Starting your own business will provide you with freedom and flexibility. You get to make all the decisions on who to hire and what kind of work to do. Owning your own business can be an amazing step toward building your dream career.

However, starting a business also requires a large investment of time and money. If you don’t have a reservoir of cash to invest in the supplies you need, you can apply for a loan. This process can be intimidating for first time entrepreneurs, with lots of paperwork and decisions to make.

Loans are available to businesses of all sizes and for a variety of needs. Whether your business is just starting or has a long history and is ready to expand, a loan may be a good choice for you. Buying machinery, equipment, and real estate will increase the value and output of your business, but is a large up-front cost that you may not be able to afford without a loan. Loans can even serve as a stop-gap when suppliers and customers take too long to pay for services.

1. Choose the type of loan that will best fit your business’s needs

To achieve your business goals with a loan, you first will need to determine what kind of business loan will best suit your plan. While there are a wide variety of lending options, grants and community development opportunities, these are the most common types of loans a business can apply for:

  1. Bank loan The money from this type of loan can be used for any business purpose. The interest rates are generally low, and the amount and length of the loan can vary to meet your needs. To qualify for a bank loan, you will need a high personal credit score, a solid business plan, and plenty of collateral. Property, equipment, inventory and business assets can all be used for collateral. If your business has been successful for several years and you can prove that you are a good investment, you are more likely to be approved for a bank loan.
  2. Small Business Administration (SBA) loan The SBA guarantees their bank loans. This office is created to help small businesses start and continue to be successful. The guarantee makes it a little easier to qualify for a loan, but you will still need good credit, a business plan, and collateral. While the SBA is not a lender, they are a source of support for small businesses and make lenders more likely to work with you.
  3. Medium term loan If you don’t qualify with other lenders, there are online lenders you can work with. Their medium term loans will provide you with a lump sum intended for one-time expenses or opportunities. The interest rates are high however (some as high as 30%).
  4. Short term loan These loans are for smaller amounts (up to $250,000) and have shorter time periods to repay (up to 18 months). These loans are much easier to qualify for because you have to pay them back so quickly.
  5. Equipment loan Just like it sounds, this loan is for purchasing equipment for your business. It works much like a car loan, where the equipment is the collateral for the loan. This money cannot be used for any other businesses expenses.

2. Prepare for the application

Once you decide what type of loan is best for your business based on how much money you need, how long you will need to repay the loan, and what you will qualify for, you can proceed with the application process. Those who are just starting their business will have a more difficult time finding an appropriate loan. Because you can’t prove that your business will make money and you will be able to make payments, you will need to be very vigilant in preparing your application and thoroughly answering questions so the lender understands your plan.

Things you should be prepared to supply to the lender during the application process are:

  • Personal credit score This is heavily considered for a loan. While it doesn’t directly relate to your new business, it does show the lender that you are reliable and pay your debts on time. You can check your credit score for free from credit reporting agencies once a year. If you have an established business, you will also have a business credit score that will be a factor in applying for a loan.
  • Loan amount You will need to go into the application process knowing how much money you need and what you will spend it on. Work on a budget to know exactly how large of a loan you can comfortably afford. Most lenders use the Debt Service Coverage Ratio tool to decide if you qualify. You can find the formula for this ratio and use the calculator to understand your business’s score here.
  • Documentation This will include personal and business tax returns, business permits and licenses, a detailed business plan, bank statements, resumes, and any financial documents for the business.

3. Shop around for a lender

Once you have your plan in place for your business, know how much money you need, and what you can afford, you can shop around for the best place to apply for a loan. To be able to compare lending institutions, ask about these factors:

  • Annual percentage rate (APR)
  • Terms of a business loan
  • Fees
  • Penalties
  • How quickly they will complete the process

Obtaining a loan is just one of the many complicated aspects of being a small business owner. The Small Business Administration (SBA) was created to help business owners be successful. They are a great source of support for this complex process. A small business is any for-profit company with less than 500 employees and less than $7 million in annual receipts. The SBA can help you understand what type of loan best suits your business as well as help you find a lender. Their team of local professionals can assist you in navigating this confusing process.