How To Get A Business Loan? In 7 Easy Steps

A business loan can provide the funds you need to expand operations, meet day-to-day expenses, and purchase equipment or inventory. If you’ve never applied for a business loan before, you may not be sure where to start or what documentation is required.

No matter what stage of growth your business is in, there will come a time when extra cash will come in handy. Many companies, large and small, use debt capital to fuel growth and fund other business initiatives. Regardless of the need, a business loan is one of the most sought-after forms of financing. Here’s how to get a business loan.

How to Get a Business Loan?

7 Easy Steps to Get a Business Loan:

  • Decide what type of loan you need.
  • Learn what lenders look for.
  • Determine what payments you can afford
  • Decide whether and how you want to collateralize the loan
  • Compare Business Lending Options
  • Gather the Required Documents.
  • Submit Your Application.
How to Get a Business Loan

1. Decide what type of loan you need to fund your business

Lenders will ask why you need a business loan. Your answer will likely fall into one of three categories and will determine what type of business loan is right for you:

MORE: What is Business Loan?

SBA loans or traditional term loans. These often have high credit limits. For example, SBA loans can reach $5.5 million. Many lenders also offer specific products to meet the needs of a growing business, such as Loans for the purchase of equipment or vehicles.

Start-up financing such as corporate credit cards and personal loans. These lenders need cash flow to support loan repayment, so companies typically cannot get business loans in the first year. Instead, you have to resort to other forms of financing.

MORE: What is Personal Loan?

A business line of credit. This can be useful if you want to manage daily expenses. This flexible type of financing lets you access financing when you need it to cover expenses like payroll or unexpected repairs and provides a useful safety net.

2. Learn what lenders look for

Before you apply, it helps to understand how lenders are likely to rate your business loan application. Lenders’ profits are based on whether borrowers repay the loans or not. With this in mind, they can consider a number of factors including revenue or cash flow, time in business, personal credit, business credit, collateral, industry, and loyalty.

Some lenders dig deeper and may require detailed financial statements and tax returns.

Answer these questions to determine if you may 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 any of the three major credit reporting agencies: Equifax, Experian, and TransUnion. You can also get your credit score for free from several credit card issuers and personal finance websites, including NerdWallet.

MORE: What is Credit Score?

Banks prefer to offer their low-interest business loans to borrowers with at least a 680-credit rating, says Suzanne Darden, a finance specialist at the Alabama Small Business Development Center. If your credit score falls below this 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 for at least one year to qualify for most online 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.

If your revenue isn’t high enough, consider looking into short-term business loans, SBA microloans, or even equipment financing.

3. Determine what payments you can afford

Take a close look at your company’s finances, especially cash flow, and assess how much you can afford to apply for loan repayments each month.

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Some online lenders require daily repayments. So, take this into account.

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 company’s income is $10,000 per month and you pay $7,000 in rent, payroll, and other expenses, you should be able to afford a $1,000 monthly loan payment. Your income ($10,000) is 1.25 times the $8,000 in expenses.

4. Decide whether and how you want to collateralize the loan

A secured loan requires business collateral, such as property or equipment, which the lender can seize if you fail to repay the loan.

MORE: What is a Secured loan?

Posting collateral is risky, but it can also increase the amount lenders will lend you and earn you a lower interest rate.

Lenders may also require a personal guarantee for unsecured loans. This means you pay back the loan in person if your business can’t, and it can result in a lender chasing things like your home or car in the event of non-payment.

MORE: What is an Unsecured Loan?

5. Compare Business Lending Options

There are three main sources of small business loans: online lenders, banks, and nonprofit microlenders. Each usually has multiple products, but one may be better than others in certain cases.

When to get a business loan from online lenders:

  • You lack collateral.
  • You lack the time in business.
  • You need financing quickly.

Online lenders offer small business loans and lines of credit ranging from around $1,000 to $5 million. The average APR on these loans ranges from 6% to 99%, depending on the lender, the type and amount of the loan, the length of the repayment period, the borrower’s credit history, and whether collateral is required.

These lenders rarely have APRs as low as traditional banks, but approval rates are higher and financing is faster than banks — up to 12 hours.

When to get a business loan from banks:

  • You have been in business for at least two years.
  • You have good credit.
  • You don’t need cash fast.

Traditional banking options include term loans, lines of credit, and commercial mortgages for real estate purchases or refinancing.

About banks, the U.S. Small Business Administration provides general lending to small businesses through its 7(a)-loan program, short-term microloans, and catastrophe loans. According to the Congressional Research Service, SBA originates up to $5.5 million in loans, with 7(a) loans averaging $704,581 in fiscal 2021. The average SBA microloan is $13,000.

The SBA also has a 504-loan program that helps promote economic development in communities by funding the purchase of company fixed assets — such as land, buildings, or equipment — through long-term, fixed-rate financing.

Obtaining a small business loan from a bank can be difficult due to factors such as lower sales volume and cash reserves. Add to that bad personal credit or no collateral, and many small business owners get nothing.

Financing takes longer than other options, but banks are usually the option with the lowest APR.

When to get a business loan from microlenders:

  • You have bad credit or no credit history.
  • You are a new company.
  • You cannot get a traditional loan.

Microlenders are non-profit organizations that typically provide short-term loans of less than $50,000. The APR of these loans is usually 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.

