How to Get a Business Loan From a Bank in 7 Steps

Getting a business loan from a bank might seem complicated, but it's not all that different from getting a personal loan. Whether you're looking to start a new business, expand, relocate, or something else, there are a few simple steps to getting a business loan.

How Hard Is It to Get a Business Loan From a Bank

In short, it depends. If your business is brand new and your personal credit is less than stellar, it could be challenging to get a business loan. Lenders use a few main factors to judge your business's ability to repay any loan, and the overall economic environment and your industry are also considered. Those main factors include personal and business credit scores, financials (projected and/or otherwise), and time in business. There are other factors that might be important to different lenders, but those are the main ones that will determine how easy or difficult it is to get a business loan.

7 Steps to Get a Business Loan from a Bank

1. Determine Your Lending Needs

Every business has different needs, and no financial solution is one-size-fits-all. Your financial situation and vision will shape the future of your business. Before approaching a bank, take the time to assess your business's financial needs. What exactly do you need? This might include startup costs, working capital, equipment, or expansion costs. Knowing how much is needed and for what will help you choose the right type of bank funding, which can include:

• Business Term Loan: Good for financing a large purchase or business expansion, a term loan is a lump sum that's repaid over time with multiple terms, or repayment periods, to choose from
• Business Line of Credit: Best for day-to-day needs, this is a revolving loan allowing you to borrow as needed; think of it like a cash-based credit card
• SBA Loan: These are backed by the U.S. Small Business Administration and usually offer lower interest rates
• Equipment Financing Loan: There are different names for this type of loan, but it's used to purchase specific business equipment

If you choose a line of credit, consider costs throughout the year, how much you might need, and your cash flow. It might make sense to request more if you'll need funds later in the year to increase inventory for your busy season, for example. Remember to also consider the payment your business can afford, as that will determine how easily you'll be able to repay the loan.

2. Review Your Credit History and Determine Eligibility

Banks will generally look at your personal and business credit history and scores when reviewing your lending application, depending on the size of your business. If it's newly established and doesn't have a credit history, your personal credit information could be the primary factor when it comes time for the bank to make a decision. Review your personal credit information for free at annualcreditreport.com. You can view your business credit information a couple of ways, either through Dun & Bradstreet (you'll need to create a D-U-N-S number first, which is a bit like your personal Social Security number) or for free through CreditSignal. You can also pull your business Experian or Equifax report for a fee and sign up for ongoing monitoring. If either needs improvement, it is worth it to make improvements before applying to increase your chances of approval and get more favorable terms like a lower interest rate.

3. Research Banks and Loan Options

Different banks offer different loan options, so shopping around and comparing is essential to find one that best suits your needs. Consider things beyond interest rates and loan terms, like eligibility requirements and customer service levels. You want a bank that will work well with you even after you've signed all the paperwork for the loan. Ask around or look up reviews to get an idea of how business owners, in general, are treated. Having an established relationship with a bank could improve your chances of approval since they know your business and have records of how well you manage your accounts.

For the loan specifically, understand the repayment period, the payments you can expect, and any potential fees. Most lenders offer business term loans, business lines of credit, and Small Business Administration (SBA) loans.

Lastly, if the loan you want requires collateral, choose that before you apply. Loans and lines of credit are offered either secured or unsecured depending on the amount (if it's under $50,000, you usually do not need collateral), but unsecured loans generally have a higher interest rate. Collateral could be a vehicle, property, cash, equipment, or investments. Work with your lender to understand their specific requirements.

4. Get Quotes

Lenders are all slightly different, so getting quotes from multiple lenders can be helpful when deciding on financing options. Comparing rates online isn't enough; lenders charge different fees, which can impact the total cost of your financing option, even if it's the same type and term, such as a 5-year loan. This can include origination and annual fees, but others, like prepayment penalties or draw fees, should be considered. At the end of the day, the lender offering the lowest rates might not be the one that can provide you with the best overall deal.

Getting a quote from different lenders typically involves a credit pull. Depending on the loan type and lender, lenders might need to pull your personal and business credit. The rate shopping exception makes it possible for borrowers to get many quotes quickly and have them all count as a single inquiry. It specifically applies to some business loans (not credit cards), and the exception window can be as short as 14 days, so you'll need to work quickly to get all the quotes you need. Rather than going to individual lenders, consider going to a marketplace like LendingTree or Credit Karma to simultaneously gather potential financing options from many lenders.

