The Ultimate Guide to Applying for a Business Loan

If your business has reached a point where it needs an infusion of funds to grow, you may be in the market for a business loan. A business loan can help a struggling small business establish itself better or help a thriving company expand its line of products, open an additional location, move to a more significant site, hire new team members, or purchase expensive equipment.

Here's all you need to know about applying for a business loan:

Make sure your credit is in order

Before applying for a business loan, check your personal and business credit health.

A personal credit score is measured in the hundreds, with scores ranging from 300-850. A score ranging from 580-669 is considered fair, 670-739 is good, 740-799 is very good, and 800-850 is considered exceptional. You can check your credit report once a year at no cost from AnnualCreditReport.com. Review your score for any inaccuracies or fraudulent charges, and dispute these immediately through any credit bureau websites: Experian, Equifax, or TransUnion.

Business credit scores are measured differently.

Experian uses Intelliscore Plus as its credit scoring model, with scores between 1 and 100.

Equifax assigns each business three different scores: a payment index score, which assesses the company's payment history with a score ranging between 0 and 100; a credit-risk score evaluating how likely it is the business will not meet on-time payments with a score ranging between 100 and 992; and a business failure score measuring how likely a business will fail, with the score ranging between 1,000 and 1,880.

Business credit scores are also measured by the Dun & Bradstreet Corporation. The D&B score range is 0 to 100, and the critical factor it considers is the timeliness of payments made to previous creditors. To receive a D&B score, a business must file for a free DUNS number, and information about the company's borrowing habits must be provided by a minimum of four lenders or suppliers.

Finally, the FICO Small Business Scoring Service (SBSS) score ranges from 0 to 300. It considers variables such as the business owner's credit score, the company's payment history, the number of employees, and the age of the business.

If your personal and business credit scores are low, improve your credit before applying for a loan by meeting your monthly payments on time and keeping credit utilization low.

Update your business plan.

Be sure to have a thoroughly crafted business plan to show a prospective lender before applying for a loan. The plan should include:

  • Details about how the company intends to use the funds from the loan.

  • The anticipated increase in revenue.

  • Strategies for repaying the loan.

Consider arranging supplemental collateral.

Lenders generally prefer to reduce the risk of a borrower defaulting on a loan by securing collateral. This usually takes the form of the company's accounts receivable, equipment, or other valuable assets for business loans. The lender can seize the collateral if the business fails and the borrower cannot repay the loan.

When applying for a business loan, you can offer additional collateral to the lender, such as personal assets, like real estate or other valuables. This will make you more likely to qualify for the loan and may bring down the interest rate on your loan as well.

Organize your personal and business documents.

You'll need the following documents and identifying paperwork to apply for a business loan:

  • Photo ID

  • Accurate monthly financial statements from the past two years

  • Business License

  • Any commercial leases

  • Business insurance plans

  • Payroll records

  • Incorporation documents

  • Current financial obligations

  • Three months of bank statements

  • Personal and business tax returns

  • Collateral, if required

Research potential lenders

It's best to research potential lenders before applying for a loan. Learn about each lender's eligibility criteria to anticipate whether you will qualify for a loan. Look up average loan interest rates for each lender, as well.

As you complete this step, choose a general source for your loan.

Startups may not qualify for a large loan and can be better off pursuing a microloan or a small, short-term loan offered by a nonprofit lender. These loans can often be applied for online.

If you need a larger loan, consider applying for a business loan through a credit union. A credit union will offer you personalized service, looser qualifying criteria, and a competitive interest rate that will help you keep more money in your business throughout the life of the loan.

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Submit your application

Once you've gotten all your paperwork in order and chosen a lender, you're ready to apply for a loan. Depending on your lender, you may be able to begin and complete the application process online. Be patient; loans can take one day to several months from funding application. Luckily, you’ll soon have the funds to take your business to the next level.

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