How to Get Your Business Loan Application Approved

How to get approved for a business loan

For the best chances of getting your business loan application approved, follow these steps.

1. Research lenders to discover the best ones for your business. 

Before applying for a business loan, you must go beyond finding lenders with favorable interest rates and terms. You must work with lenders that are likely to approve your application. You don’t want to go through this process and pay application fees only to discover that you’re not a suitable candidate for a particular lender. For example, if you’re in a specific industry or have subpar credit, you may need a lender that provides high-risk business loans.

2. Decide what kind of business loan — and how much money — you need.

Many different kinds of business loans exist, including the following: 

• Small Business Administration (SBA) loans
• Private loans
• Term loans
• Line of credit
• Invoice factoring
• Merchant cash advances (MCAs)
• Secured and unsecured loans
• Loans from alternative lenders
• Microloans

You’ll need to decide which loan type is best for your needs and circumstances and how much money you can afford to borrow. (We’ll dive deeper into the various types of business loans later in this article.)

3. Understand a lender’s qualification requirements.

Every lender has minimum business loan qualification requirements related to the following factors:

• Cash flow: Lenders want to ensure you can make your monthly payments, so they look at how well you manage cash flow. They want to know if you have more money coming in than going out. “Be ready to show a history of steady, strong cash flow or a business plan with a strong likelihood of sufficient cash flow to repay the debt,” advised Rob Stephens, founder of CFO Perspective.
• Credit score: Your business credit score (or an owner’s personal credit score) dictates whether you’ll be approved for the loan and what interest rate you’ll receive. The better your credit score, the less interest you’ll pay. The worse it is, the more it will cost to borrow money. Lenders will likely pull your credit report when you apply for a loan, which could help or harm your chances of approval. “Maintain a good personal credit score,” Stephens recommended. “Banks will require a personal guarantee on the debt, so good personal finances improve the odds of getting a loan.” 
• Debt-to-income (DTI) ratio: Lenders often also examine the DTI ratio, which measures how much money you bring in compared to how much money you owe. Your DTI ratio demonstrates how leveraged your business currently is, so a lower ratio suggests your business has a better ability to repay additional financing.

When considering a lender, understand all its qualification requirements. If you don’t qualify for any reason, move on to a more suitable lender.

4. Gather your business loan documentation.

Lenders require ample documentation from loan applicants to assess their lending risk. 

“To apply for a conventional small business loan, you’ll first need to share all of your financial details, including your personal financial information, your future growth plans and precisely how you’ll use the requested capital,” explained Farhan Ahmad, group chief executive officer for PayNet.

Ensure you have all necessary documents in hand, including the following:

• Your company’s financial statements for the past three to five years 
• Up to one year’s worth of corporate bank statements 
• Your business’s employer identification number
• Owners’ Social Security numbers and other personal information, such as birth dates and contact information
• Business articles of incorporation
• Business licenses and permits 
• Franchise agreement (if applicable)
• Business plan
• Personal and business tax returns for the past three years
• Income statement and cash flow statement
• List of current accounts receivable
• Schedule of business debts and accounts payable
• Documentation of any previous business bankruptcies or bounced checks
• Annual profit and revenue
• Copies of commercial leases

If you’re applying for an SBA loan, you will also need the following:

• SBA Form 1919
• SBA Form 413
• Profit and loss statement (current and for the past three years)
• Projected financial statements for the upcoming year with an explanation of how you hope to achieve this (you should have this already in your business plan)
• List of affiliates and subsidiaries with details (if applicable)
• Written narrative about your company’s history and how you got to this point of needing funding
• List of other business loans you’ve already applied for
• Proof of equity (if you’re buying an existing business)

“Some applications will require even more information,” Ahmad noted. “Generally speaking, low-cost, long-term loans have more paperwork than high-cost, short-term ones.”

Having all this information on hand will ensure you can provide the lender with everything it needs. Your thoroughness can shorten the loan application process and give you a better chance of approval.

5. Apply for the loan that best meets your needs.

After researching lending options for which you qualify, deciding on a specific loan type and gathering your documentation, it’s time to apply for your top choice loan. Complete the application accurately, thoroughly and to the best of your knowledge.

6. Answer follow-up questions.

The lender may contact you after you apply to ask you follow-up questions. Answer promptly and send any additional documentation it requests. 

7. Wait for approval.

Lenders vary widely when it comes to business loan approval wait times. They must examine your financial statements, including your annual revenue, tax returns and existing loan balances, to determine whether your business can support new debt. They will also consider your credit history and ensure you meet their minimum credit score, a threshold that varies by lender. All of this can take some time.

“If you’re applying through a bank, you’ll then need to pay the application fee and wait for a period of two to four weeks to see if you’ve been approved,” Ahmad explained. Some loans can take 90 days or longer. 

If the loan is approved, you’ll receive your funding.

8. Fix any issues the lender identifies.

The lender may contact you to pinpoint problems with your loan application as it currently stands. For example, it might say you must reduce your current debt load, improve your credit score or have more cash in the bank to be considered. 

