Demystifying the Business Loan Approval Process

Demystifying the Business Loan Approval Process

Demystifying the Business Loan Approval Process

When you start a small business, there are a lot of unknowns. Will customers want what you’re selling? What kinds of hurdles will your business face? And will your business succeed? There’s no crystal ball that can answer all those questions, but preparing as best you can and moving forward will get you one step closer to your goals.

Similarly, when it comes to getting financing for your business you’ll likely face a lot of uncertainty. How will a lender view your business? Will you get as much as you hope to borrow? Will the terms be affordable?

Again, there are elements of the small business loan approval process that will always be a mystery, mainly because lenders don’t want to reveal all their secret sauce, and possibly open themselves up to fraud. But there are absolutely steps you can take as an entrepreneur to increase your chances of securing funding. We’ll share those here.

Understanding the Business Loan Approval Process

Knowing what to expect when you apply for a small business loan makes the process less stressful. Small business financing follows the general same path, regardless of the specific place you go to secure funding.

Step 1: Application

Applying for a business loan can take minutes, or weeks, depending on the type of financing you’re trying to get. Online lenders are make the application process every quick, while traditional lenders (SBA loans and many bank loans) often take longer. 

Regardless of the type of loan you apply for, you’ll usually need to provide the following information: 

Applicant personal information, name, address, identification. A social security number may be needed for verification or for a personal credit check. 

Business information: name, address and business EIN. Business license and/or entity documentation (such as operating agreement for an LLC or articles of incorporation) may be required. Business bank account statements, tax returns and/or financial statements may also be required. Some loans require a copy of the business lease, if that applies. 

Providing complete information when you apply can make the process faster, and help ensure your loan application doesn’t get rejected for missing key information. 

Step 2: Underwriting

At this step, the information you provided on your business loan application is reviewed to determine whether you meet the lender’s requirements. It’s in underwriting that your loan may be approved or rejected, and where your credit limit or loan amount will be finalized. This may also be when the interest rate you get will be determined. 

Sometimes lenders will request more information before completing underwriting and the sooner you provide it, the sooner they can make a decision on your application. 

Step 3: Approval

Here, you’ll find out whether your loan has been approved, or whether you’ve been offered a loan for a different amount than you requested. 

If you are approved, you’ll need to accept the loan at the terms offered. While business loan approval is a reason to celebrate, be sure to read the loan offer carefully to decide whether you want to proceed. Once you accept the loan, you’re on the hook to repay the loan or financing at the terms in the offer. 

Step 4: Funding

If all looks good, your loan will be funded. Just like the application process, this can take place in hours or days, depending on the financing source. In most cases, you’ll need a business bank account so the loan funds can be deposited. 

Tips For Getting Approved For A Business Loan

Every year, the Federal Reserve surveys small business owners about their credit needs and experiences. In the 2022 Small Business Credit Survey, almost ten percent of business owners who didn’t apply for financing in the past year were so sure they wouldn’t get approved that they didn’t bother to apply. 

Don’t give up before you try. Understanding what lenders are looking for may help you find the right option for your business. 

So what do you need to get approved for a loan? Eligibility requirements vary by type of loan options as well as by lender, but many look at two or more of the following factors:

  • Credit scores (good credit usually helps)
  • Revenue and ability to repay the loan from cash flow
  • Time in business (2+ years is often preferred)

Your industry may also play a factor, since some lenders prefer to lend into certain industries and not others. Make sure your business credit reports list your correct industry code (NAICS or SIC code) and always review a lender’s list of restricted industries to make sure yours isn’t on that list. 

Check Your Credit Scores

Small business lenders often check credit. Not all do, but enough do that you want to make sure you know what’s on both your personal credit reports and business credit reports, and your credit scores for each. Bad credit isn’t always a dealbreaker, but it will limit some options. 

In general, here’s how your personal credit scores may play a role in getting approved for various types of business loans and financing:

Types of FinancingGood Personal Credit Typically RequiredBad Credit May Be Acceptable
SBA loansYesNo
Bank loansYesNo
Lines of creditUsuallyNo
Merchant cash advanceNoYes
Invoice factoringNoYes
Term loansUsuallyNo
Business credit cardsYesYes (certain cards)
Personal credit scores and small business financing. Source:

In addition to personal credit scores, some lenders will check business credit scores. If you aren’t familiar with business credit, don’t be embarrassed. Most business owners aren’t. There are simple steps you can take to establish business credit, and these can be valuable in terms of providing you with more financing options. 

Prepare a Business Plan

To be fair, few lenders besides banks or traditional financial institutions will ask for a business plan. Still, since banks make some of the lower-cost business loans, it’s good to have one up to date and available if one is requested. 

Even if you don’t have to provide one, creating a business plan can be valuable in other ways when it comes to getting financing. It can help you identify how much money you’ll need to borrow and how you’ll deploy that money to make more money in your business. Without this information, you may find yourself guessing at the amount you need and you could wind up borrowing more or less than your business can put to good use. 

