Ask an Advisor: Your Small Business Loan Questions, Answered
By: Aries Payne
Securing funding is one of the biggest challenges small business owners face, so whether you're launching a new venture or expanding operations, understanding the loan process is key. Here are some of the most common questions our entrepreneurs ask about small business loans, with insights from our SBDC business advisors, so you can feel more confident about approaching lenders.
What do lenders look for when reviewing a small business loan application?
When lenders evaluate a small business loan application, it all boils down to one thing: risk.
“For an existing business, lenders want to see a profitable history,” says John Lee, director of the Lamar University SBDC. “Does the business generate enough cash flow to easily make loan payments, and will this cash injection allow them to increase that cash flow? For a startup, lenders want to know the business is a sure thing, or they won't take the risk.”
Lee noted that lenders also look closely at the business owner’s history. “Have they done this type of business successfully in the past, or are they currently successful? Do they pay their bills on time? Do they exhibit good character and financial stability? The person is just as important as the business. It's all about risk.”
Charles Capers, business advisor at the Houston SBDC, adds that lending decisions often come down to a few key factors. “Most lenders make loan decisions based on their credit underwriting policy,” he says. A credit underwriting policy is a lender’s internal process for evaluating a prospective borrower’s financial strength, repayment ability and overall risk before approving a loan.
The evaluation typically consists of a review of whether the business owner has “sufficient cash flow coverage for debt capacity, good personal credit and, in some cases, a source of collateral,” Capers concludes.
How much does my personal credit matter When applying for a business loan — and what if it’s not perfect?
“Personal credit matters,” says Capers. For many small business loans, especially for startups, lenders will review the owner’s personal credit because the business may not yet have an established credit history.
“If your credit is not perfect, you should review all your credit bureaus (i.e., Experian, Equifax and TransUnion) to correct any derogatory debts to creditors,” Capers continues. Demonstrating responsible financial habits — such as paying bills on time and reducing outstanding debt — can also help improve your standing with lenders over time.
What documents should I have ready before applying for a small business loan?
Getting organized before you apply for a small business loan can make the process much easier. Capers recommends having the following key documents ready:
- A detailed business plan
- Business and/or personal tax returns
- Current profit-and-loss statement
Having these materials prepared in advance shows professionalism and helps lenders assess your ability to repay.
If you’re not sure how to create a business plan or profit-and-loss statements, an SBDC advisor can provide templates and walk you through the process.
What’s the biggest mistake small business owners make when seeking funding?
According to Lee, one of the most common mistakes business owners make when seeking funding is failing to maintain accurate and healthy financial records.
“Doing all you can to minimize your profits on paper to reduce your tax liability effectively reduces the value of your business,” he says. “Using your business account as your personal piggy bank also reduces its value. Lenders are looking for cash flow and profitability, so always make sure your business is healthy on paper. At some point, you’ll need to borrow money, and your financial worksheets will be the determining factor.”
Shay Iacoponelli, business advisor at the Brazos Valley SBDC, agrees and adds that lack of preparation is another common mistake.
“Too often, business owners apply without recent tax returns, current financial statements or a business plan and pro forma that clearly explains how the funds will be used,” Iacoponelli says. “Lenders evaluate risk by reviewing two to three years of financial history when available, assessing both personal and business credit, and confirming repayment ability through a debt-service coverage ratio of at least 1.25,” meaning that your business should earn at least $1.25 in net income for every dollar of loan payment owed.
Iacoponelli also notes that most loans require a down payment — 10 to 20 percent for SBA programs and up to 30 percent or more for conventional loans — plus collateral when available.
“Although the SBA provides more flexibility than conventional lenders if collateral falls short, failing to address these fundamentals often results in denial and unnecessary credit inquiries,” she says.
How can the SBDC help me improve my chances of getting approved?
SBDC advisors can be a critical resource in helping entrepreneurs become loan-ready.
“Advisors play a key role in preparing business owners before they ever meet with a lender,” says Iacoponelli. “This includes organizing financial records, developing realistic cash flow projections, and crafting business plans that meet lender expectations. Since SBA loans can carry guarantees of up to 85 percent on smaller amounts, presenting strong cash flow, collateral and personal commitment is essential. By addressing these requirements in advance, we position clients to approach lenders with confidence, complete documentation and a compelling case for approval.”
SBDC advisors also help match you with the most appropriate financing options — whether conventional loans or SBA programs — and ensure requests align with business goals and financial capacity.
Ready to start the process? Book a no-cost appointment with one of our business advisors for personalized guidance in navigating small business loans.
