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How to Get a Business Loan in 5 Steps

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Learning how to get a business loan can help you secure the capital you need to start and grow your business. Business loans can cover immediate needs like payroll and finance large projects like remodeling a facility.

To help you secure the best loan for your needs and qualifications, you’ll need to know your credit score, choose the right loan type and lender and gather the necessary documents.

How to get a business loan in 5 steps

Understanding the steps involved in how to get a small business loan can help you obtain the best loan for your situation.

  1. Check your credit.
  2. Decide what type of business loan you need.
  3. Choose a lender.
  4. Make sure you qualify and gather the required documents.
  5. Submit your business loan application.

1. Check your credit.

Lenders will review your personal and business credit score to assess your ability to repay a loan. For newer companies that don’t have much business credit history, the lender would place more weight on their personal credit.

Before applying, make sure your credit score is at least 680. Generally, a FICO Score below 680 can make it difficult for you to get approved — in which case, a bad-credit business loan may be a better fit.

You can use LendingTree to check your personal credit score for free but you may need to pay to access your business credit score.

2. Decide what type of business loan you need.

There are several types of business loans, each with its own terms and requirements. From general-purpose loans like lines of credit to specific loans like equipment loans, you’ll need to research which best fits your needs.

Small Business Administration (SBA) loans can cover a host of financing needs — from general operating costs to securing real estate. Loan amounts can range from $25,000 to $5 million, with rates around 10%. Applicants with a personal credit score of 680 or higher are more likely to qualify for an SBA loan.

Term loans are funding in lump-sum amounts that business owners repay in installments over time. Depending on whether they are short or long term, loan amounts can rise to $5 million, with interest rates starting around 5%. Lenders usually require a 600 to 700 minimum credit score.

Business lines of credit provide business owners access to capital up to $250,000 on an as-need basis. Interest rates start at 4.80% and apply only to the amount borrowed. Borrowers with credit scores as low as 650 and below may qualify.

Equipment loans provide financing up to $1 million for assets like commercial ovens or office furniture. Because your lender is likely to require you to use the equipment you’re buying as collateral, your loan is less risky and interest rates can be as low as 3.00%. Borrowers should strive for a 620 minimum credit score before applying.

Invoice financing offers financing as a loan or line of credit for 60% to 97% of the value of your unpaid invoices. Instead of interest rates, the lender typically charges a flat, upfront fee plus an ongoing processing fee. Lenders can consider credit scores as low as 530.

Merchant cash advances are lump-sum payments up to $500,000 issued in exchange for a portion of future earnings — ideal for business owners who need quick access to funds for immediate needs, such as meeting payroll. Lenders typically calculate the cost of a merchant advance by multiplying your factor rate (typically between 1.1 and 1.5) by your advance amount. Lenders may accept bad-credit borrowers if the business has a high volume of credit card transactions.

3. Choose a lender.

Business owners can secure a business loan from banks and credit unions or online lenders. When choosing a lender, consider the following factors:

  • Eligibility requirements: Banks typically have stricter requirements, which can make it difficult for newer businesses with bad credit to secure funding. Online lenders are generally more lenient and require less documentation.
  • Time to funding: Online lenders typically have automated application processes with streamlined paperwork demands, leading to shorter application times. Online lenders generally issue funds faster than banks, too.
  • Loan amounts: Borrowers are more likely to find loans as small as $5,000 from alternative lenders. If you seek a larger loan, banks are more likely to issue loan amounts into the millions.
  • Rates and terms: Although more difficult to qualify for, banks generally offer more favorable rates and terms. The tradeoff for online lenders’ lenient requirements is often higher costs and stricter repayment terms.

4. Make sure you qualify and gather the required documents.

Applying haphazardly for business loans you don’t qualify for can rack up excessive credit inquiries that may harm your credit score. Learning how to qualify for a business loan can increase your chances of getting your application approved.

