How to Get a Business Loan in 5 Easy Steps
A small business loan can provide the financing your company needs to cover daily expenses, purchase inventory, invest in equipment or expand with a franchise. You can apply for small business financing via a traditional bank, credit union or online lender.
Here’s a step-by-step guide on how to get a business loan, as well as alternative ways to get financing.
1. Decide what type of business loan you need
Finding the right small business loan for your company depends on multiple factors, such as whether you need one-time or ongoing funding, how quickly you need funds and your business’s credit profile. Common types of small business loans to consider include:
| Loan type | Ideal for… | Loan amounts | Term length | Time to funding |
|---|---|---|---|---|
| General business finances, such as hiring staff or purchasing inventory, equipment and real estate | $500 to $5.5 million | Up to 300 months | 1 to 3 months, or 14 days if working with an SBA-preferred lender | |
| Low-cost expenses like supplies, marketing and payroll, or emergency expenses | $2,000 to $1.5 million+ | 3 to 24 months | Same day to 3 business days | |
| Larger projects and fixed assets, like renovations and expansions | $25,000 to $3 million+ | 6 to 300 months | 2 business days to three months | |
| Flexible access to cash on an as-needed basis | $1,000 to $1 million+ | 3 to 60 months | Same day to 2 weeks | |
| Short-term expenses like payroll, inventory and rent, or keeping your business afloat during seasonal lulls | $5,000 to $1.5 million+ | 3 to 84 months | Same day to 3 business days | |
| Purchasing or upgrading necessary equipment for your business | $25,000 to $2 million+ | 4 to 84 months | Same day to 3 business days | |
| Buying, building or renovating property for your business | $100,000 to $5 million+ | 60 to 360 months | 3 to 4 months | |
| Business owners who need small loan amounts and can’t qualify for traditional financing | $500 to $50,000 | 6 to 300 months | Same day to 3 months |
If you’re considering a first-time business loan, aiming for a lower amount can help you keep up with payments while building your business credit.
An online, alternative lender could be a better option for emergency business expenses since some offer same- or next-day funding. However, these fast-turnaround business loans usually have higher rates than traditional banks or SBA lenders.
2. Determine your eligibility
Each lender has specific business loan requirements, often outlined on their website. In general, you can expect lenders to review the following criteria when applying for small business financing:
- Credit score: To get the best interest rates and most flexible terms, you typically need a personal FICO Score of 670 or higher and a business credit score above 80. You can use LendingTree Spring to monitor your credit score for free.
- Time in business: Alternative lenders typically require your business to operate for six to 12 months before extending credit, while traditional banks may require a minimum of two years. Early-stage companies can consider startup financing.
- Annual revenue: Many lenders require reliable income for small business financing. Annual minimums can range from $36,000 to $480,000 or higher.
- Collateral and/or personal guarantee: Secured business loans reduce a lender’s risk by requiring collateral, such as real estate, equipment or cash. If you default, the lender can repossess your collateral as a form of payment. A personal guarantee might also be required, allowing a lender to seize your personal assets if you fail to repay the debt.
- Repayment terms: Most lenders limit your loan to 30% of your annual revenue to ensure you can manage payments. Note that some lenders require weekly or even daily repayments, which could be a strain on your business’s budget.
3. Gather required documents
While every lender will have its own list of required documents, you can help speed up the application process by having the following paperwork ready to go:
- Business plan. A strong business plan outlines your company’s mission and goals, including financing and marketing strategies. This reassures lenders you’ll put their money to good use.
- Business licenses. Each state has different requirements for business licensure. Make sure all required documents are up-to-date before applying for business financing.
- Financial documents for the business. Your lender may use your bank and income statements and balance sheets to confirm your company’s annual revenue.
- Personal financial statements. Your and your business partners’ personal financial information can help lenders determine your overall creditworthiness for a business loan.
- Personal and business tax returns. Personal and business tax returns are needed to show your overall net profit. Eligible business partners will likely need to provide this information as well.
- Articles of Incorporation, bylaws or operating agreement. You may need to provide these legal documents depending on your type of business entity.
- Building lease. If applicable, have any building leases on hand, including your monthly payment.
An executive summary is a three- to five-page document outlining your business’s needs and the project’s relevance to your company’s success, anticipated costs and timeline. You should also include recent revenue and profit numbers, current market dynamics and your overall growth plan for the next one to three years.The more details you can include in your executive summary, the better. You want lenders to see your business as well organized and stable, with the potential to grow.
4. Get quotes
It’s important to get multiple quotes from different lenders when you’re considering financing options. Even when lenders advertise rates online, there are multiple factors that go into the rates that they actually offer you. You may be offered a rate that’s several percentage points higher than what’s listed online.