Addressing and fixing these issues to qualify for the loan will likely take time. You can either resolve the issues and reapply, apply with another lender with less stringent requirements or pursue alternative funding sources, such as applying for a business credit card or pursuing credit card receivables financing.

What to do if you aren’t approved for a business loan

If you aren’t able to get approved for a business loan, you can work to try to improve your financial or credit situation or consider alternative funding. Here are steps to take if you are turned down for a loan.

1. Find out from the lender why your loan was denied

The first thing you need to do is to find out why your loan was denied. The lender will send you a letter detailing why they could not approve your loan. 

Reasons for denial may include:

• Incomplete or incorrect information: In most cases, lenders will make sure you have all the paperwork you need before loan submission. But if something is missing, you might be denied.
• Low or no credit score: A low credit score might not indicate credit delinquency. It may be a lack of business credit instead. However, high revolving balances or late payments may lower your company’s score, which could cause a denial.
• Insufficient income/cash flow: If your business income isn’t high enough to cover business expenses, your loan may be turned down. Your DTI ratio should be below 50% if you want to be approved for a loan.
• Lack of collateral: The lender might want your loan secured and, if you can’t provide collateral, the loan may be turned down. Also, if the collateral you provide doesn’t have sufficient value for the loan amount, that can result in a rejection.
• Business plan: Your business plan is especially important if you are a new business or applying for a large business loan. The lender wants to see how you plan to grow before lending your company money.
• Lack of history: Your business may be too new or you may not have a long history of bringing in revenue. The longer your business has existed and the longer it has been profitable, the better chance you will be approved.
• High-risk industry or legal issues: Depending on what your business does, a lender might not be allowed to approve your loan. Even if your line of business isn’t prohibited from borrowing, it may be considered high risk by your lender.

2. Try to correct any issues noted by the lender and reapply

If the issues that caused you to be denied can be easily corrected, you can reapply for the loan once that has been done. If the issues take longer, you must determine whether you can afford to wait to reapply. If the financial need is immediate, you may have to consider alternative forms of funding.

3. Consider alternate forms of business funding

If a loan isn’t an option, other ways to get immediate funds might allow you more time to rectify issues with your lending profile.

Other funding options include:

• Borrow from friends and family: You may be able to take out a loan from friends or family. Following IRS guidance with these types of loans is important to ensure compliance.
• Crowdfunding: Several great crowdfunding platforms are available, including Kickstarter and Indiegogo. However, you may need to provide some reward or equity to supporters in this fundraising effort.
• Small business grants: Some organizations and government entities offer grants that don’t have to be repaid. These grants are especially useful for businesses too new to qualify for loans.
• Financial technology lenders: Online, alternative lenders could be more willing to lend than a traditional bank. Do your research to ensure it is a legitimate website and you aren’t paying excess fees or a high interest rate.
• Venture capital or angel investors: These are companies or individuals willing to help fund your business, usually in exchange for some equity in the company. This will require a strong business growth plan.

How does a small business loan work?

While small business loans vary in application processes and specifics, typical term loans (loans with a specific repayment schedule) all involve costs, terms and a loan structure.

Small business loan costs

Small business loan costs include the following: 

• The loan amount: The amount of money you’ll borrow in your small business loan can vary significantly. For example, you could take out a microloan for a few thousand dollars or borrow a much more substantial amount — surpassing $1 million — in a term loan. 
• Interest rates: Generally, small business loan interest rates range from 6% to 15.5%, depending on the lender’s requirements and the borrower’s creditworthiness. 
• Additional fees: Beyond the interest rate, most lenders charge other fees, such as:
  • Application fees
  • Origination fees
  • Monthly and annual maintenance fees
  • Late-payment fees
  • Prepayment penalties

Loan terms 

Small business loan terms vary by lender. Some offer only short-term loans of no more than 24 months while others will let you repay loans for many years. When determining which loan is right for you, consider why you are borrowing the money and how far in the future the payback is. You don’t want to end up repaying a loan on something that lost its value long ago.

In our review of Fora Financial, we explain why this lender is a good option for short-term loans. Borrowers may do better with an SBA loan if they want to repay it over an extended period. 

Loan structure

Here’s an example of the structure of a typical small business term loan:

• A lender approves a borrower’s loan request for $10,000.
• The term of the loan is one year.
• The APR on the loan is 10 percent.
• The borrower must repay the principal amount of $10,000 plus approximately $550 in total interest over the life of the loan.
• The loan will be repaid in 12 monthly installments of about $880.

This is a highly simplified example of a small business loan, but the general structure applies to all term loans.

Types of business loans to consider

Choosing the right type of business loan is critical for your business’s long-term viability. Any loan you accept should have reasonable fees and repayment terms you can handle.

Here’s a breakdown of popular business loan types.

Traditional loans (bank and SBA loans)

• Collateral requirement
• Good credit requirement
• Longer turnaround for funding
• APR fixed by the government

Most organizations look to traditional loans and SBA loans first. If you have good credit and proven assets, these loans provide crucial benefits. Notably, bank loans funded through the SBA have competitive interest rates. According to the SBA, interest rates range from 8% to 15.5%. Generally, SBA loans range in value from $500 to $5.5 million.    

