How to Apply for a Small Business Loan

Running a business requires a strategic approach. You must balance short- and long-term needs to find a pathway to success – and sometimes that requires extra funding. That’s when business loans can help.

Business loans can provide access to a lump-sum or ongoing funding. That can solve a range of problems, from keeping the business running to expanding your operations. However, the application process is a bit different from applying for a loan for personal use.

Here, we’ll walk through the requirements and process to apply for a small business loan.

Decide whether you may qualify for a small business loan

The first step to getting a small business loan is figuring out if you may qualify. Where you get your loan – which may be a bank, credit union or online lender – can shape the loan's requirements.

In general, lenders may consider factors such as:

• Time in business: Some lenders may require anywhere from 3 months to 2 years in business to qualify
• Annual revenue thresholds: There may be a minimum revenue threshold requirement to qualify for a small business loan. Your revenue may help determine the loan amount or credit limit you can qualify for, too.
• Personal and/or business credit scores: Lenders can use your personal and business credit scores to help evaluate your creditworthiness.  Generally, the higher your scores, the better the terms you may be able to qualify for.
• Credit utilization ratio: Lenders like to see low credit utilization. This measures your existing revolving debt compared to your total available credit.

Reasons to apply for a small business loan

Small business loans can suit many purposes. For example, a loan may help you purchase inventory, equipment or real estate to expand your business. Or a line of credit can help you keep up with operational costs during leaner months. Depending on the lender, you may also be able to use a small business loan to start your business.

Choose what kind of loan you want

There are generally two types of small business financing options to consider. Each option can fit different needs.

Installment loans: These give business owners access to a lump sum to be repaid in fixed installments over time. You may have to pay an origination fee or use collateral to access this type of funding. Installment loans are generally best for funding larger needs, like purchasing equipment or covering a big, unexpected business expense.

Commercial mortgages are installment loans that allow you to purchase or renovate a facility for your business, or refinance an existing commercial mortgage. Installment loans are for a set amount, so, if you need more money, you’d have to apply for a new loan.

Line of credit (LOC): A LOC lets business owners repeatedly borrow money, up to a limit, and repay that amount plus interest. LOCs may come with an annual fee. This type of revolving business credit typically makes sense for ongoing funding needs, like keeping up with payroll. 

Compare small business lenders

Terms may vary from lender to lender, so shopping around for your small business loan is key.

One significant factor is the interest rate, which shapes your total cost of borrowing. Business loan interest rates may be fixed (which results in predictable payments) or variable (which can mean an increase or decrease in your rate and payment over time). The loan term is another important factor. It helps determine your monthly payment amount, interest rate and how much interest you’ll pay over the life of your loan.

Other factors that may help shape your decision include:

• How and when funds can be disbursed
• Your relationship with the lender
• Loan fees, such as annual, origination and prepayment fees
• A dedicated banker to help with your application versus an online lender

Gather your documents and apply

When you’re ready to apply, gather your documents to complete your loan application. Required documents may vary depending on the lender, but may include things like:

• Financial documents: Your business balance sheet, income statements, tax returns and bank statements may help lenders determine whether you meet their revenue requirements and can afford the loan. You may also need your personal tax returns.
• Legal documents: Lenders may need to verify that your business is properly established. You may need your business formation document, a legal document you receive from the secretary of state’s office after registering your business.
• Personal details of the business owners: Your Social Security number or individual taxpayer identification number can help lenders verify your identity and creditworthiness. If you have co-applicants, you’ll need to include their details, too. You’ll also typically need their date of birth, address, residence, citizenship status and country of citizenship. You may also need to let the lender know how many employees you have.
• Personal guarantee: Many lenders require applicants to give a personal guarantee for unsecured business loans. That means you’d be responsible for repaying the loan if your business can't pay. Learn more about what you need to bring.

Receive your funds

If your loan is approved, funds can be disbursed as a lump sum for installment loans, or you'd get access to your line of credit. Then you may use that money to help solve your business needs and make payments as your loan documents require.

Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.