How to get a business loan: A complete guide for small businesses

Running and managing a business is an incredible journey, but sometimes, cash flow can be unpredictable. Business owners can take out a loan to advance their venture forward or handle an unexpected expense. 

Understanding the loan landscape is crucial, whether you’re starting from scratch, expanding operations, or navigating a temporary obstacle.

This blog will explain the entire process, from different loan types and applications to managing repayments.

What is a business loan? How do they work?


A business loan is a financing option where a business borrows money from a lender to pay certain expenses. This can include a new project, expanding your business, hiring staff, etc.

You then need to repay the loan over a set period with interest. It’s similar to a car loan but for your business. The loan terms can vary depending on the lender and your credit rating.

Loans present an excellent opportunity for companies on the rise. They can give you access to time-sensitive deals on assets or unexpected business openings that can push your venture forward.

What do you need to apply for a business loan?


When applying for a business loan, lenders require specific documentation and information to assess the financial strength and financial stability of the business. These may include:

  1. A business plan. This is your business’s roadmap. You’ll want to outline your business structure why you need the loan and how you plan to use it to boost your business. It’s your chance to showcase your vision and strategy.
  2. Financial statements. You’ll need to provide detailed financial statements, including income statements, balance sheets, and cash flow statements. These give lenders a peek into your business’s financial health and ability to repay the loan.
  3. Your credit history. Both personal and business credit history come into play here. Lenders want to see if you’ve got a good track record of paying back debts. So, gather up those credit reports and be ready to lay them out.
  4. Legal documentation. You’ll need to gather all those legal documents – business licences, incorporation articles, and any contracts relevant to the loan application. It’s all about showing that you’re legit and above board.

Understanding the different types of business loans 


Secured business loan

Picture borrowing a friend’s car and leaving your phone as collateral for security. Secured loans operate similarly. You borrow funds backed by your business assets (like property or equipment). If repayment is not made, the lender can claim these assets. These loans often boast lower interest rates due to reduced risk.

Unsecured business loan

Think of unsecured loans as borrowing from a trustful family member who relies on your promise to repay without offering security. These loans depend on your business’s credit history and growth potential. They’re quicker to process but typically carry higher interest rates, reflecting increased risk for the lender.

Types of lenders 

Banks

Traditional banks offer stability and security but be prepared for stricter eligibility requirements and slower processing times. Ideal for larger loans or companies with established financials.

These sturdy institutions like long-term commitments and established financials. They offer:

  • Term loans are ideal for large, one-time expenses like equipment purchases or property renovations.
  • Flexible credit lines for ongoing expenses or handling seasonal variations.

Good for: Businesses with good credit history, regular cash flow, and larger loan requirements.

Online and alternative business lenders

Think speed and flexibility! They often cater to smaller businesses and start-ups, with faster approvals and easier online applications. Interest rates can be higher, so compare closely.

They typically offer the following:

  • Term loans with faster approvals for needs like marketing or inventory purchases
  • Short-term loans for urgent needs, but with high-interest rates
  • Merchant cash advances for a boost against your future credit card sales; fees will apply

Good for: Start-ups and businesses seeking small loans with quick approvals.

Peer-to-peer lenders

For P2P lending, you borrow directly from individual investors, building a community feel. However, smaller loan amounts, potential credit score impacts, and less regulation than traditional lenders require careful consideration.

Good for: Start-ups with strong community connections and established businesses seeking alternative options.

Examples of matching loans to business type and needs

  • Restaurant: A line of credit from an online lender to manage seasonal fluctuations or a short-term loan for a temporary equipment repair.
  • Medical Practice: An industry-specific loan from a healthcare lender for new medical equipment or technology upgrades.
  • Renewable Energy Start-up: A P2P loan leveraging your community connections or a term loan from an eco-focused lender for project expansion.

Factors to consider when choosing a lender for your business

Interest rate

The interest rate is the cost you pay to borrow money from a lender. This is usually a percentage of the loan amount, paid on top of the original borrowed amount (the principal). Think of it as a rental fee for using the lender’s money.

To decide which interest type is right for you, consider your risk capability and loan duration:

  • Variable rates can increase or decrease based on market conditions, potentially leading to lower or higher payments depending on the trends. This can be beneficial for longer loans with higher risk capabilities.
  • Fixed rates remain constant throughout the loan term, offering predictability and budgeting ease. However, they might be slightly higher than variable rates. This is ideal for shorter loans with low-risk exposure.

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Often overlooked, these fees can be a significant part of your overall borrowing cost. Look out for these terms when reviewing loan terms:

  1. Origination fee: This one-time upfront charge, typically a percentage of the loan amount, covers the lender’s processing costs. Negotiate, if possible, and factor it into your total loan cost.
  2. Processing fee: Another upfront charge to cover administrative tasks like verifying your information and preparing loan documents. The amount can vary depending on the lender and loan details.
  3. Late payment penalties: These are costly charges incurred for missed or late payments, adding a painful bite to your loan. Understand the penalty structure and avoid them at all costs!
  4. Underwriting fee: This fee covers assessing your credit score and risk profile. It might be a flat fee or based on the loan amount.
  5. Documentation fee: Some lenders charge for preparing and handling loan documents. Ask if it’s included in other fees or a separate charge.
  6. Prepayment penalty: If you pay off the loan early, some lenders might charge a fee, impacting your financial flexibility. Read the fine print carefully!