The SBA’s 7(a) loan program is a popular option for many businesses. While many small business loans require a personal guarantee from the borrower, the SBA guarantees these loans. With an SBA guarantee, borrowers who would otherwise be denied a loan may be able to secure funding. However, securing funding through the SBA 7(a) loan program takes time and requires solid annual revenue, a good credit score and at least two years in business.

Online lenders

• Variable APR
• Less stringent credit requirements
• Lower maximum loan amounts
• Quicker loan processing

If you can’t get a business loan from a traditional bank or need fast funding, online lenders may be a good option. Online loan companies are ideal for companies searching for quick approval and loan processing. They can also help those with less-than-stellar credit histories. 

Standard APRs are likely to be higher than traditional loans, but these lenders may not require collateral. Application processing and approvals are faster with online lenders than with traditional banks, which is crucial if you need to improve cash flow quickly.

Alternative loans

• Stricter loan terms
• Short repayment schedules
• Fast loan processing
• Flexible credit requirements

Alternative lenders generally provide fast approval and funding but charge higher rates. They also tend to have simple online applications and more latitude regarding application approval. Alternative lenders typically provide short-term loans, meaning you’ll likely have to pay higher installments than you would with a conventional bank loan.

Alternative lending opportunities are growing in popularity and include the following: 

• Peer-to-peer (P2P) loans: A P2P loan is an unsecured loan with a fixed interest rate. These loans provide short-term funds with an average repayment time of between two and four years. The benefits of P2P loans include no application fees, fast processing and flexibility with credit score. 
• MCAs: A MCA is a lending program intended for organizations with a high volume of credit card transactions. It is a very short-term loan, with repayment completed in less than three months. To repay the loan, a percentage of your daily credit card transactions is paid directly to the credit card provider. For instance, if you make $350 in daily sales and your lending term is to pay 10 percent of daily sales, the lender would take $35.
• Invoice factoring: Invoice factoring is a lending program that allows you to be paid upfront for any unpaid invoices. The lender pays you for the invoices and takes a percentage. Repayment is usually done in full within three months after clients pay the invoices.

Microloans

• Short-term lending
• Collateral required
• Good credit needed
• Competitive interest rate

Microloans are short-term loans of smaller amounts than traditional loans. Microloans provide a low annual percentage rate (APR), but you must have a solid credit history and collateral. Many types of microloans exist. For example, our review of Accion explains how this lender provides microloans starting at $500. However, the SBA’s microloan program is particularly well known for favorable terms for borrowers. 

According to the SBA, the average microloan amount is around $13,000. The program specifies what the funds can be used for, including supply inventory, working capital, machinery and equipment purchases and rentals and business furniture.

Is a small business loan right for you?

Before applying for a loan, get clarity on how much you need and what these funds will be used for. Loans are essential tools for entrepreneurs, but if they aren’t managed wisely and strategically, they could become an undue financial burden. 

Ask yourself the following questions to ensure a small business loan is right for you: 

• Why are you borrowing money? It’s essential to understand why you are borrowing money before selecting a loan product. “Is it for day-to-day expenses like inventory and employee salaries?” Ahmad said. “Are you a first-time entrepreneur in your first year of business, in need of a startup business loan? Are you hoping to expand your business, perhaps by adding another location? Or do you just need a safety cushion?”
• What type of loan meets your needs? Once you know why you’re borrowing money, you can determine which loan is right for you. “For example, for day-to-day expenses, you might need a smaller loan with a longer repayment period, but for expansion, you might require a larger loan with a shorter repayment period,” Ahmad explained.
• Can you meet your loan obligations? Your repayment obligations should be at the forefront of your mind. Small businesses without a repayment strategy based on their actual financial metrics could run into debt trouble, which can spiral when late penalties are added to your past due amounts. “To make sure you’re able to pay back a loan on time, I recommend setting up an airtight budget for business expenses,” Ahmad advised. “If you keep close track of how much money you’ll need each month for all of your expenses — from inventory to paychecks to electrical bills — you’ll be better prepared to set aside the requisite repayment amount each month and, therefore, more likely to pay it back on time.”

A matter of demonstrating reliability

If you need a small business loan and have good personal and business credit scores, thorough financial documentation, a history of strong cash flow and a manageable DTI ratio, you should have little trouble getting approved. However, securing a small business loan might be more challenging for businesses lacking in these areas. Still, with the proper documentation and guarantees, it’s possible.

If you discover that a conventional small business loan is unlikely, consider an alternative lender. However, be mindful that these lenders typically charge much higher rates, so ask yourself if it’s necessary before taking out a loan.

Securing any loan is a matter of demonstrating reliability to the lender. If you can show you can repay your loan with interest in the allotted time frame, your application will likely be approved on the first pass.

Matt Sexton and Jennifer Dublino contributed to this article. Source interviews were conducted for a previous version of this article.