It’s also essential to consider the full financing offer. Some lenders may have additional fees that impact the total cost of the loan. Business loan origination fees often most directly increase the total cost of the loan, but there may be additional fees like prepayment penalties, annual fees or draw fees that you should consider.
Ultimately, the lender advertising the lowest rates may not be the lender that can offer you the best overall deal.
How getting quotes works
Requesting a quote from a lender typically involves a credit pull, and business loans may require pulls of both your business and personal credit, though this depends on the loan type and lender in question. While both soft and hard credit pulls can temporarily lower your credit score, the rate shopping exception makes it possible for borrowers to get multiple quotes in a short time frame and only have it count as a single inquiry. This specifically applies to certain types of business loans (as opposed to credit cards), and the rate shopping exception window may be as short as 14 days.
You can get quotes from individual lenders or use a marketplace like LendingTree to quickly assess potential financing options from multiple lenders at once.
Rate shopping can save you thousands of dollars in interest alone. For example, if you’re comparing quotes for a $50,000 business loan with a 10-year term, the first lender may offer you a 12% annual percentage rate (APR). Your monthly payment would be $717.35, and you’d pay a total of $36,082.57 in interest throughout the duration of the loan.
If, however, you shop around for better rates, you may find a 10-year loan with a 10% interest rate. A 2% decrease in interest would lower your monthly payment to $660.75, and reduce your total interest paid to $29,290.44, saving you $56.60 a month and $6,792.13 over the course of the loan.
5. Apply for a business loan
Applying for online business loans is often quick and automated — you may even receive immediate approval if you meet the requirements. However, traditional banks may require you to visit a physical branch to apply for a small business loan.
Consider asking a business colleague or your local Small Business Development Center (SBDC) to review your business loan application before submitting it. Having a polished loan application can help avoid delays in the financing process.
Your lender may also need additional information, such as:
- Personal details for all business owners, such as name, date of birth, Social Security number
- Business name or DBA name
- Business street address
- Phone number
- Type of business
- Date the business was established
- Employer Identification Number (EIN)
- Annual net profit
- Number of W-2 employees (if applicable)
What to do if you’re rejected
While you always hope for an approval, there are situations when a loan application may be rejected. If the first lender rejects your request for funding, there are several options available to you:
- Apply with a different company. One lender may approve your application even if another has already said no, especially if you’re able to find a lender with less strict eligibility requirements or ask for a smaller loan. While this could help you acquire the funding you want now, there’s a risk that the second lender will deny your application for the same reasons the first lender gave.
- Work on your credit and wait. A low business or personal credit score may cause your loan to be rejected, so actively taking steps to improve both your personal and business credit scores before reapplying can lead to better success. While this may be one of the most effective ways to increase your odds of future loan approval if low credit was the reason for rejection, it can be difficult to wait if you need funding fast.
- Consider other types of funding. If a loan isn’t an option, you may consider alternative funding options like business credit cards, business lines of credit or invoice factoring. These options can provide funds quickly, though they may not offer the single large lump sums you were hoping for initially.
How to choose the best business loan
You can apply to multiple small business lenders within a 14-day window without further impact to your credit score, often called rate-shopping. Once approved, thoroughly review each lender’s business loan agreement and pay attention to the following factors to help find the best deal for your business.
Compare rates
Interest can be charged as fixed or variable. While variable rates may be lower, fixed rates can make it easier to stick to a budget. Some lenders charge a factor rate, which can make it hard to compare against other options.
If possible, convert interest or factor rates to the annual percentage rate (APR) to better compare options. The APR includes all interest and fees, showing you what you’ll pay in total over the life of the loan.
Watch out for fees
Some lenders include additional fees for business financing, such as origination fees, maintenance fees, late charges and prepayment penalties. Add these to the loan amount to ensure the total cost is worth it.
Note that some lenders, like Fora Financial, offer a prepayment discount when you repay your debt early.
Consider term lengths
Consider whether your repayments start immediately and how long you have to repay the debt. While a longer loan term typically means lower payments, you can save interest by opting for a shorter term.
Look at funding speed
For businesses needing immediate access to capital, a same-day business loan could get you funds within 24 hours — although the rates will likely run high. Traditional bank and SBA loans tend to have the lowest rates but the longest wait times, with some options taking up to 90 days to approve and fund.
You can also trim the SBA turnaround time to approximately two weeks by working with an SBA Preferred lender or 36 hours with an SBA Express Loan.
Some lenders offer no-credit-check business loans or guarantee approval before submitting any documentation. Such loans often come with high fees and unfavorable terms. Look for signs of predatory lending and read small business lender reviews before proceeding.
