Business Loans 101: What Every Business Owner Needs to Know Before Applying

Last Updated: 

April 9, 2024

When you have a checklist of things to do, the trickiest task turns out to be simple; this applies to business loans.

The never-ending paperwork and procedures might seem intimidating, but if you need a business loan, you’ll have to get elbow-deep into it.

This article has broken down everything you need to know about applying for business loans, so let’s get started.

Key Takeaways on Applying for a Business Loan:

  1. Document Checklist for Business Loans: Ensure you have essential documents like business licence, bank statements, tax returns, lease, financial statements, articles of incorporation, and profit/loss statements ready before applying for a business loan.
  2. Understanding the Application Process: Know why you need the loan, determine the required amount, and choose the most suitable loan type (e.g., SBA loans, term loans, micro loans, real estate loans, business line of credit). Fill out the application accurately and honestly, online or in-person.
  3. Factors Affecting Loan Approval: Your credit score, cash flow, annual revenue, debt service ratio, collateral, and a well-detailed business plan are crucial factors affecting loan approval. Maintaining a healthy credit score and positive cash flow enhances the likelihood of approval.
  4. Credit Score Importance: Your credit history, payment history, credit in use, and owed amounts versus income contribute to your credit score. Maintaining a healthy credit is vital for favourable loan terms, and digital banking and credit-building apps can assist in this.
  5. Positive Cash Flow Impact: A positive cash flow demonstrates financial health, indicating the ability to settle debt payments. Lenders view positive cash flow favourably when considering your loan application.
  6. Annual Revenue Requirement: Meeting specified annual revenue requirements is crucial for loan approval. Lenders evaluate your business's total yearly income, considering gross sales or services.
  7. Debt Service Ratio and Reliability: The debt service ratio assesses your ability to cover interest and principal repayment. Lenders seek assurance that you can meet loan payments without default, ensuring your reliability.
  8. Collateral Significance: Collateral, an asset owned by the business, serves as a security in case of loan default. The amount of required collateral varies based on the loan type, amount, credit score, and nature of the collateral.
  9. Business Plan as a Key Requirement: A formal written business plan outlining your business operations, revenue generation, and goals is a key requirement for loan approval. It provides a promising impression of your business to lenders.
Discover Real-World Success Stories

Documents To Get Started With Paperwork

Ensure you have all the primary documents required for your application. 

While the exact documents might vary based on different loan types and the lender’s requirements, these are the common ones you’ll need:

  • Business Licence
  • Personal and business bank statements
  • Personal and business tax returns
  • Building lease
  • Financial statements
  • Articles of incorporation
  • Profit and loss statements

Business Loan Application Process

You’ll have a million questions about getting a loan, so here’s a basic outline of how you can apply for it.

1. Why Do You Need A Loan?

Narrow down why you need to get a business loan; whether it’s to finance inventory, expand your business, or make equipment upgrades, it should be something realistic that your business needs to achieve its goals.

2. How Much Money Do You Need?

Once you’ve identified what you need money for, it’s time to see how much that “need” costs. While some expenses, like property or equipment purchases, will be concrete, others, like marketing efforts or SEO expenditures, will require you to ballpark the amount before borrowing. 

3. What Type Of Loan Is Best For You?

Having decided on the amount, you can now choose the best loan option. Some available options in the market include SBA loans for small businesses, term loans for large purchases or working capital, micro loans for minor upgrades, real estate loans for expansion, and a business line of credit. Additionally, exploring business loans Florida could provide tailored options for entrepreneurs in the Sunshine State.

4. Filling Out The Application

With all this information, now you can start filling out the paperwork. You can choose to do this online or in person. Ensure you fill in all the details accurately and be honest about any queries because errors will only cause delays in your approval process. 

Factors That Affect Business Loan Approval

Getting approved for your desired business loan involves thorough checks. The lender will evaluate various factors based on your chosen loan; these factors will also determine your approved loan term, interest rates, and amount.

These are the six factors that affect your business loan approval:

Credit Score

The valuation of your credit history, payment history, credit in use, and owed amounts versus income determines your credit score. Lenders will check whether or not you meet the credit requirements, which will, in return, impact specific terms and interest rates of your loan.

It’s essential to maintain healthy credit, and if you struggle with that, digital banking and credit building apps can help keep you with managing this.

Cash Flow

If your business has a positive cash flow, it shows your company is in good financial shape and adds to its cash reserves instead of draining them; this means you can settle debt payments, and the lender will be optimistic about approving your loan.

Annual Revenue

The total yearly income of your business includes all the money your business brings in through gross sales or services. While the criteria for minimum annual revenue may vary, lenders will only approve your loan if you qualify for the specified revenue requirements.

Debt Service

Every lender needs assurance that you can cover your loan payments without default, and debt service is their way of ensuring that you’re reliable. The debt service ratio calculates your business’s net operating income and debt amount to determine your ability to cover the interest and principal repayment of any debts.


Collateral is an asset owned by the business that can be used to cover the loan amount if the borrower defaults on repayment. The amount of collateral required varies based on the reason for the loan, type of loan, loan amount, credit score, and nature of the collateral itself.

Business Plan

Lenders will ask for your formal written business plan since it outlines how your business operates, makes money, and pushes toward success. If it states your goals, methods, and timeframe, your business plan will leave a promising impression for your loan approval.

To Conclude

Waiting for your approval can be daunting, but if you’ve read through this article and kept all the specifics ready, you’re sure to get a quick response. Your lender may have additional requests, so get back to them promptly. 

You’ll receive details with further instructions after your approval, so until then, be patient!

People Also Like to Read...