Before You Apply for A Small Business Loan

You know the saying, “You only get one chance to make a first impression?” That’s true in many aspects of business, including when you apply for a small business loan. Before making a formal application to a bank for a small business loan, be sure to research banks and other lending institutions, which are actively making small business loans in your community and arrange a meeting with at least two of these lenders.

There are multiple government and non-profit agencies in most communities to assist small businesses with planning and counseling, including assistance in preparing a business loan application. These include the U.S. Small Business Administration (SBA), Small Business Development Center, SCORE, Chamber of Commerce and Economic Development Agencies.

Additional Types of Loans/Financing Worth Exploring:

Small Business Options
Here is list of more than 29 financial resources.

By first contacting one of these agencies, you will be able to determine which banks are more aggressively seeking loans and obtain a referral to meet with them. You should also contact your own accountant, attorney, insurance broker or business associate for a similar reference.

Once your list of banks is narrowed down to two or three, set up a meeting with each bank to discuss your individual situation with them. You should take the opportunity to better understand the bank’s procedures for processing and approving the type and size loan you are looking for.

Factors Used by Banks to Evaluate Business Loans

The application process

The process used by a bank to evaluate small business loans varies considerably for each institution and is based on several factors.

The size and complexity of loan request determines the depth and nature of the underwriting process. For smaller business loan requests (typically loan requests less than $100,000), most banks use a more streamlined approval process or automated underwriting process. Some banks utilize automated credit scoring systems for loan requests as high as $250,000.

Credit scoring models are heavily reliant on the strength of the credit reports of both the business and the principal owners of the business who will be required to guarantee the loan.

In addition to information obtained from credit reporting agencies, the automated system will use income and asset information from the applicant’s tax returns and from the application to underwrite the loan for sufficient cash flow and liquid assets.

Most banks will require that they be able to review three years of operating history for the business and three years’ financial information from any principal owner with 20% or more ownership interest in order to obtain a commercial loan.

Generally, for a business with less than two years of operating history, the business will be considered a “start-up” and generally will not qualify for a conventional loan with a bank. Only in cases where the principal owners have sources of income and strong cash balances to support the loan repayment without the business income, would they be considered by a bank for a start-up business loan. Some banks will consider a loan to a start-up business with an SBA guarantee, but even with the SBA guarantee (discussed in Chapter 4) most banks will not consider a start-up business for financing. If the loan request is declined by the automated system or when the loan request exceeds the threshold amount of $100,000, then the loan is processed with great detail and scrutiny.

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About the Authors

Garrett Sutton, Corporate Attorney & Author

Garrett Sutton, Esq., author of Start Your own Corporation, Run Your Own Corporation, Loopholes of Real Estate, The ABC’s of Getting Out of Debt, Writing Winning Business Plans and Buying and Selling a Business in the Rich Dad Advisors series, is an attorney with over twenty-five years experience in assisting individuals and businesses to determine their appropriate corporate structure, limit their liability, protect their assets and advance their financial, personal and credit success goals.


Gerri Detweiler is the author of four books, including the Ultimate Credit Handbook (named one of the top five personal finance books of the year when it was released), and a media favorite quoted in publications like USA Today, The Wall Street Journal and featured on The Today Show and CNN. A credit educator since 1987, she’s served on credit reporting agency Experian’s Consumer Advisory Council twice.