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Update Jan. 19, 2021: The latest round of the Paycheck Protection Program is open to small businesses hard hit by the coronavirus pandemic.
The legislation provides more than $284 billion for first and second forgivable coronavirus relief loans, reviving the Paycheck Protection Program that lapsed in the summer. It also widens the kinds of businesses that could seek PPP funding, such as news outlets, and adds funding for smaller, independent entertainment venues and restaurants. For the latest information, read our PPP page.
Small-business loans can help you start or maintain your business. And though tightened lending standards may make getting a loan more difficult, learning how to navigate the process ahead of time will help you be successful.
Discover how to get a small-business loan in five simple steps.
1. Decide what type of loan you need.
Lenders will ask why you need outside financing, and your answer will likely fall into one of four categories:
To start your business.
To manage day-to-day expenses (think payroll and inventory).
To grow your business.
To provide a safety net.
Your reasoning will determine which type of small-business loan you can get. For example, if you’re starting a business, it’s virtually impossible to get a loan from a bank or online lender in your company’s first year. Lenders require cash flow to support repayment of the loan, so startups are typically disqualified from financing.
Instead, you’ll have to rely on business credit cards, borrowing from friends and family, crowdfunding, personal loans or other types of startup financing.
Businesses with a year or more of history and revenue have more financing options, including government-backed loans, term loans, business lines of credit and invoice factoring.
2. Compare small-business lenders.
There are three types of lenders that can help you finance your small business: online lenders, banks and nonprofit microlenders. These lenders offer products including term loans, lines of credit and accounts receivable financing.
Use online lenders when:
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 those at traditional banks, but approval rates are higher and funding is faster than with banks — as fast as 12 hours.
» MORE: Compare small-business lenders
Use banks when:
You can provide collateral.
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. SBA loans range from about $500 to $5.5 million, with an average loan size of $500,000.
Small businesses can have a tough time getting approved due to factors like lower sales volume and cash reserves. Add to that bad personal credit or no collateral (such as real estate to secure a loan), and many small-business owners come up empty-handed. Getting funded takes longer than other options, but banks are usually the lowest-APR option.
Use microlenders when:
You can't get a traditional loan because your company is too small.
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, Kiva, the Opportunity Fund and the Business Center for New Americans are just a few examples of microlenders.
3. Determine if you qualify for a business loan.
There are four questions that can help you determine whether you 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 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 online small-business loans for borrowers with bad credit or loans from a nonprofit microlender.
How long have you been in business?
In addition to your credit score, lenders will consider how long your business has been operating. 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 online lenders require a minimum annual revenue, which can range anywhere from $50,000 to $250,000. Calculate your revenue and find out the minimum a given lender requires before you apply.
Can you afford the payments?
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 have $7,000 of expenses including rent, payroll and inventory, the most you can comfortably afford is $1,000 a month in loan repayments.
4. Gather your documents.
Before you apply for a loan, you also need to make sure you have all the required documentation. Locating these files now and having them easily accessible will help further streamline the process.
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).
5. Apply for a business loan.
You made it! Now that you’ve determined which type of lender is right for you, look at two or three similar options based on loan terms and annual percentage rate. The gold standard for comparing loans, APR is the best look at your total cost of borrowing for the year, since it includes all loan fees in addition to the interest rate.
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, and your credit score could be affected when applying for a small business loan if you use your personal credit history, which is why it’s important to go with your best bet.
Frequently asked questions