5. Gather Documents: What Banks Need When Applying for a Business Loan

Different lenders require different documentation, which could include some or all of the list below. Gather them ahead of time to streamline the process and get the application submitted sooner.

What Banks Need When Applying for a Business Loan

• Business plan, if your business is new
• 2-3 years of tax returns, potentially both personal and business
• Personal financial statement
• Financial statements such as a current balance sheet, profit and loss statement, and current and historical cash flow statements
• Bank statements from the past 6-12 months if you are applying where you do not have business bank accounts
• Legal documents such as your business license, registration, and any relevant legal contracts and documents
• Collateral, such as property or equipment, if required to secure the loan
• Other general information, such as:
• Name of the business and DBA (doing business as) name
• How long you've been in business
• Number of employees
• Social Security numbers of anyone who owns 20-25% or more of the business, depending on the business type and lender

Consider including financial projections for the next few years to back up the amount you're asking for. This will also help the bank verify they're making a loan that will be paid back. When you're ready, start reaching out for quotes and compare offers to get the best possible loan for your business.

6. Submit Your Application

Now that you know which bank and loan you want to get, it's time to apply. You may be able to do this online, or you may need to apply in person, depending on the bank's process. There might be additional questions about your business and financials, and they may also ask for a more in-depth meeting to understand your goals and how you plan to use the money from the loan. Be honest about your situation and plans, and keep in mind the more prepared and organized you are, the smoother this process goes.

The application process varies, but it can take a week up to a few months to find out if you're approved or denied. Ask your lender how long it usually takes to hear back for your specific type of loan.

7. Review and Accept Loan Terms

The bank will ask you to sign some paperwork to finalize the loan if you're approved. Review the entire document carefully, including the fine print, and don't hesitate to ask questions if anything seems unclear. Look at the interest rate, repayment schedule, and all fees or charges associated with your new loan. After you've reviewed, sign the agreement and accept the offer. Funds will be deposited according to the agreement, and once that's done, you can now use them for your business needs.

Manage Your Loan Responsibly: How Business Loan Repayment Works

Now that you have the loan, it's vital to manage finances wisely to meet repayment obligations. Just like you would with your personal finances, make timely payments, track expenses, and maintain accurate financial records to ensure this loan improves your business credit score to build a positive financial history. This way, you can secure future funding and continue to grow the business.

What Happens During Business Loan Underwriting

The bank will now review all your financial documents, credit history, and other information to decide whether or not to approve your loan application. They will also verify income, any assets or debts, and other details about collateral if applicable. This usually takes at least a couple of weeks but can be done in days, depending on the amount and loan type. Ask your banker how long the decision process usually takes at the bank you submit your application to. The underwriter reviewing your application might ask for clarification or additional information during this process, so responding quickly helps to keep things on track.

What to Do if Your Application is Rejected

First, remember this does happen, and you still have options! If you can take a smaller loan, ask if they will lend you a smaller amount instead. If that won't work, find out why the lender rejected your application so you can improve your application to reapply when the time comes. You can also apply with a different company that may have different lending requirements.

Tips to Improve Your Approval Odds

Even if your business doesn't have credit yet, there are still things you can do to improve your odds of approval. Lenders that see you're serious and have a solid plan are more likely to approve your application if they can. It all depends on their policies, but below are a few items to keep in mind as you prepare to apply.

• Have a detailed business plan
• Focus on building good credit; it helps to start with a business credit card
• Have a plan for how you will use the money
• Provide organized documents
• Be prepared to offer collateral, if possible

Alternatives to Small Business Loans

If a traditional bank business loan is not an option, alternatives like business credit cards or lines of credit are also available. If the purpose of your loan can wait (your current equipment works, but you'll need to buy in the semi-near future), consider services and tools to help you save. For example, services like CollectEarly^® can help you get your invoices paid in hours rather than weeks so you can get your finances in order and save for equipment instead of getting a loan.

WaFd Bank is Here to Help

After more than 100 years, we know a thing or two about helping businesses thrive. Our experienced and knowledgeable bankers are here to answer any questions you might have, big or small. Find accounts tailored to businesses and commercial enterprises of any size, along with tools, services, and other offerings to ensure your business succeeds. Compare accounts, stop by your local branch, or give us a call at 800-324-9375 today!

Loans subject to credit approval, terms and conditions may apply.