How to Get a Business Loan
A business loan can provide the financing small businesses need to cover daily expenses, purchase inventory, invest in equipment or expand with a franchise. Follow these steps to find and choose the right loan for your business.
1. Calculate how much you need
Start by figuring out how much money you need to meet your business goals. For example, if you’re buying a new commercial oven, start by getting a quote for the type of oven you need. If you’re planning an expansion, you’ll want to break down your expected expenses.
Then, analyze your business budget to figure out how much you can afford to borrow without putting a financial strain on your business. If the monthly payments you can afford don’t line up with the loan amount you need, you’ll need to figure out where you can make adjustments. For our oven example, you’d want to consider different brands or get quotes for used equipment to find something that fits in your budget.
The calculator below can help you determine what your business can afford to borrow.
2. Get your financial records ready
Next, prepare to apply for a business loan by gathering all the documents and information lenders might need. Specific business loan requirements vary between lenders, but you’ll generally need to provide detailed information on both your personal and business finances.
This information can usually be pulled from the software you use to run your business, so before you move any further, get your logins ready, check for missing passwords and consider saving important documents in a secure folder so they’re easy to access when the time comes.
Here’s what you need to do to get started:
- Download your last three years of personal and business tax returns from your tax software
- Pull financial documents from your accounting software, including:
If you don’t use accounting software, you can create these reports using a program like Microsoft Excel or Google Sheets, though it’ll be a bit more work.
You’ll also need to provide general business documents, such as:
- Proof of legal residency, like a utility bill with your name and address
- Copies of your Articles of Incorporation, Bylaws or Operating Agreement
- Copies of business licenses and permits
- Copies of your business plan
- Your commercial lease or purchase agreement
- Information on your collateral, if you’re applying for a secured business loan
3. Get several quotes
Loans for small businesses are provided by traditional banks and online lenders. Loan amounts, repayment terms, interest rates and other factors can vary widely between lenders, so to get the best deal on your business financing, you’ll want to gather multiple quotes.
One of the simplest ways to compare your options is to work with a marketplace like LendingTree. Our network includes more than 30 individual business lenders, so all you have to do is fill out one short form to identify lenders that might be a match for your business.
Another option is to work directly with your financial institution. Having an existing relationship may make it easier to qualify for a loan, and some banks even offer rate discounts for existing customers. You can compare your bank’s loan offer against other lenders to find the best deal.
Interest rates play a large role in determining the total cost of your loan — and the size of your monthly payments. A small difference in business loan interest rates can have a significant impact on the cost of borrowing.
For example, let’s say you’re looking to borrow $50,000 with a 10-year repayment term. One lender offers a 10.00% interest rate, while another offers a similar rate of 11.00%.
While the difference may seem minimal, the costs add up. With an interest rate of 11.00%, you’ll pay $28 more per month and $3,360 more over the life of the loan than you would with a 10.00% rate.
All numbers are rounded to the nearest dollar.
| 10.00% interest rate | 11.00% interest rate | |
|---|---|---|
| Monthly payment | $661 | $689 |
| Total interest charges | $29,290 | $32,650 |
| Total repayment | $79,290 | $82,650 |
4. Choose a lender and review documents
Traditional banks and credit unions tend to offer the lowest rates on business loans, but these loans can be difficult to qualify for, as they usually require a high credit score and at least a few years in business. It may be easier to get approved with your bank if you have an existing relationship, but a loan approval still isn’t guaranteed.
Once you’ve checked in with your bank and gathered quotes from other lenders, it’s time to compare your options. To pick a lender, consider each of the following factors:
- Interest rate: Is the rate fixed or variable? If any of the lenders on your list charge a factor rate, converting it to a simple interest rate can make it easier to compare costs.
- Repayment term: How long will you have to repay your loan, and how frequently will you need to make payments? Some lenders may require daily or weekly payments, which can increase your interest costs.
- Time to funding: How long will it take to deliver your funds? If time is limited and you need to move quickly, this might be one of your top priorities, but keep in mind that the fastest business loans aren’t always the most affordable.
- Additional fees: In addition to interest rates, some lenders charge additional fees that can increase the total cost of borrowing, such as origination fees, late fees and prepayment penalties.
- Collateral: Some lenders may require collateral or a personal guarantee to approve your loan application. While this may allow you to get a lower rate, it can put your assets at risk and can make the underwriting process slower.
