It's natural to feel overwhelmed by the loan process if you've never taken out a small business loan before. Even if you've been approved for a loan, you may need to brush up on your financial knowledge.
How Do Small Business Loans Work?
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Regardless, we created this guide to assist you in becoming more comfortable with the small business financing process. Let's start with a high-level summary of the procedure. Then, so that you may be better prepared, we'll go through each phase of the procedure in depth.
The Small Business Loan Process at a Glance
The following are the normal steps involved in a small business loan approval pipeline, according to the Small Business Administration:
Small business owner prepares a business plan and meets with the lender. Owner completes and submits the lender’s loan application. Lender reviews the application, reviews the business’s credit history, and approves the loan. Lender prepares loan documents. Once any terms and conditions of the loan authorization are satisfied, the loan is closed. The loan proceeds are disbursed based on agreed-upon terms and conditions. Throughout the life of the loan, the borrower makes payments as agreed. When the loan is paid back in full, the liens of collateral are released and the note is marked as paid. To be clear, these are the steps usually involved with a traditional small business loan from a bank or SBA loans . Depending on what you’re getting the loan for, you may need to provide additional documentation. Other financial institutions
Also, if you’re putting up collateral or providing a personal guarantee , there will be additional steps to take. However, generally speaking, this is how your business loan process will go.
In the next few sections, we’ll explore these business loan steps in more detail:
Steps #1 – #3: Business Plan and Application Review With a standard term loan, you'll need to submit a business plan as well as a loan application.
While loan applications vary by lender, you may expect to be requested for personal and financial information. This could involve the following:
Your contact information
Number assigned by the Social Security Administration
The nature of your enterprise
The structure of your company.
Financial information, such as profit and loss statements, tax returns, and other documents, will also be requested.
With this application, as mentioned, you’ll also be asked to submit your business plan. The idea behind the business plan is to help the financial lender determine the viability of your business. At minimum, your business plan must:
Provide background on the business and yourself. Describe the experience of your management team. Summarize your business’s current activity and results. Identify and explain your industry, your customers, and your market. State how much money you need, how you determined how much you need, and what the loan will be used for. Once you’ve submitted all this information, your lender will decide whether or not to approve your business loan application.
Keep in mind that, depending on the lender and your business structure , other people may also be required to submit an application. For example, if your business is structured as a partnership, your other partners may be required to fill out an application too.
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Steps #4 – #6: Loan Documentation and Disbursement Your lender will put together a packet of loan documentation once your loan has been approved and underwriting is completed. Your loan agreement is contained in this package.
While different forms of loans necessitate different agreements, the loan agreement effectively spells out your loan's terms. Your contract will include details concerning
various loan costs , how and when the loan is repaid, and any additional terms and conditions.
Once you and the lender sign these documents, the next step is for the lender to release the funds. In what amount and when the lender releases these funds depends on what’s stated in your loan agreement.
Steps #7 – #8: Repaying the Small Business Loan After you’ve received your loan funds, the repayment period will start. The amount and timing of your payments will be documented in your loan agreement.
In most cases, however, you'll pay back your loan in instalments. The principle and interest will be included in each of these recurring instalments. If you have any queries regarding your repayment conditions, consult your lender before you take out a loan.
To pay off the loan sooner, you may be able to make bigger instalments than are required. Some lenders, on the other hand, charge costs for early repayment. You can inquire with your lender or study your agreement to see if you can repay your loan early and avoid paying a penalty.
Once you’ve completed repayments, the lender will remove any liens on your collateral. When the liens are removed, the business lender no longer has a claim against you. Then, to mark the end of your loan agreement, the lender will mark your note as paid.
Conclusion: Take Time to Prepare for the Small Business Loan Process The feeling of being overwhelmed by the small business financing procedure is perfectly normal—perhaps even anticipated. Fortunately, you can soon overcome that discomfort by familiarising yourself with the procedure.
Just keep in mind that different online lenders' loan approval processes have different quirks.
Also, keep in mind that the foregoing procedure is only applicable to typical term loans. Other types of finance, like merchant cash advances, equipment financing, and commercial lines of credit, have slightly different procedures.
Finally, the following resources can help you learn more about common loan criteria and documentation:
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
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