Remember to always ask questions about any additional fees, their purpose, and if they’re negotiable. Compare offers from different lenders and read the fine print to find potential hidden charges.

Repayment terms

Repayment terms define when and how often you’ll pay to return the borrowed funds. Choosing the proper term depends on your budget, loan purpose, and projected income. Longer terms offer smaller monthly payments but accumulate more interest, while shorter terms require higher payments but pay off the loan faster.

Loans can be paid monthly, quarterly, or even annually. Pick a schedule that aligns with your earnings schedule for better cash flow management. Some loans have flexible schedules, while others have fixed options.

Some lenders offer a grace period where you only pay interest or no payments for a short initial period. This can be helpful for businesses needing time to ramp up before full repayment kicks in.

How to apply for a small business loan

1. Calculate your eligibility

Start by calculating your exact loan needs. What specific goals do you aim to achieve? Whether it’s acquiring new equipment, expanding inventory, or launching marketing campaigns, understanding your precise requirements is crucial.

Be realistic about your financial limits. Don’t overwhelm yourself by applying for a loan you can’t comfortably repay. Remember, responsible borrowing is key to sustainable growth.

2. Get your credit score in good shape

If you use credit cards for expenses, take a close look at your credit score. If it could be better, consider strategies to improve it. Remember, a strong credit history increases your approval chances and may result in lower interest rates.

3. Prepare a comprehensive business plan

In the business plan, you must include projected financial statements, such as income statements, cash flow statements, and balance sheets. Provide realistic projections based on market research and your own historical financial data.

4. Manage the loan approval process 

Once you’ve identified promising candidates, begin filling out applications. Remember, transparency and accuracy are key. It will be important to build trust with potential lenders. Don’t be afraid to follow up and negotiate terms if necessary. Remember, open communication can lead to more favourable outcomes.

5. Repay the business loan

Congratulations! You’ve secured your business loan. Now comes the crucial task of managing and repaying your loan responsibly. Make sure you fully understand the terms, and pay your instalments on time to avoid late fees. If your financial situation changes, inform your lender promptly. 

6. Seek professional advice or support 

With loans, you have to 100% understand the terms and conditions. Making assumptions can lead to mistakes that can impact the sustainability of your business. If there’s anything you’re unsure about, consult with a professional. A financial advisor or an accountant can provide valuable insights into the best financing options.

Ready to obtain your first small business loan?

By following these steps and approaching the loan process with careful planning and preparation, you can secure the financial support to propel your small business to new heights. Like a well-constructed skyscraper, your business can soar high with a secure foundation and responsible financial management.


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FAQs about acquiring a business loan

How much deposit do you need for a business loan?

Deposit requirements vary widely depending on the lender, loan type, and your financial situation. Some lenders may require no deposit, while others might ask for anywhere from 10% to 20% or even more of the loan amount. Secured loans, where you provide assets as security, typically require lower deposits than unsecured loans.

Deposits can improve your chances of approval and assist in securing a lower interest rate.

What if I can’t pay back my business loan? 

Defaulting on a business loan can have severe consequences. Late payments incur penalties, damage your credit score, and affect your ability to secure future loans. In extreme cases, lenders may seize assets or take legal action.

If you foresee difficulty repaying, you should communicate with your lender to explore options like restructuring the loan terms or seeking a repayment plan. Remember, open communication and early intervention are crucial in mitigating the impact of potential debt default. 

What is an acceptable security for a business loan? 

Acceptable securities vary based on the lender’s policies and your loan type. Common options include:

  • Real estate: Your business property or personal property like your home (not recommended due to personal risk).
  • Inventory: Due to its fluctuating value, this can be a risk for lenders.
  • Equipment: Machinery or vehicles owned by your business.
  • Accounts receivable: Outstanding customer invoices, though securing loans against these can be complicated.

Remember, securing the loan puts those assets at risk if you default on the loan. Carefully evaluate the potential drawbacks before using valuable assets as security.

What if my loan gets declined?  

Getting your loan application declined can be disheartening, but it’s not the end of the road. Most lenders provide feedback on declined applications. Analyse the reason and address any shortcomings in future applications.

Explore different lenders with varying eligibility criteria. Research online lenders, industry-specific lenders, or government-backed loan programs that might cater to your specific needs.

Can I get a business loan with no deposit?

While securing a business loan without a deposit is possible, it requires a strong financial profile, a guarantee, or a guarantor to convince lenders of your ability to repay. Explore niche lenders, and government programs, and negotiate where possible.

Higher interest rates and stricter terms often accompany no-deposit options. Consult professionals for personalised guidance and alternative solutions.

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