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Getting a business loan doesn’t have to be a painful process — if you do a little homework. You can increase your chances of approval by understanding your business’s qualifications then finding the small-business loan that fits your needs.
Here's how to get a business loan in six simple steps.
How much do you need?
We’ll start with a brief questionnaire to better understand the unique needs of your business.
Once we uncover your personalized matches, our team will consult you on the process moving forward.
1. Decide what type of loan you need to fund your business
Which type of business loan is right for you depends on what you’re hoping to accomplish. In general:
If you want to finance a large purchase or business expansion: Traditional term loans are lump sums that you pay back over time with interest and 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.
SBA 7(a) loans
Up to $5 million.
Working capital, expansion and equipment purchases.
SBA Express loans
Up to $500,000.
Fast funding for working capital, expansion and real estate and equipment purchases.
SBA 504 loans
Up to $5 million (up to $5.5 million for select projects).
Purchase long-term, fixed assets like land, machinery and facilities.
Program | Loan size | Purpose |
|---|---|---|
Up to $50,000. | Working capital, inventory, supplies, equipment and machinery. | |
Up to $2 million. | Repair physical damage due to a declared disaster and cover operating expenses. | |
SBA Export Working Capital loans | Up to $5 million. | Working capital to support export sales. |
SBA Export Express loans | Up to $500,000. | Expedited funding to enhance a business’s export development. |
SBA International Trade loans | Up to $5 million. | Long-term funding to expand export sales or modernize to contend with foreign competitors. |
If you need funds for day-to-day expenses: Business lines of credit are a flexible kind of funding that lets you tap into financing as you need it to cover expenses such as payroll or unexpected repairs, offering a useful safety net.
If you’re looking to fund a startup: It can be tougher for entrepreneurs to get a traditional business loan, but business credit cards and personal business loans can be good options if you haven’t been in business long enough to qualify for a line of credit or term loan.
2. Determine if you qualify to get a business loan
A number of places offer business loans, including banks, online lenders and microlenders. Answer these questions to help determine at which type of lender you’ll meet the eligibility requirements to qualify for a small-business loan:
What's your credit score?
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 in the good and excellent ranges, or 690 and above.
If your credit score falls below that threshold, consider nonbank lenders. Online business loans can be a little easier to qualify for. You may also want to consider small-business loans for borrowers with bad credit or microloans.
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, for business loans and lines of credit.
If your revenue isn't high enough to qualify for those loan products, consider looking into business credit cards or SBA microloans.
3. Determine what payments you can afford
Look carefully at your business’s financials — especially cash flow — and evaluate how much you can afford to apply toward loan repayments each month.
Your total income should be at least 1.25 times your total expenses, including your new repayment amount, says Suzanne Darden, a finance specialist at the Alabama Small Business Development Center.
For example, say your business’s income is $10,000 per month. That’s 1.25 times $8,000 of expenses. If you already pay $7,000 in rent, payroll and other costs, you should be able to afford a $1,000 monthly loan payment.
Some online lenders require daily or weekly repayments, so make sure to factor that in — you’ll need enough cash flow to make payments at the time they’re due.
Estimate the cost of getting a business loan
Estimate payments to understand the cost of a business loan
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4. Decide whether and how you want to collateralize the loan
Business loans can be secured or unsecured. 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 increase 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
You’ll typically want to get the business loan that offers you the best terms. But other factors, like funding speed, may matter to your business and different funding sources 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 generally provide small-business loans and lines of credit of up to $500,000. 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 the same day in some instances.
When to get a business loan from banks:
- You've been in business for 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 real estate loans to buy properties or refinance.
Through banks, the U.S. Small Business Administration guarantees general small-business loans with its 7(a) loan program, microloans and disaster loans. The SBA also has a 504 loan program that helps fund the purchase of land, buildings or equipment through long-term, fixed-rate financing.
Taking out a small-business loan from a bank can be difficult if you’ve been in business less than two years or don’t have consistent revenue. Add bad personal credit or no collateral to that, and many small-business owners come up empty-handed.
Getting funded by a bank tends to take longer than getting a loan from an online lender, but banks tend to offer the lowest APRs.
When to get a business loan from microlenders:
- You have bad credit or no credit history.
- You are a new business.
- You can't get a traditional loan.
Microlenders are nonprofits that typically make short-term loans of less than $50,000. 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 nonprofit microlenders.
6. Apply for a business loan
You made it! Now it's finally time to apply for a small-business loan.
Start by looking at two or three similar options to compare their 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.
» MORE: Compare small-business lenders
Of the loans you qualify for, choose the one with the lowest APR and best terms for you — as long as you’re able to handle the loan’s regular payments — and gather your business loan application materials. These may include:
- Your business’s name and address.
- Your business tax ID number.
- Your business plan.
- Your business loan proposal.
- Business financial statements.
- Personal details about your company’s owners.
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
If you haven’t gotten a business loan before, you will need strong personal credit, solid business financials, 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.