3 tips to help you get approved for a business loan
1. Clean up your credit
It’s crucial to dispute any errors on your credit report before submitting a loan application. While the disputing process varies by credit agency, most investigations finish within 30 days.
Consider working with a credit repair company if you need additional assistance repairing your credit.
2. Establish a relationship with a lender
Building a relationship with a financial institution can improve your chances of getting a small business loan. Consider applying for small business financing at your current bank or open a business checking account with a desired lender. Some lenders even offer rate discounts or rewards when banking members get a business loan.
3. Offer collateral
Collateral reduces lender risk since your lender can seize your collateral to recoup its losses if you default on your loan. If your company is new and you don’t have business assets yet, you could pledge personal assets, such as home equity or a retirement account.
Types of small business lenders
Banks, credit unions and online lenders offer various types of small business financing. Here are some types of lenders to consider, including details on how each type works.
While traditional banks tend to offer the most competitive business loan interest rates, they usually have stricter criteria and a longer application process than alternative lenders. Criteria typically include at least two years in operation, collateral and consistent revenue.
The most popular SBA loan is the SBA 7(a) loan, which funds up to $5 million for general expenses. If you want to finance major assets, like real estate or large equipment, the SBA 504 loan can provide up to $5.5 million — the amount guaranteed by the SBA. However, some lenders offer amounts of $20 million or higher.
Low-income, women, veteran and minority entrepreneurs might be eligible for up to $50,000 with an SBA microloan.
For example, the USDA’s Rural Microentrepreneur Assistance Program offers business loans up to $50,000 with a fixed interest rate and a term of up to 20 years. To qualify, your business must have 10 or fewer full-time employees and operate in a rural area.
If you can’t gain approval from a traditional bank, you might have better luck with an alternative lender since they usually look at your company’s overall potential instead of relying solely on credit scores. However, you will likely pay a higher rate for the flexibility.
Some popular microloan lenders include Accion Opportunity Fund, Grameen America, Kiva and LiftFund.
Alternatives to small business loans
While small business loans can help take your business to the next level, not everyone meets the eligibility criteria. Here are some alternative ways to get the funding your business needs.
- Small business grants: You can apply for small business grants through the federal, state or local government or a private entity like a foundation or corporation. While grants provide free money for specific business types or industries, they tend to be very competitive.
- Business credit cards: Business credit cards are convenient for financing everyday expenses, like low-cost inventory and supplies. However, compare interest rates when considering business credit cards versus business lines of credit since credit cards typically have higher rates. Plus, carrying a significant monthly balance on your credit cards could negatively impact your credit score.
- Crowdfunding: Raise funds from your customer base using crowdfunding platforms like GoFundMe for business. While crowdfunding platforms generally don’t have business requirements, they typically take a percentage of all donations you receive.
- Friends and family: Getting a family loan can save you from hard credit inquiries and high interest rates. However, it’s worth outlining all expectations in writing to ensure you don’t strain the relationship.
- Personal loans for business: You can technically use personal loans for business purposes, which are typically easier to get than business loans. However, loan amounts may cap at $50,000 with higher APRs. Additionally, you can’t claim interest on personal loans as a business tax deduction.
Frequently asked questions
Although no-collateral business loans can help in a pinch, they tend to come with less attractive rates and terms. You will likely find more competitive business loan offers if you can wait until your business is more established with a steady cash flow.
Here are some typical personal credit score requirements for a small business loan:
Bad credit business loan: Some lenders offer business financing for bad credit, accepting scores as low as 500.
SBA business loan: While there’s no set credit score, it’s generally recommended to have a score of 680 or higher to improve your chances of approval. The SBA also uses the FICO Small Business Scoring Service (SBSS) for 7(a) loans, with the current minimum score being 155.
Alternative lenders: Since nonbank lenders tend to look at factors beyond your credit score, many accept scores as low as 500 to 625.
Traditional banks: While most traditional banks don’t disclose credit score requirements in advance, scores below 670 are considered fair or poor. You’ll have a better chance of securing the best rates for your business loan if your score is 740 or higher.
Your lender may also consider your business credit score, generally measured on a 100-point scale. Scores below 50 are considered high risk, whereas scores of 80 or higher are more favorable.
Some lenders place less emphasis on creditworthiness if your business has steady revenue and collateral, such as equipment or real estate. However, be prepared to pay a higher interest rate as a tradeoff when getting a loan with poor credit.
Compare business loan offers
- 1. Decide what type of business loan you need
- 2. Determine your eligibility
- 3. Gather required documents
- 4. Get quotes
- 5. Apply for a business loan
- What to do if you’re rejected
- How to choose the best business loan
- 3 tips to help you get approved for a business loan
- Types of small business lenders
- Alternatives to small business loans
- Frequently asked questions