How To Apply for a Business Loan

What you need to know to get a loan for your business

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A business loan may come in handy if you own or manage a business. Depending on the loan type, you can use the funds to cover startup costs, marketing, inventory, payroll, commercial real estate, and anything else you need to run or grow your business.

Business loans or lines of credit account for 76% of the financing small businesses sought out, according to a 2022 report from Fed Small Business, a project of the U.S Federal Reserve.

Below, we’ll dive deeper into the types of business loans, what to watch out for, and how you can apply for one.

Key Takeaways

  • A small business loan can help you cover a variety of business-related expenses.
  • Many business loan types are available, including term loans, SBA loans, and business lines of credit.
  • Before you apply for a small business loan, gather the right documents and shop around to find the best option for your unique needs.

Should You Get a Business Loan?

The versatility of business loans might benefit you in several situations. For example, If you’re a new business, a small business loan can:

  • Build business credit
  • Help manage cash flow
  • Fund startup costs such as equipment and inventory

If you’re an established venture with plans to expand, a small business loan can help you or quickly build an emergency fund to cover unexpected expenses.

Avoid using a small business loan to pay for a depreciating asset that won’t increase in value or generate income. You should also avoid small business loans with high fees, interest rates, and unfavorable loan repayment terms. A small business loan should help increase the future value of your business rather than decrease it.

Types of Business Loans

Not all small business loans are created equal. There are many different types.

Term Loans

When most people think of business loans, term loans come to mind first. With a term loan, you receive a lump sum of money upfront and repay it over time, usually through fixed monthly payments or installments. Term loans typically are unsecured, meaning you don’t need collateral such as commercial property or equipment to take them out.

SBA Loans

The U.S  Small Business Administration offers a variety of loans partially guaranteed by the SBA and issued by private lenders; these loans may be available to businesses banks won’t lend to due to risk. Programs include 7(a) loans for a wide variety of purposes, 504 loans to repair or purchase assets, and microloans of $50,000 or less.

Business Line of Credit

A business line of credit is a flexible loan that works like a credit card. It can be secured or unsecured. Upon approval, you can withdraw funds up to a set credit limit. You then pay interest on what you’ve borrowed. A business line of credit is ideal if you’re a seasonal business, need to pay for working capital, or have emergency cash at your disposal. You pay interest on the credit used.

Equipment Loans

Equipment loans are exactly what they sound like: loans to help you pay for new or used business equipment, such as heavy-duty machinery, computers, and other types of technology. Since the loans are secured to the equipment and the lender can seize the equipment if you default, equipment loans may be easier to acquire.

Other Business Loans

Other business loans you might investigate include:

  • Commercial real estate loans: Loans to purchase land or commercial buildings you need.
  • Business auto loans: Loans to buy cars, vans, and trucks your business needs.
  • Specialized loans: Medical-practice loans help physicians start a business, while farm loans help create, expand, or maintain a family farm.
  • State loans: Some states offer small business loans, including for businesses facing difficulties acquiring financing.

What You Need To Apply for a Business Loan

Most lenders will request certain documents and information when you apply for a small business loan. Before you begin the application process, ensure you have the following on hand:

  • Legal documents: Business licenses and registrations, articles of incorporation, franchise agreements, and commercial leases
  • Business plan: Outlining who you are, what you do, and how you intend to use the funds to meet your goals
  • Income tax returns: Business returns and personal tax returns of owners
  • Financial statements: Balance sheets, income statements, and statements of cash flow; accounts receivable and payable; financial projections
  • Resumes: To demonstrate the management team’s experience
  • Business credit report: To showcase your business history regarding borrowed money


SBA loans may require even more documentation, including personal financial statements, and a history of your business and its challenges.


Some business loans require collateral, which is something valuable your business owns. This may be equipment, inventory, invoices, or commercial real estate. If you fail to make your loan payments, the lender can take your collateral and sell it to recoup some of their losses.

A collateral secured loan is only a good idea if you’re confident you can repay it according to your contract’s terms. However, a loan secured with collateral will also usually offer lower interest rates.