Be sure to review the lender’s requirements, including:

  • Time in business: Most lenders prefer to finance seasoned companies with a track record of repaying debt. You may need six months to three years of time in business, depending on the lender.
  • Revenue: Businesses with consistent annual revenue are more likely to receive loan approval.
  • Credit score: A credit score of at least 680 is the minimum most banks and credit unions require. If you do not qualify for a bank loan, online lenders will usually accept business owners with lower credit scores.
Gather required documents.

During the underwriting process, your lender might request certain documents; business plans, income tax returns and your personal and business balance sheet are common requirements. For secured loans, you’ll need to pledge certain assets as collateral that the lender can seize if you default on loan payments.

Different lenders or loan types may require additional qualifications. For instance, the SBA enforces small-business size standards and may request a vendor quote for equipment loans.

5. Submit your business loan application.

Applying for online business loans is often quick and automated — you may receive immediate approval if you meet the requirements. If approved, you may see the funds deposited into your account as quickly as the same day.

Applying with a traditional bank is generally more time-consuming because the process may involve meeting with a loan officer and waiting for approval from a committee. Time to funding may take a few days to multiple weeks. SBA loans can sometimes take over two months.

Tips to help you get approved for a business loan

Here are a few tips that can boost your chances of getting your loan application approved:

Clean up your credit before you apply.

If you discover an error on your credit report, — a lien that doesn’t belong to you, for example — dispute it. While the disputing process can vary by the credit agency, most investigations finish within 30 days. If you need additional assistance in repairing your credit, consider working with a credit repair company.

Establish a proper relationship with a lender.

Building a relationship with a financial institution can improve your chances of getting a business loan. Opening a personal or business bank account offers a starting point in your search for future business financing needs.

Consider offering collateral.

Collateral reduces lender risk because your lender can seize your collateral to recoup its losses if you default on your loan. Startups, however, often have few business assets, if any. Pledging personal assets equal to the loan amount — equity in a home or a retirement account, for instance — can increase the chances of getting a loan application approved, according to Ken Alozie, a Washington D.C.-based SCORE mentor. SCORE is an SBA-affiliated organization that coaches and educates small business owners and entrepreneurs.

Shop around for the best loan for you.

Each lender carries its own terms. As a result, some lenders might be better for you than others. Shop around for the best fees, interest rates and repayment terms available to you before you apply for a business loan. Also, be sure to note whether the lender makes a “soft” or “hard” credit inquiry — soft inquiries generally won’t harm your credit score but a stream of hard inquiries can.

Alternatives to a small business loan

  • Business credit cards: Plastic is convenient for financing everyday expenses, like inventory and supplies. Keep in mind that carrying a monthly balance can affect your credit score, which can lower your chances of securing a business loan.
  • Crowdfunding: Raise funds from a large number of people using crowdfunding platforms like GoFundMe. Crowdfunding platforms generally have no time-in-business requirement but they may collect a fee to use their service.
  • Friends and family: Obtaining capital from a generous friend or family member can save you from hard credit inquiries and high interest rates. However, you may compromise your relationship if you don’t repay the loan. Be sure to outline all expectations in a written agreement if you take this route.
  • Personal loans for business: Personal loans are issued to you, the individual, instead of your business. While personal loans typically don’t require collateral, they tend to offer loan amounts of only up to $50,000 and carry higher APRs.

Business loan FAQs

How hard is it to get a business loan?

If you have a low credit score or your business is relatively new, it can be difficult to obtain a traditional bank loan. You can increase your chances of getting a loan by applying with online lenders, which generally have more lenient requirements.

What are typical small business loan requirements?

Business lenders will typically review a business owner’s credit score, time in business and revenue. Lenders may also require financial documents, such as your history of cash flow and balance sheet. Depending on whether the loan is unsecured or secured, you may need to pledge assets as collateral, too.

What credit score is needed for a business loan?

Business owners with credit scores of 680 or higher are more likely to qualify for traditional bank loans. There are instances where lenders have accepted applications with credit scores as low as 500 — however, higher interest rates typically apply.

When should I pass on a business loan offer?

If you feel uncomfortable with anything in your loan agreement, consider shopping for a different lender who can offer rates and terms you can handle. Also, be sure to read the fine print and understand how the lender defines defaulting on the loan.

 

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