How Do Small Business Loans Work? | Fora Financial Blog
How Do Small Business Loans Work?
April 23, 2021
How Do Small Business Loans Work

How Do Small Business Loans Work?

If you haven’t taken out a small business loan before, it’s common to feel overwhelmed by the loan process. In fact, even if you have received a loan amount, you may need to brush up on your financing knowledge.

Regardless, we wrote this guide to help you familiarize yourself with the small business loan process. We’ll start by overviewing the process. Then we’ll detail what each of the steps within the process looks like so you can be better prepared.

The Small Business Loan Process at a Glance

According to the Small Business Administration, the typical steps involved in a small business loan approval flow like this:

  1. Small business owner prepares a business plan and meets with the lender.
  2. Owner completes and submits the lender’s loan application.
  3. Lender reviews the application, reviews the business’s credit history, and approves the loan.
  4. Lender prepares loan documents.
  5. Once any terms and conditions of the loan authorization are satisfied, the loan is closed.
  6. The loan proceeds are disbursed based on agreed-upon terms and conditions.
  7. Throughout the life of the loan, the borrower makes payments as agreed.
  8. 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 traditional term loan, business lenders will require that you submit a business plan and a loan application.

While loan applications differ from lender to lender, you’ll generally be asked for personal and financial information. This could include:

  • Your contact details
  • Social security number
  • The nature of your business
  • Your business structure.

You’ll also be asked for financial statements such as your profit and loss statements, tax returns, and more.

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:

  1. Provide background on the business and yourself.
  2. Describe the experience of your management team.
  3. Summarize your business’s current activity and results.
  4. Identify and explain your industry, your customers, and your market.
  5. 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

Once your loan is approved and underwriting is complete, your lender will assemble a package of loan documents. This package is your loan agreement.

While different types of loans require different documents, the loan agreement essentially lays out the terms of your loan. Your agreement will include information about 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.

Usually though, you’ll repay your loan with periodic payments. Each of these periodic payments will include principal and interest. If you have any questions about your repayment terms, be sure to ask your lender prior to taking out the loan.

You may be allowed to make larger payments than you’re required to pay the loan off early. However, some lenders will assess fees for early repayment. You can ask your lender, or review your agreement, to determine if you can pay your loan back early without a fee.

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

It’s completely normal—perhaps even expected—to feel overwhelmed by the small business loan process. Fortunately, by familiarizing yourself with the process, you can quickly overcome that feeling.

Just remember to be prepared for the different nuances in individual online lenders’ loan approval processes.

Also, keep in mind that the process we’ve outlined above applies to traditional term loans. Other types of financing such as merchant cash advances, equipment financing, or business lines of credit follow slightly different processes.

Finally, if you’d like to learn about typical loan requirements and documentation, check out the following resources:

Fora Financial

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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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].