Knowing the steps to getting a business loan can help reduce frustration and increase your chances of approval.
Steve Nicastro, Jackie VelingDecember 1, 2021
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A business loan can help you start or grow your company, but navigating the process and lending standards can be intimidating if you don't know how to get a business loan. Breaking it down to manageable steps — from understanding qualifications to shopping for lenders and knowing how to apply for a small-business loan — can help you secure the funding your business needs.
1. Decide what type of loan you need to fund your business
Lenders will ask why you need a small-business loan. Your answer will likely fall into one of three categories and determine which type of business loan is right for you:
SBA loans or traditional term loans. These often have high borrowing maximums — SBA loans can reach $5.5 million, for example. Many lenders also offer specific products to fit a growing company's needs, such as loans for equipment or vehicle purchases.
Startup financing, such as business credit cards and personal loans. These lenders require cash flow to support repayment of the loan, so companies in their first year typically can't get business loans. Instead, you’ll have to rely on other financing.
A business line of credit. This could make sense if you want to manage day-to-day expenses. This flexible kind of funding lets you tap into financing as needed to cover expenses such as payroll or unexpected repairs, offering a useful safety net.
You can get your credit report for free from each of the three major credit bureaus: Equifax, Experian and TransUnion. You can also get your credit score for free from several credit card issuers and personal finance websites, including NerdWallet.
Banks prefer to offer their low-rate business loans to borrowers with credit scores above 680 at least, says Suzanne Darden, a finance specialist at the Alabama Small Business Development Center. If your credit score falls below that threshold, consider small-business loans for borrowers with bad credit or loans from a nonprofit microlender.
How long have you been in business?
You need to have been in business at least one year to qualify for most online small-business loans and at least two years to qualify for most bank loans.
Do you make enough money?
Many lenders require a minimum annual revenue, which can range anywhere from $50,000 to $250,000.
Look carefully at your business’s financials — especially cash flow — and evaluate how much you can afford to apply toward loan repayments each month.
Some online lenders require daily repayments, so make sure to factor that in.
To comfortably repay your loan each month, your total income should be at least 1.25 times your total expenses, including your new repayment amount, Darden says. For example, if your business’s income is $10,000 a month and you pay $7,000 in rent, payroll and other costs, you should be able to afford a $1,000 monthly loan payment. Your income ($10,000) is 1.25 times $8,000 of expenses.
4. Decide whether and how you want to collateralize the loan
A secured loan requires business collateral, such as property or equipment, that the lender can seize if you fail to repay the loan.
Putting up collateral is risky, but it can also raise the amount lenders let you borrow and get you a lower interest rate.
Lenders may also require a personal guarantee — even for unsecured loans. This means you'll personally repay the loan if your business can't, and it may let a lender come after things like your house or car in instances of nonpayment.
5. Compare small-business lenders
There are three main sources of small-business loans: online lenders, banks and nonprofit microlenders. Each typically has multiple products, but one may be better in certain instances than others.
When to get a business loan from online lenders:
You lack collateral.
You lack time in business.
You need funding quickly.
Online lenders provide small-business loans and lines of credit from about $1,000 to $5 million. The average annual percentage rate on these loans ranges from 6% to 99%, depending on the lender, the type and size of the loan, the length of the repayment term, the borrower’s credit history and whether collateral is required.
These lenders rarely have APRs as low as what traditional banks offer, but approval rates are higher and funding is faster than with banks — as fast as 12 hours.
When to get a business loan from banks:
You've been in business at least two years.
You have good credit.
You don't need cash fast.
Traditional bank options include term loans, lines of credit and commercial mortgages to buy properties or refinance.
Through banks, the U.S. Small Business Administration provides general small-business loans with its 7(a) loan program, short-term microloans and disaster loans. The SBA provides loans up to $5.5 million, with 7(a) loans averaging $704,581 in fiscal year 2021, according to the Congressional Research Service. The average SBA microloan is $13,000.
The SBA also has a 504 loan program that helps promote communities' economic development by funding business's fixed asset purchases — like land, buildings or equipment — through long-term, fixed-rate financing.
Taking out a small-business loan from a bank can be tough due to factors like lower sales volume and cash reserves. Add bad personal credit or no collateral to that, and many small-business owners come up empty-handed.
Getting funded takes longer than other options, but banks are usually the lowest-APR option.
Microlenders are nonprofits that typically lend short-term loans of less than $50,000. The APR on these loans is typically higher than that of bank loans. The application may require a detailed business plan, financial statements and a description of what the loan will be used for, making it a lengthy process.
Also, the size of the loans is, by definition, “micro.” But these loans may work well for smaller companies or startups that can’t qualify for traditional bank loans due to a limited operating history, poor personal credit or a lack of collateral.
Accion Opportunity Fund, Kiva and Accompany Capital are just a few examples of microlenders.
Estimate the cost of getting a business loan
6. Gather your documents
Before you apply, make sure you have all the required documentation. Locating these files now and having them easily accessible will help streamline the process of getting a small-business loan.
Depending on the lender, you’ll need to submit a combination of the following:
Business and personal tax returns.
Business and personal bank statements.
Business financial statements.
Business legal documents (e.g., articles of incorporation, commercial lease, franchise agreement).
7. Apply for a business loan
You made it! Now that you’ve determined which type of loan and lender are right for you, it's time to apply.
Start by looking at two or three similar options based on loan terms and annual percentage rate, or APR. Because APR includes all loan fees in addition to the interest rate, it's the best way to understand the total cost of a business loan for the year.
Of the loans you qualify for, choose the one with the lowest APR (as long as you’re able to handle the loan’s regular payments), and apply with the documents you’ve gathered.
Note that credit bureaus don’t differentiate between business and personal inquiries. If you use your personal credit history, your credit score could be affected when applying for a small business loan, which is why it’s important to go with your best bet.
Frequently Asked Questions
You will need a strong personal credit score, solid business financials, such as revenue, at least a year in business and in some cases collateral to qualify for a small-business loan at a bank. Online lenders require less stringent requirements. If you're just starting out, consider alternatives such as business credit cards. See our list of startup funding options.
It can be challenging to qualify for a small-business loan without a strong personal score (starting around 700) and a solid cash flow from your business. Those are among common reasons why your business loan application can be denied.