You’ve put in the work and developed a business plan, but do you have the funding to make your next stage happen? Whether you have a brick-and-mortar store or operate virtually, growth often comes with new expenses, from equipment and inventory to staffing and expanded space.
Securing a small business loan is not always straightforward. Below, we cover common financing options, how lenders evaluate applications, and steps that may help improve your odds of approval.
What Is a Small Business Loan and How Is It Used?
A small business loan provides capital that can be used to support specific business needs. Depending on the loan type, funds may be received as a lump sum or accessed through a line of credit.
Small business loans are categorized by the following types:
- Small Business Administration (SBA) Loans: This flexible, government-backed financing option can support a variety of business needs. Features such as lower down payment requirements and longer repayment terms can make SBA loans attractive for growing businesses. Common programs include SBA 504 and 7(a) loans.
- Traditional Commercial Loans: This financing solution is designed for larger, more established enterprises seeking to finance targeted projects or efforts. Options include commercial property, equipment or permanent working capital.
- Lines of Credit: You’ll borrow funds from a credit limit approved by a lender, paying interest on the amount withdrawn. Often used for working capital, seasonal fluctuations or unexpected expenses, a line of credit provides flexible access to funds when needed. Principal needs to be paid to zero annually for 30 days.
Small business loans can go toward a range of improvements, including:
- Purchasing or upgrading equipment
- Buying office space or a storefront
- Improving or expanding existing facilities
- New construction
- Acquiring an existing business
- Partner buyouts
- Refinancing real estate
- Adding more or diversifying inventory
- Hiring staff
How Do Lenders Evaluate Small Business Loan Applications?
Lenders give preference to businesses with a strong likelihood of paying back a loan. Their decision is often based on:
- Business and personal credit history
- Business operating history
- Cash flow
- Existing and projected financial performance
- Capital investments
- Collateral
- Economic conditions
- Purpose of the loan
Lenders may also consider:
- Industry trends and market demand
- Reasonableness of the projections and business plans
How to Prepare Your Application
Show lenders that you’re ready to grow by:
- Preparing an Income Statement: With this document, lenders can determine the profitability of your venture and how large a payment you could manage. As a baseline, prepare to showcase your sales volume, cash flow and how you turn a profit.
- Budget: A detailed budget helps demonstrate how your business manages expenses, allocates resources and plans for future growth. It also helps lenders understand where financing will be used and how it may support operations.
- Income Tax Returns: These documents help verify your business’s profitability and provide insight into its overall financial performance. Lenders often use tax returns alongside financial statements and cash flow information when evaluating repayment ability.
- Business Plan: How do you intend to use the loan, if approved? Connecting your goals to clear outcomes, projected profits and market competition helps the lender understand if you have a stable path forward and where funding will help.
- Collateral: Just as with personal loans, collateral helps you secure a small business loan. With your application, provide an itemized list of business assets, including their current value, liens, and documentation that supports ownership. Rather than risk personal assets, many business owners use their equipment, inventory or facility to obtain funding.
- Personal Finances: Prepare a personal financial statement of your personal assets and liabilities.
Frequently Asked Questions About Small Business Loan Approval
What credit score do I need for a small business loan?
Requirements vary by lender and loan type, but stronger credit generally improves approval odds and may help secure more favorable terms.
Can a new business qualify for a loan?
Some lenders offer financing options designed for startups, although approval may depend on personal credit history, available collateral and the strength of the business plan.
How long does it take to get approved for a small business loan?
Approval timelines vary based on the lender and the type of financing requested. Some loans may be approved within days, while others can take several weeks.
What documents are typically required for a small business loan application?
Lenders commonly request financial statements, tax returns, bank statements, business plans and information about available collateral.
Grow Your Business with Ion Bank
Our lending solutions can help support your business goals. To learn more about our full scope of business products, contact Ion Bank today.