The size of the loans is also “micro” by definition. But these loans may be a good fit for smaller businesses or startups that don’t qualify for traditional bank loans due to limited operating history, poor personal credit, or lack of collateral.

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6. Gather the Required Documents

Once you understand your lending options, gather the required documents. A lender will likely ask for these items:

  • Personal and business tax returns
  • Business licenses
  • Articles of incorporation
  • Personal and business bank statements
  • Profit and loss statements
  • Financial statements
  • Business plan
  • Building lease

If you’re unsure what documents are needed, contact the lender before applying.

7. Submit Your Application

You made it! Now that you’ve determined what type of loan and lender are right for you, it’s time to apply.

First, look at two or three similar options based on loan terms and the annual percentage rate (APR). Because the 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 are able to meet the regular payments on the loan) and apply for it using the documents you have collected.

Note that credit bureaus do not differentiate between business and private inquiries. Using your personal credit history could affect your credit score when applying for a small business loan, which is why it’s important to make your best choice.

How to get a loan to buy a business

It is not always necessary to start a business from scratch these days. If you see a promising company for sale, buying it can be a good investment. However, you will likely need a business acquisition loan to fund the venture.

Use the steps above for this type of loan as well. However, instead of providing all the documentation for your own company, you need to include the same type of information for the company you are going to buy.

How to get a business loan with no money

Getting funding can seem like a catch 22. You wouldn’t need the loan if you had money, but the bank needs to see you have good earnings to consider you a wise risk. How can you qualify when money is tight? Here the bank convinces with security and an excellent credit rating. These two factors are perhaps the most important when money is tight.

Start with a business credit card and trade credit with your suppliers. Spend time improving your business credit profile and demonstrate a track record of reliably making regular payments. If you can demonstrate your ability to service debt, you are more likely to be approved.

How to get a business loan without collateral

No collateral? If your credit is good or excellent, you have the revenue to support debt, and you have a good track record, there are lenders that will work with you. Unsecured loans generally have higher interest rates and origination fees, however, so become familiar with what you’ll pay out of pocket for the privilege.

How to get a business loan with bad credit

Whether you’re new to a home loan or have made some mistakes in the past, applying for a business loan with a bad credit profile can be frustrating. Bad credit doesn’t have to stop you from getting financing, however.

While it may take longer to get approval, there are some products available that will prioritize your credit profile differently than others that are willing to work with borrowers who don’t have a perfect profile (provided they have a healthy business and the ability to prove fault for successful service).

These include merchant credit accounts, business cash advances, secured business credit cards, and some microcredits.

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You can also work on demonstrating your ability to repay a business loan in other ways. These include:

  • Credit card sales. These are easy to document and show a bank or other lender an average of your incoming cash and total earnings. It can help determine if you’re earning enough to pay them back. Whether they’re using it to give you a traditional loan or give you a working capital loan, it’s possible to use your credit card transactions as a means of funding to get you through a rough patch.
  • Bank deposits. You should have a separate business checking account that you can use as evidence of an established pattern of your deposits and withdrawals. Some lenders will grant you a loan based on deposits made over a period of time.
  • Co-sign. Having a friend, relative, or business associate who will vouch for your creditworthiness and co-sign a loan can increase your chances of approval. Note that if you cannot make monthly payments, they will be held responsible; do so only if it is worth the risk to your business and personal relationships.

The best way to get a bad credit loan is to take action now to improve your credit score. While this will take time, it is the most effective way to get approval for the type of loan that is both affordable and most profitable for your business.

MORE: How to Get Loan With Bad Credit?

Although there are ways to get bad credit financing, establishing yourself and your business as a good credit risk will create more options and improve the chances of a successful application.

How much income do you need to get a business loan?

Many lenders require a minimum annual revenue, which can range anywhere from $50,000 to $250,000.

If your revenue isn’t high enough, consider looking into short-term business loans, SBA microloans or even equipment financing.

How do I get a business loan for the first time?

One of the most common questions people ask when starting a startup is, “How can I pay for this?” When looking for a loan to start a business, without a track record or revenue, it becomes difficult.

You can show off your business acumen with a well-written business plan and secure your loan with collateral that improves the odds, but it will still be a challenge. Since you don’t have a business yet, your personal credit score is the only thing a lender needs to assess your creditworthiness.

You may need to get creative and consider crowdfunding, small business credit cards, or even loans from friends and family.

What credit score is needed to get a business loan?

Most traditional lenders, such as banks and credit unions, require good credit scores. A minimum credit rating of 700 is often required, although some lenders only reach 680. The SBA loan threshold may vary by lender, but 680 or higher is typical. (Remember that financial institutions may require a personal credit check for any owner with 20% or more ownership.)

Many online lenders are more flexible. Some lend to borrowers with personal credit ratings in the mid-600s, others go even lower. Cash advance (or business advance) providers, as well as other alternative financing options, sometimes offer to finance to borrowers with credit scores as low as $500 and reasonable income.

How hard is it to get a business loan?

This depends on the type of loan and your qualifications. Typically, bank loans (including SBA loans) have the most involved application process and require the greatest amount of documentation.

Online lenders can be very quick and flexible. Link your bank account so they can analyze earnings and potentially get you an approval in hours and funding the next day.