Another way it can help is if you decide to pursue crowdfunding or venture capital. Elements of your business plan can be used to create a successful crowdfunding campaign or pitch deck. 

Get Your Financial Documents in Order

A significant amount of business success is due to preparation. Preparing for financing is no different. Get all your documentation in order and stored in a place where it’s easy to access, so when you apply you can give the lender the information it needs to make a decision.

Be prepared to share the following, if requested:

  • Business bank statements for the last 3—6 months. (If you’re using a personal bank account for your business, switch to a business checking account.) 
  • Financial statements such as profit and loss statements, balance sheet, etc. Your business bookkeeping should be up to date so you’ll be able to quickly and easily share that information. 
  • Personal and business tax returns for the past 2—3 years, if available. Again, not every lender will require this information but some may. 
  • List (or schedule) of business assets and value
  • Schedule of business debts including amounts owed and repayment terms. 

Demonstrate Your Ability to Repay the Loan

You may have heard of the 5 C’s of credit: character, creditworthiness, capital, collateral and capacity. Of these, capacity refers to the borrower’s ability to repay the loan from cash flow. The lender may use business bank account data and/or financial statements to determine whether you have the capacity to pay back financing. 

Types of Small Business Loans

When you start shopping for business financing you may be surprised at the sheer variety of loan products available. Some of the most popular types of small business financing include: 

Lines of credit: A business line of credit gives you funding you can draw from when you need it.  Borrow up to your credit limit, pay it back, and do it again. LOCs are often best for short-term needs, including working capital. 

Term loan: Here you borrow a fixed loan amount for a fixed period of time and pay it back with a predictable repayment schedule. 

SBA loans: Most SBA loans are guaranteed by the U.S. Small Business Administration but made by approved lenders such as banks and other financial institutions. There are a variety of SBA loan programs, including 7(a), 504 loans and Export loans. (Disaster loans are made directly by the SBA.) 

Business credit cards. A popular source of financing for startups, small business credit cards provide a line of credit you can borrow against when needed. If you get a card with a low Annual Percentage Rate (including 0% APR intro offers), you can minimize interest costs when you borrow. 

Invoice financing. Businesses that invoice other businesses (B2B) may speed up the time to get paid by using invoice factoring or financing. Here, the credit of the company that owes the invoice is often more important. 

Business cash advances. Business and merchant cash advances are a type of financing that’s based more on past sales than on factors like credit. In other words, you probably don’t need great credit to qualify.

Equipment financing. Businesses that need equipment, ranging from computers to heavy machinery, may use equipment financing or leasing to acquire equipment and improve cash flow. 

Commercial real estate. If you need to acquire real estate or improve property your business owns, commercial real estate loans may help. These loans may be made by banks or credit unions, financing companies or even hard money lenders. Some SBA loans may be used for real estate purposes. 

Common Reasons for Loan Denial

You may not always fully understand why you were turned down for a business loan. Unlike consumer loans, business loans don’t always require a full disclosure of why your application wasn’t approved. (Here’s what small business lenders must tell you when you apply.) 

Still there are some common factors that can land a loan application in the rejection pile:

Poor Credit History

Lenders want to avoid unnecessary risk and lending to small businesses already carries inherent risk since many businesses don’t last. Credit history is often used as one proxy for risk. If a borrower has paid loans on time in the past, they are more likely to do so in the future. In the 5 C’s of credit mentioned earlier, creditworthiness is an important factor. 

If you have bad credit, understand that you’ll have fewer choices when it comes to financing. It’s even harder if your business is a startup, since bad credit startup loans aren’t widely available. 

But fewer options doesn’t mean no options. Financing options for businesses with bad credit can include loans that are based on business revenues (like invoice financing or business cash advances) as well as more creative options like microloans (including SBA microloans), crowdfunding, or loans from Kiva which offers a hybrid of the two. 

Insufficient Cash Flow

Debt service coverage ratio is a popular ratio that lenders use to help quantify the ability of a business to pay back a loan. Calculating your DSCR (or asking your accounting professional to help you) can be useful when trying to understand how much you can borrow. 

If your business has seasonal fluctuations in income, make sure you work with a lender that understands your type of business. 

Lack of Collateral

Collateral is property you pledge to secure a loan. Collateral can come in the form of business assets (such as equipment, real estate, inventory or even accounts receivables) or personal assets (such as home equity). 

Not all business loans require collateral, but often lenders prefer to get collateral when they can. Most SBA loans, for example, can’t be turned down solely because of lack of collateral but when it’s available it is required—including home equity. 

Conclusion: The Loan Approval Process

If you’re approaching the business loan process with a fear of the unknown, realize that just like figuring out how to start a business, you can figure this out.

Getting your information in order and preparing as much as you can will help make it easier. Lean on professionals like your accounting professional or even a SCORE mentor or SBDC advisor to help you prepare. 

Nav can help you compare business loans and know what you can qualify for before you apply. You can view your top financial options from 160+ trusted loans and credit cards based on your business data. It’s simple to get started

Frequently Asked Questions About the Business Loan Approval Process

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