If you’re a startup or newer business with a limited credit history, you might find it easier to qualify for an unsecured loan that requires collateral.

Shopping Around for the Best Loan

Small business owners frequently state that challenges with lenders include a difficult application process, long wait for credit decisions or funding, high interest rates, and unfavorable repayment terms, according to the 2022 Fed Small Business report. Compare interest rates, repayment terms, fees, and penalties of all the loans you find, so you can borrow the ideal product. Ensure you can fit new loan payments into your monthly budget.


The three most common loans to get approved for are auto and equipment loans, merchant cash advance, and business line of credit.

How Much Will I Get From a Loan?

Lenders want to ensure you can make regular payments on your loan using regular income or revenue, along with your credit history. As a result, amounts can differ significantly—the SBA lends a range from $500 to $5.5 million. The amount you’ll qualify for will depend on a number of factors including:

  • Lender
  • Loan type
  • Your personal or business credit score
  • Annual revenue
  • Bank statements and balance sheets
  • Collateral or assets
  • Time in business

In general, the criteria lenders are looking for include:

  • A higher credit score
  • An average daily balance of more than $10,000
  • Low liabilities on credit cards or other loans
  • Debt service coverage ratio less than 1.25 or 1.35 times business expenses

Loan approvals dropped after the pandemic—only 68% were approved in 2021, compared to 83% in 2019. If you’re unhappy with the denial or the approved amount, focus on improving your credit and reapply at a later time. To do so, pay your suppliers and vendors early, monitor your credit reports and correct any errors or inaccuracies, and keep debt levels low.


You might need to ask someone to be a co-signer for your business loan.

Applying for a Business Loan: A Step-by-Step Guide

Once you’re ready to apply for a small business loan, follow these steps.

  1. Shop Around

    Research and explore various lenders and loan products. You can look at government organizations such as the SBA, credit unions, online lenders, and large and small banks. Alternative funding sources may be found through nonprofit lenders and crowdfunders. Find a lender that offers the lowest rates and best repayment terms, and watch out for hidden fees that can increase the overall cost of your loan.

  2. Gather Your Documents

    You’ll need various business and financial documents to apply for a business loan. Ask your potential lenders which documents you’ll need. Collecting the proper documentation in advance could speed up the application and approval process.

  3. Apply

    After choosing a lender, it’s time to apply. Before you submit your application, double-check it for errors, as they can lead to delays with approval and funding. Respond when lenders reach out to you with document requests; doing so demonstrates you’re a serious borrower and may speed along the application process.

  4. Get the Funds

    If you’re approved, wait for the distribution of funds. While online lenders offer fast funding, the SBA and banks may take days or weeks to send funds. Don’t be afraid to check in with the lender if it’s taking longer than expected.

How To Repay Your Business Loan

Once you receive your loan, it will be your responsibility to repay them. In general, you should repay your business loan similarly to a personal loan. Keep track of your debts and payments, and find ways to increase business income and reduce spending.

You repay term loans over time through fixed monthly payments. If you chose a line of credit, you could make a minimum monthly payment. When you repay the amount you’ve drawn plus any interest, those funds will be available for you to use again.

Do your best to pay off your loan on time or your credit will take a hit and make it difficult for you to secure business financing in the future. You can also repay your loan early to reduce debt and gain peace of mind. To do so, make biweekly payments, round up your monthly payments, or make one extra payment each year.

Frequently Asked Questions (FAQs)

What questions should I ask when applying for a business loan?

When you apply for a business loan, ask yourself how much money you need, what your credit looks like, and how you’ll use the funds. Also, figure out if you’ll be able to make payments based on the terms in the contract. Prepare for lender questions around credit, collateral, and capital as part of your loan proposal.

How long should I wait after getting a business loan to apply for a mortgage?

Commercial real estate loans or business mortgage loans undergo even more review than a home mortgage loan. If you plan to take out a business mortgage loan to buy, renovate, or refinance commercial property, remember that a lender will look at your complete financial picture. This includes your net operating income divided by your annual debt with interest and principal. The lender will investigate whether you have the ability to repay the loan and aren’t overextended. It’s usually best to pay down existing debt before taking out more.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
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