- Funding type: If you need funds to purchase equipment or commercial real estate, a lump sum of cash may be exactly what you need. But if you’re looking for funds to cover operational expenses or fill in gaps during slow seasons, a revolving form of financing — like a business line of credit — might be a better option.
Before you close on a loan, read the business loan agreement carefully and ask questions about anything you don’t understand. This legally binding document includes details on rates, fees and collateral requirements.
If you’re working with LendingTree’s concierge service, you’ll have a dedicated point of contact throughout the process who can answer any questions you have about lender-specific policies. If you’re comparing lenders yourself, reach out to your loan officer or customer service representative for more information.
Use a loan calculator to see how each loan offer could impact your business finances. If the lowest interest rates you can qualify for are higher than you originally anticipated, you may need to apply for a smaller loan amount to keep your monthly payments from getting out of control.
Remember: Borrowing more than your business can realistically afford to repay is risky, as it can create a dangerous debt cycle that will ultimately do more harm than good. If the loan offers you receive don’t align with the amount you can afford to pay on a monthly basis, return to step one and compare alternative options, like getting a smaller loan or holding off on getting funding while you focus on increasing your profit margins.
5. Receive your funds and begin repayment
Once a loan agreement is signed, your lender will walk you through the closing process, including any additional documents that may be required. The time it takes to receive your money depends on the type of small business funding.
With a term loan, you can expect your funds as a lump sum. In most cases, you’ll give your bank information to your lender and receive your funds through a direct deposit.
With a business line of credit, you’ll be given access to a credit line, which you can borrow against up to a preset limit. Depending on your line of credit, you may be able to transfer funds directly into your bank, write checks from your credit line or use a card to make purchases.
In most cases, you’ll begin making payments on your loan immediately, though some lenders may allow you to defer payments for up to 90 days. Depending on your lender, you may be required to make payments daily, weekly or monthly.
Tips to increase your approval odds
- Clean up your credit. 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.
- Establish a relationship. Having a relationship with a financial institution can improve your chances of getting a loan. Consider applying for financing at your current bank or opening a business checking account with your desired lender.
- Offer collateral. Collateral reduces lender risk because the lender can seize the collateral to recoup its losses if you default on your loan. If your company is new and you don’t have business assets, you may be able to pledge personal assets, but this puts your assets at risk if your business fails.
Common mistakes to avoid
- Applying for the wrong product. If you don’t plan ahead, it can be easy to choose a loan product that isn’t the right fit for your needs. Consider how the funds will be used to make sure you select the right loan type.
- Applying for the wrong amount. Asking for too much can put a financial strain on your business, and in some cases it can lead to your loan application being denied. Meanwhile, asking for too little can prevent your business from achieving its goals.
- Providing incomplete information. Submitting inaccurate or incomplete documentation can lead to significant delays or even rejection. Make sure financial statements, tax returns and other required documents are both accurate and complete before you send them to your lender for review.
- Skipping rate shopping. Interest rates have a large impact on your short- and long-term loan costs — both of which can impact the financial health of your business. Don’t rush to apply with the first lender on your list. Take the time to compare multiple options to find the best rate.
Some lenders offer fast financing, with funds deposited into your business bank account as soon as the same day you apply, while others take several weeks — or even a few months — for your loan to be processed and your funds to be delivered. If time to funding is a top priority for your business, pay close attention to this detail as you compare your options.
Unless you need to pay emergency costs or capitalize on a limited-time opportunity, it’s typically not worth getting a loan with a higher interest rate just to speed up the timeline. In the case of SBA loans, it can take several months to receive financing, but the U.S. Small Business Administration (SBA) caps interest rates to keep costs from getting out of control.
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 a lender rejects your request for funding, there are several options that may be available to you:
Apply with a different company
One lender might approve your application even if another has already said no, especially if you’re able to find a lender with more flexible eligibility requirements or if you ask for a smaller loan. While this could help you acquire the funding you want without delay, there’s a risk that the second lender will deny your application for the same reasons the first lender gave. Alternatively, you may be able to qualify with the second lender, but they might charge higher fees and interest rates.
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 your credit before reapplying can be a good strategy. Work on improving both your personal and business scores. While this may be one of the most effective ways to increase your odds of loan approval in the future, it can be difficult to wait if you need funding fast.
Consider other types of funding
If a loan isn’t an option, you might want to consider alternative funding options.
