How Do Business Loans Work? The Loan Process Explained - FF Blog
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How Do Business Loans Work? The Loan Process Explained
June 01, 2022
How Do Small Business Loans Work

How Do Business Loans Work? The Loan Process Explained

If you haven’t taken out a small business loan before, it’s common to feel overwhelmed by the loan process. Even if you have been previously approved for a loan amount, you may need to brush up on your financing knowledge before applying for a business loan.

Regardless of your working capital situation, we wrote this guide to help you familiarize yourself with the small business loan process. We’ll start by overviewing the typical steps you’ll have to go through during the business loan application process. Then, we’ll detail what each of the steps within the process looks like so you can be better prepared to pursue financing.

Small Business Loan Process Overview

The loan process may vary depending on your business lender. However, most lenders require specific steps, such as a credit report review and the completion of an application.

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

  1. Create a Business Plan: The small business owner will likely be asked to prepare a business plan explaining how the business operates. They may also meet with the business lender to discuss their financing needs.
  2. Submit Application: The owner must complete and submit the lender’s loan application.
  3. Lender Completes Application and Credit History Review: The lender will review the application, check the business’s credit report, and approve the loan. You may be disqualified if you don’t meet the lender’s business or personal credit score requirements.
  4. Lender Prepares Loan Offer: The loan provider will prepare the loan documents.
  5. Loan Offer Finalized: Once any terms and conditions of the loan authorization are satisfied, the loan will be closed.
  6. Loan Given to Borrower: The loan proceeds will be disbursed based on agreed-upon terms and conditions.
  7. Borrower Pays Off the Loan: Throughout the life of the loan, the borrower will make payments as agreed.
  8. Once Balance Is Paid Off, The Loan Process Is Complete: When the loan is paid back in full, the collateral liens will be released, and the note will be marked as paid.

These are the steps usually involved with a traditional small business loan from a bank or SBA loan. 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, additional steps will be taken. However, generally, this is how you can expect your business loan process will go.

In the following sections, we’ll explore these business loan process steps in more detail.

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Steps #1 – #3: Business Plan and Application Review

With a traditional term loan, small business lenders will require that you submit a business plan and a loan application.

While business loan applications differ from lender to lender, you’ll generally be asked for personal and financial information, including

  • Your contact details
  • Social security number
  • The nature of your business
  • Your business structure
  • Cash flow projections
  • How the loan will be spent

You’ll also need to submit financial statements such as your profit and loss statements, tax returns, and more.

As mentioned, you’ll also submit your business plan with this loan application. The idea behind the business plan is to help the financial lender determine the viability of your business. At a 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 how you plan to spend loan funds. Most business loan providers will require that loans are used for business expenses, such as real estate, inventory, or equipment, to name a few common examples.

Once you’ve submitted all this information, your lender will decide to approve your business loan application.

Keep in mind that other people may also be required to apply depending on the lender and your business structure. For example, if your business is structured as a partnership, your partners may also be required to complete the application process.

How-Do-Business-Loans-Work

Steps #4 – #6: Loan Documentation and Disbursement

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

While different types of loans require additional documents, the loan agreement essentially lays out the terms of your loan. Your contract will include information about various loan costs, repayment schedules, and any additional terms and conditions.

Once you and the business lender sign these documents, the next step is for the lender to release the funds. What amount and when the lender releases these funds depends on your loan agreement. It would be best if you asked questions about the funding timeline before applying so that you’re aware of how long this typically takes.

Steps #7 – #8: Repaying the Small Business Loan

After you’ve received your loan funds, the repayment period will start. Your loan agreement will document the amount and timing of your payments.

Usually, though, you’ll repay your business loan amount with periodic payments. Each of these recurring payments will include principal and interest rates. If you have any questions about your repayment terms or how much you’ll pay in interest, ask your lender before taking out the loan.

You may be allowed to make larger payments than you’re required to pay back the loan 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 business lender will remove any liens on your collateral. When the liens are cleared, 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 application process, you can quickly overcome that feeling.

Remember to be prepared for the different nuances in individual online lenders’ loan approval processes. In addition, the loan process may change depending on the type of business loan you’re pursuing.

Also, keep in mind that the process 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 from the Fora Financial Blog:

Editor’s Note: This post was updated for accuracy and comprehensiveness in June 2022.

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].