whether it is fixed or variable
- Loan term (how long you have to repay)
- Total estimated payment and how often you pay
- Fees (origination, annual, closing costs, etc.)
- Personal guarantee requirements
- Collateral requirements
- Prepayment penalties or restrictions
Use the same loan amount and term when you compare offers so you are looking at a fair side-by-side view.
7. Apply for the Loan and Answer Questions
When you feel ready, complete the formal application with the lender you have chosen. Provide all requested documents in a clear and organized way.
Be honest and straightforward in your answers. If there have been challenges in your past numbers, explain what happened and what you have changed since then.
During the review process, the lender may ask for additional documents or clarification. Respond as quickly as you can. Delays in providing information can slow down or even derail the process.
Remember, the lender is trying to understand two things:
- Can this business repay the loan?
- Is this owner responsible and prepared?
Your job is to show, with numbers and with your story, that the answer to both questions is yes.
8. If You Are Declined: Improve, Adjust, or Look at Alternatives
Not every application is approved. A decline is disappointing, but it can also give you useful information.
Ask for Feedback
Ask the lender, politely, why the application was declined. They may not share every detail, but they can often tell you if the main issue was credit, cash flow, lack of time in business, collateral, or something else.
Improve Your Position
Use this feedback to build a plan. For example, you may decide to:
- Improve your cash flow or profitability before applying again
- Pay down certain debts
- Correct errors on your credit report
- Build a longer track record of consistent revenue
Sometimes the best move is to wait, strengthen the business, and apply later from a stronger position.
Alternative Sources of Funding
If you cannot get a traditional loan right now, there may be other options. Each comes with its own risks and trade-offs.
- Supplier credit or longer payment terms
- Small business grants in your industry or region
- Crowdfunding or pre-selling to customers
- Friends and family loans (with written agreements)
If you are considering grants, see SBA Small Business Grants for an overview of how some programs work.
Be cautious about using high-interest credit cards, pledging your home, or taking on obligations that could create personal hardship if the business struggles. Slow, steady progress is usually safer than quick money with heavy strings attached.
Should You Use a Business Loan Broker?
Business loan brokers match business owners with lenders. Some are paid only if the loan is approved, while others charge fees regardless of the outcome.
A good broker can:
- Help you understand which lenders might be a good fit
- Point out weaknesses in your application before you apply
- Save you time by handling some of the back-and-forth
Before you work with a broker, ask:
- How are you paid? By me, the lender, or both?
- Do you work with many lenders or just a few?
- What types of loans do you usually place?
- Will you show me all offers you receive, not just one?
If the fees seem high, the terms look confusing, or you feel pressured, step back and take your time. You want someone who is on your side, not just chasing a commission.
Simple Checklist Before You Apply
Use this quick list as a final review before you apply for a business loan:
- I know exactly why I need the loan and how it will help the business.
- I have checked my cash flow and existing debt.
- I have reviewed my credit reports and corrected any errors.
- I have estimated how much I truly need and tested the payment.
- I have chosen the loan type that fits my situation.
- My financial statements, tax returns, and bank statements are organized and up to date.
- My business plan is current and shows how I will use the funds.
- I have a shortlist of lenders and understand their basic requirements.
- I am prepared to answer questions honestly and clearly.
You do not need everything to be perfect, but the more prepared you are, the smoother the process becomes.
Helpful Tools and Resources
For more background and planning tools, you may find the following helpful:
U.S. Small Business Administration – Loan Programs Overview
SBA – Calculate Your Startup Costs
IRS – Topic No. 505, Interest Expense
Use these tools along with your accountant or financial advisor to build a plan that works for your specific situation.