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 money that doesn’t have to be repaid, they tend to be very competitive.
- Business credit cards: Business credit cards are convenient for covering everyday expenses, like inventory and supplies. However, credit cards typically have higher rates than lines of credit. Plus, carrying a significant monthly balance on your credit cards could negatively impact your credit score.
- Crowdfunding: You could raise funds from your friends, family and customer base using crowdfunding platforms. While these platforms generally don’t have business requirements, they typically take a percentage of the funds you receive, and you may need to offer something in exchange for each investment.
- 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 make sure you don’t strain the relationship.
- Personal loans for business: You can technically use personal loans for business purposes, which may be easier to get than business loans. However, loan amounts tend to be lower and interest rates tend to be higher.
Frequently asked questions
The amount of time it takes to receive your funds depends on your lender. Many online lenders offer fast funding, which may allow you to receive your funds as quickly as the same day you apply. In general, most alternative lenders will deposit your funds within three business days.
With a traditional lender, you may have to wait a bit longer. Funding times vary greatly between banks and credit unions. Some may offer same-day funding, while others may take several weeks (or months) to approve and process your loan application.
The credit score you need to qualify for a business loan depends on the lender and the loan type. Traditional lenders typically set higher credit score requirements, while alternative lenders may be more willing to work with borrowers with low scores.
In general, borrowers will need a personal credit score of 670 or higher to qualify for the best rates, but some lenders may work with borrowers with scores as low as 500, especially if they can provide collateral. However, interest rates tend to be higher for borrowers with low credit scores. Depending on the age of your business, your lender may also consider your business credit report, which is attached to your company’s EIN rather than your Social Security number.
One of the ways lenders assess your ability to potentially repay a business loan is based on your debt-service coverage ratio (DSCR), which measures your company’s ability to repay its debts.
Specifically, it looks at your annual business income before interest, taxes, depreciation and amortization (EBITDA) and how it compares to your annual debt obligations. To calculate your DSCR, divide your annual income by your annual debt payments, including both principal and interest.
A lower score generally indicates a higher lending risk, while a higher score tells lenders that you have enough cash flow to handle your debt payments.
Business loan interest rates vary by lender, loan type and loan term. Based on data from the Federal Reserve, the average rate on a business term loan is around 7% to 8%. Anything at or around this industry average is typically considered a low rate, though starting rates for some types of financing (like merchant cash advances) may be higher.
Your interest rate will also largely depend on your credit profile and funding needs, so a “good” rate for your business may be different than the average. To get the best rate, get quotes from multiple lenders before taking out a loan.
A Uniform Commercial Code (UCC) filing is a legal form that establishes your lender’s right to seize specific business assets if you default on a business loan. This is also known as a UCC lien and, if required, will be detailed in your loan agreement.
It’s important to note that UCC liens may be required on both secured and unsecured business loans. The UCC filing may cover a single asset or multiple assets. In the case of a blanket lien, the lender has a claim on most (if not all) of your business assets, including any assets you acquire in the future. Assets listed in a UCC lien cannot be used as collateral for other loans or sold without your lender’s permission.
If you miss a business loan payment, you may face several consequences. Many lenders enforce late payment penalties including fees and interest rate adjustments. If you only miss one loan payment, you may simply pay a fee and notice a dip in your credit score.
However, if you miss multiple payments, your loan may be at risk of default. This could create a situation where you are forced to repay the loan in full or risk losing your business or personal assets. For this reason, it’s important to always make at least the minimum payment on your business loan. Check your loan agreement for more details on what events can trigger a default and what the potential consequences might be.
Even if your business closes its doors, you will still need to repay any outstanding business debts. If you pledged collateral to secure the loan, lenders may seize this collateral to recoup their losses. And if you signed a personal guarantee, the lender may be able to come after your personal assets as well.
If you’re in a position to sell your business, that’s often a better option, as the buyer will usually assume responsibility for any existing debts — though this isn’t guaranteed. You’ll need to negotiate terms with your buyer.
If selling your business isn’t an option, try talking to your lender to see if you negotiate a repayment plan.
Compare business loan offers
Read more
Business Loans for Startups Updated November 9, 2018 A startup business loan can help you access capital to launch or expand your business….Read more
SBA Loan Calculator Updated November 5, 2024 Use LendingTree’s SBA Loan Calculator to estimate monthly payments on SBA Loans. It’s important to…Read more