How to Get a Small Business Loan: Five Key Steps

ByJulija A.
September 14, 2021

No matter if your goal is to resolve cash flow issues, cover payroll, seize a growth opportunity, or increase the value of your company, a business loan for a growing company can help you achieve it. Still, making sure that you plan your finances and devote enough time to exploring funding opportunities is of utmost importance. But not everyone knows how to get a small-business loan.

Considering that business loans are available from both traditional lenders such as banks and credit unions, and alternative funding providers, such as online lending marketplaces, it’s easy to get overwhelmed.

Knowing the steps to get that additional capital your business needs - from understanding evaluation criteria to learning how to compare offers and submit applications - can not only reduce frustration but also increase your chances of approval. Keep reading to learn more about the lending process and the five steps you need to take to get the right small-business financing.

#1 Learn About Eligibility Requirements

Before applying for small-business financing, it’s essential to understand the eligibility criteria you’ll need to meet. Lenders evaluate loan applications based on several different factors, so let’s take a look at some of the most common ones:

Credit Score

In addition to your company’s credit profile, your personal credit score will also play a significant role in any creditworthiness decision. The reason behind this is simple - lenders try to determine whether loan applicants will make on-time payments based on how they handled their finances in the past. So before you proceed with business financing applications, it’s vital that you understand your credit profile.

Luckily, you can get your credit report for free from the three major credit reporting agencies - Experian, Equifax, and TransUnion. The three bureaus also let you monitor your score, either for free or for a small fee. The better your credit, the more options you’ll have when it comes to submitting business loan applications.

Banks and other traditional lenders typically only accept applicants with scores of at least 680 and preferably in the 700s. However, keep in mind that all is not lost if your score falls below that threshold. You can still get a small-business loan from nonprofit microlenders or funding for bad-credit business borrowers.

Cash Flow

Funding providers want to be sure that you’ll be able to make on-time payments. Given that most lenders impose daily, weekly, or monthly repayment schedules, cash flow is a good indication of whether your company will be able to meet these terms. When assessing the state of your cash flow, lenders may look at past sales, expenses, future reporting, or even unpaid invoices.

Additionally, small-business-loan providers may also request to view at least three of your most recent bank statements before approving a business line of credit, a short-term loan, or even a business credit card.

Annual Revenue

Many funding providers turn down small-business-loan applicants unless they can meet their minimum annual revenue requirement, which can range anywhere between $50,000 and $250,000. To avoid being rejected for a loan, make sure to calculate your revenue and find out the lender’s requirements.

If your annual revenue isn’t high enough, don’t give up just yet. If you are not sure how to get a small-business loan in your circumstances, look into short-term options or equipment financing solutions.

In-Business Time

Lenders will also consider how long your company has been operating. With most online funding providers, you’ll need to have been in business for at least one year, while traditional lenders such as banks and credit unions require two years as the minimum in-business time. That’s why startups generally find it a bit tricky to qualify for financing from major funding providers. So, if you are after startup business loans, we suggest you look into business credit cards.

Collateral

In theory, you can get business financing in the form of secured and unsecured loans. The only difference between the two options is that a secured loan requires you to put up collateral in the form of property or equipment the lender can seize if you don’t repay the loan. On the other hand, unsecured business loans don’t require you to put up any collateral for potential seizure. That’s why they’re quite rare and only meant for funding providers’ most creditworthy clients.

Putting up business collateral can be risky, even if it’s just a general UCC lien, but it can also increase the amount lenders let you borrow and secure better small-business loan rates.

Note that your funding provider may also require a personal guarantee regardless of whether you go for a secured or an unsecured loan. This means that you may need to step in and repay the loan personally should your business fail to do so.

Industry

Lastly, remember that some industries are more difficult to finance than others. While most funding providers won’t be opposed to offering a loan to any business, certain lenders have industry preferences that affect their financing decisions. For example, if you run a company that deals with adult entertainment, gambling, or unproven tech, your options will be limited compared to someone running a company in a more widely accepted field.

Most business lending companies provide a list of industries they don’t serve, so prospective borrowers can review their options before submitting applications.

#2 Explore Different Loan Types

After getting familiar with general eligibility requirements, the next step involves determining what type of funding you need depending on your company's financial needs and credit situation. Chances are that your funding needs will fall into one of the following categories:

  • Starting a new business. As we have already mentioned, lenders typically require evidence of healthy cash flow to support the loan’s repayment schedule, which makes it hard for companies that have been operating for less than a year to qualify for business loans. If this resembles your situation, remember that there are new-business loans, such as startup financing solutions, small-business credit cards, or even personal loans.
  • Managing day-to-day expenses. If you need a working capital boost to keep up with your everyday expenses, a business line of credit is probably the right choice. No matter if you need to bridge cash flow gaps or cover an unexpected cost, this flexible funding type will offer you a safety net. Alternatively, you can also look into short-term business funding.
  • Growing your business. If your goal is to expand your company and make some major changes, such as purchasing new offices or a vital piece of equipment, we suggest you look into traditional small-business lending options such as long-term loans or government-backed SBA loans, which typically have higher borrowing maximums. Additionally, keep in mind that many lenders offer specific funding products to meet a growing company's needs, such as loans for vehicle purchases or equipment financing.

#3 Compare Small Business Funding Providers

Now that you’re aware of the eligibility requirements for qualifying for funding and what loan product best fits your needs, it’s time to pick a lender. Note that not all lenders provide all types of financing, so you’ll need to narrow down your search to those that offer your preferred loan types and are likely to approve your application based on their business loan requirements.

