Update March 29, 2021: Small-business owners now have until May 31, 2021, to apply for a first- or second-draw loan through the Paycheck Protection Program. Lenders will have until June 30 to process outstanding PPP applications. For the latest information, read our PPP page.
Getting a small-business loan can be a time-consuming process. By knowing whether you'll meet a lender's qualifications before you apply, you can avoid potential frustration.
Here are five steps to help you qualify for a small-business loan.
1. Build personal and business credit scores
Personal credit scores indicate your ability to repay personal debts, such as credit cards, car loans and a mortgage. Small-business lenders require a personal credit score because they want to see how you manage debt.
FICO scores, commonly used in lending decisions, range from 300 to 850 (the higher, the better). You can get a free credit score on NerdWallet and a free copy of your credit reports at AnnualCreditReport.com.
Fast ways to improve your personal credit include disputing any inaccuracies in your report and paying bills on time and in full.
More-established companies will have business credit scores (which generally range from 0 or 1 to 100) with credit bureaus such as Experian, Equifax and Dun & Bradstreet. Steps to building business credit include establishing trade lines and keeping public records clean.
You’ll likely need excellent business credit and good personal credit to qualify for a government-backed SBA loan or traditional bank small-business loan. Online lenders may be more lenient with credit scores, emphasizing your business’s cash flow and track record instead.
2. Know the lender’s minimum qualifications and requirements
You'll typically need to meet minimum criteria around credit scores, annual revenue and years in business to qualify for a business loan, though some lenders may be flexible if you underperform in one area but overperform in another.
Qualifications can also vary by the type of business loan you want. For example:
For loans backed by the U.S. Small Business Administration: Your business must meet the SBA's definition of a "small" business, operate as a for-profit company and can’t be an ineligible business, like life insurance companies and financial businesses such as banks. You must also be current on all government loans with no past defaults — you’ll be disqualified if you’ve been late on a federal student loan or government-backed mortgage, for instance.
For bank and online business loans. Banks and online lenders typically underwrite loans based on traditional factors, but online loans carry less stringent requirements. For example, some online lenders offer bad credit business loans or may approve companies that haven't been in business as long. On the downside, this ease of qualification typically comes with a more expensive loan.
3. Gather financial and legal documents
Banks and other traditional lenders typically require a wide range of paperwork during the application process. The financial and legal documents you may need for a small-business loan include:
Personal and business income tax returns.
Balance sheet and income statement.
Personal and business bank statements.
A photo of your driver’s license.
Articles of incorporation.
A resume that shows relevant management or business experience.
Financial projections if you have a limited operating history.
Online lenders may provide a streamlined application process with fewer documents and faster underwriting. If you have good credit and strong business finances, some online lenders may offer you rates comparable to bank loans.
When getting a small-business loan, be sure to compare options to find the lowest cost loan that fits your company's needs.
4. Develop a strong business plan
Lenders will want to know how you plan to use the money and see that you have a strong ability to repay. They may require a solid business plan that details the purpose of the loan and how you expect it to increase profits.
You business plan should also include the following:
Product and/or service description.
Facilities and operations plan.
Current and projected financials.
Promotional, marketing and sales strategy.
SWOT analysis (strengths, weaknesses, opportunities, threats).
Your business plan should clearly demonstrate that you will have enough cash flow to cover ongoing business expenses and the new loan payments. This can give the lender more confidence in your business, increasing your chances at loan approval.
Use NerdWallet’s business loan calculator to estimate your monthly loan payments:
5. Provide collateral
To qualify for a small-business loan, you may have to provide collateral to back the loan. Business collateral is an asset, such as equipment, real estate or inventory, that can be seized and sold by the lender if you can’t make your payments. It’s a way lenders can recover their money if your business fails.
For example, SBA 7(a) loans above $25,000 require collateral, plus a personal guarantee from every owner of 20% or more of the business. A personal guarantee puts your credit score and your personal assets on the hook.
Some online lenders do not require collateral but may want a personal guarantee. Others may also take a blanket lien on your business assets — essentially another form of collateral — giving the lender the right to take business assets (real estate, inventory, equipment) to recoup an unpaid loan. Each lender has its own rules, so ask questions if you're unsure what's required.
If you don’t have collateral to get a loan or don’t want to take on the risk of losing personal or business assets, unsecured business loans may be a better option.
Compare small-business loans
NerdWallet has come up with a list of the best small-business loans to meet your needs and goals. We gauged lender trustworthiness and user experience, among other factors, and arranged lenders by categories that include your revenue and how long you’ve been in business.