Here are the main types of lenders:

  • Direct lenders. Banks, credit unions, investors, and online lenders all fall into this category. If you decide to work with a direct lender, you won’t face a third-party intermediary when submitting your loan application, receiving funds, or making repayments.
  • Lending marketplaces. This option is unique because it lets you find suitable lenders based on your qualifications. A lending marketplace is one of the most convenient places to apply for a business loan, as it matches you with the top choice from its pool of lenders based on your company’s qualifications and funding needs. Considering that lending marketplaces usually operate online, applications are typically processed much faster than in traditional direct-lending scenarios.
  • Peer-to-peer lenders. The space of peer-to-peer lending or P2P for short has grown in size and popularity over the past few years and can be a great choice for prospective business borrowers who have been rejected by more traditional financing providers. Peer-to-peer business loans come in many shapes and sizes, such as crowdfunding opportunities. 

To help you decide which type of lender is right for you, we encourage you to ask yourself the following set of questions:

  • Do I have good credit?
  • How much money do I need?
  • How quickly can I pay the money back?
  • Will access to a continuous line of credit be beneficial for my business?
  • Which banks do I have an established relationship with?
  • Am I comfortable with putting up personal or business assets for collateral?

If you have a credit score of at least 680, have been in business for a minimum of two years, and don’t need the cash immediately, consider getting a business loan from a bank or a credit union. That way, you’ll get access to some of the market’s lowest annual percentage rates.

Applying for this type of loan with an online lender or a lending marketplace is a smart choice if you need the funds quickly but lack collateral and time in business. While these types of funding providers typically have less favorable APRs than banks, their approval rates are much higher, and funding times much faster. 

A peer-to-peer lending marketplace is a good place to apply for a loan for a business if you can’t qualify for a more traditional solution, especially if you run a new business or have bad credit. You may not be eligible for a large loan amount, but the funding still should be enough to help you weather a storm or take on a business opportunity.

#4 Get Prequalified and Gather Your Documentation

While you can get pre-qualified based on the basic information you provide with some lenders, the complete loan application process will probably involve a hard inquiry on your credit report. That’s why you should narrow down your choice and apply only with the lenders who are highly likely to grant you a business loan, so as not to damage your credit too badly.

Before you start, remember to check whether you have all the required documentation. Gathering all the necessary files in advance and keeping them handy will help streamline the process of applying and getting approved for your loan.

While different lenders may request different pieces of information, you’ll probably need to submit the following:

  • Business and personal credit scores
  • Business and personal bank statements
  • Tax returns and other relevant IRS documents for both your and your company’s tax accounts
  • Your company’s legal documents, such as articles of incorporation and franchise agreement
  • Business forecast with details on future costs and cash flow

#5 Apply for a Business Loan

Finally, after you’ve identified the right type of financing, it’s time to start the loan process officially and apply.

We suggest you start by comparing two or three similar offers by looking at their overall loan terms focusing on the annual percentage rate. In addition to the interest rate, APR also includes all the fees you’ll be charged, such as the origination fee or closing costs. In other words, APR reflects the total annual cost of a particular business funding opportunity.

You’re likely wondering how to get a small-business loan that won’t end up costing you an arm and a leg. Of the options you can qualify for, choose the loan with the lowest APR. Also, make sure that you’ll be able to keep up with the loan’s repayment schedule. Once you’re comfortable with the terms, submit your application with all the documents you’ve previously gathered.

There are virtually no differences in the loan application process, whether you’re sitting in a lander’s office with pen and paper or filling out forms online. Completing applications for small-business loans can take time, but if you prepare your documentation beforehand, it’ll be much less laborious. Once you’re done, depending on the loan type you opted for, you’ll need to wait anywhere between one business day and six months.

Lastly, it’s important to mention that, from the credit bureaus’ point of view, business and personal funding inquiries are the same. In other words, if the lender asks about your personal credit history, your credit may be affected each time you submit an application. That’s why it’s crucial to go with your best bet.

Q&As
How hard is it to get a small-business loan? +

One of the most common reasons banks reject small-business owners applying for additional capital is their below-average credit score. Traditional funding providers are risk-averse and typically require borrowers to have a minimum score of 680. When evaluating applications, they also look at time-in-business, cash flow, and annual revenue, making it difficult for startups and newly-established businesses to qualify.

On the other hand, online lenders, lending marketplaces, and peer-to-peer platforms cater to a broader range of business funding seekers, offering options even to poor-credit applicants. So, if you are wondering how to get a small-business loan with bad credit, note that it’s definitely possible, though it may require additional exploring.

Can I get a business loan with no money? +

In most cases, lenders require you to demonstrate that you already have lots of money before they decide to lend you some more. There are, however, alternative funding sources that offer loans to businesses that are just starting out. Sometimes referred to as “no-income business loans,” these financing options are typically used for solving cash flow issues, debt consolidation, or inventory purchases.

How do I qualify for a small-business loan? +

First of all, it’s important to point out that not all business funding providers have the same eligibility requirements. While traditional lenders such as banks generally don’t offer financing to businesses that have been operating for less than two years, there are online lenders that provide financing to startups.

In other words, to make sure that you’ll be eligible for funding, inquire about different lenders’ minimum qualifications and requirements, compare their business loan rates, and choose the option that best fits your needs and circumstances.

What credit score is needed for a small-business loan? +

There isn’t a simple answer to this question as different lenders have different eligibility requirements. Remember that there are funding providers that take your overall business and personal financial situation into account when evaluating applications.

Moreover, certain lenders focus on offering startup loans or funding for bad-credit applicants. All of these can be the answer if you’re wondering how to get a small-business loan with a less-than-stellar credit score.

About author

Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.

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