Many small and midsize businesses will need a business loan at some point, whether it’s to purchase new equipment or real estate, obtain working capital during a seasonally slow period, or invest in a major new opportunity. There are a variety of loan products and lenders available, and securing the right business loan can be a confusing process, especially for first-time borrowers. Follow our guide to understand the seven basic steps involved in getting a business loan.
Apply for a loan
How to Get a Small Business Loan
- Determine your goals for the loan.
- Explore the different types of business loans available.
- Compare small business lenders.
- Understand the requirements to qualify for a business loan.
- Calculate the cost of a loan and determine affordability.
- Gather documentation.
- Apply.
1. Determine your goals for the loan.
Before applying for a business loan, you should have a clear purpose for the funding and understand how much capital you’ll need. Businesses obtain loans for many reasons, such as:
- Buying equipment, machinery, or real estate to help grow your business
- Expanding your business to another location
- Dealing with a seasonal slow period
- Hiring and training new employees
- Building your business credit score
- Dealing with an emergency
- Refinancing existing debt
Having a clear understanding of the purpose of a loan can affect what type of loan will be most beneficial to your business. Lenders will also often want to see that you have a good plan for how borrowed funds will help your business grow and succeed, as well as seeing that you will be able to repay the loan comfortably.
Loan Amount
As part of understanding the goals for your loan, it’s important to know roughly how much you’ll want to borrow. Borrow too little, and you may not be able to meet your business goals. On the other hand, an excessively large loan could lead to large loan payments that could be difficult for your business to handle. If your business plans to take on a major project such as opening a new location or purchasing new equipment, make sure that you have an accurate idea of the full cost of the project. Otherwise, you might find yourself financially overextended.
Timing
In addition to knowing how much you’ll want to borrow, you should also have a good sense of how soon your business needs funding. Timing can have a big impact on the type of loan you apply for, application requirements, interest rates, and more.
If you’re not urgently in need of funds, you’ll likely have more favorable loan options. You can also use time to your advantage, especially for newer businesses with limited financial histories. If you can establish a longer operating history and build up your credit scores, you’re more likely to see lower interest rates and have an easier time getting approved for a loan.
However, there are some circumstances where a business will need to secure funds quickly, whether it’s to take advantage of a time-sensitive opportunity to start a new project or deal with a sudden emergency that requires costly repairs.
Online loans are known to have a streamlined application process and are generally able to disburse funds more quickly than bank loans or SBA loans, which require more extensive documentation and take time to be approved. However, online loans are typically more expensive, with higher interest rates and fees.
2. Explore the different types of business loans available.
There are many types of loan products, and the best loan for your business depends on what loans you are able to qualify for, as well as how you plan to use the loan. Once you’ve determined your goals for a loan, you should look into the different types of loans available.
Some of the most common loan types include:
| Loan Type | Best For |
|---|---|
| Term loan | Qualified businesses looking for short or long-term financing needs and predictable repayment schedules |
| Business line of credit | Businesses that need flexible access to working capital |
| SBA loan | Small businesses that have trouble getting approved for more traditional loans but are otherwise qualified |
| Equipment financing | Businesses looking to finance the purchase of new equipment |
| Microloan | Startups and newer businesses looking for small amounts of capital (less than $50,000) |
| Invoice financing | Businesses that regularly invoice clients and have capital locked up in large outstanding invoices |
| Merchant cash advance | Seasonal businesses that take card transactions and need quick access to cash |
| Commercial real estate loan | Businesses looking to expand, renovate, or purchase commercial property |
| Personal business loan | New business owners with good personal credit looking for small amounts of funding |
| Business acquisition loan | Business owners looking to purchase an existing business, buy a franchise, or buy out a business partner |
Term Loans
One of the most common types of business loans, term loans allow businesses to borrow a lump sum that is repaid in installments over time. The length of the loan can range from months in the case of short-term loans to years for medium- and long-term loans. Most term loans are for one to five years.
Term loans can be used for a wide range of business needs, including purchasing real estate, inventory, or equipment, hiring new employees, performing renovations, expanding a business, or refinancing debt.
Term loans are available from banks and credit unions as well as online lenders. Term loans are likely to have favorable interest rates, especially for longer-term bank loans.
Business Lines of Credit
Unlike a term loan, a business line of credit is a revolving line of credit—it gives businesses access to a fixed amount of capital that they can draw from as needed. As you repay your loan, funds become available again.
Business lines of credit are flexible and can help businesses access working capital. Business lines of credit are often used for buying inventory, paying suppliers, dealing with late invoices, paying for urgent expenses such as maintenance, or starting a new contract or project.
SBA Loans
SBA loans are guaranteed by the U.S. Small Business Administration, making them a much lower risk loan for lenders. There are a number of loan programs through the SBA, each with their own requirements, and the lenders that work with the SBA may have additional requirements.
Designed for small businesses that would otherwise struggle to obtain financing, SBA loans require extensive documentation and can be more difficult to qualify for, but they offer favorable terms, with lower interest rates and longer repayment terms than many other business term loans.
Equipment Financing
Equipment financing allows businesses to borrow funds to purchase new equipment or replace or upgrade existing equipment. This type of financing is structured as a term loan, with borrowers paying off the cost in regular installments, with added interest.
Equipment financing is a great choice for small businesses that need to purchase equipment, with a relatively easier approval process and more favorable terms than other types of loans, including fixed interest rates and longer terms. This means that payments are generally manageable and predictable.
Microloans
Microloans offer smaller loan amounts, ranging from a few hundred dollars up to $50,000. This type of loan can be a good option for small businesses and startups since it has less stringent requirements for credit scores, length of time in business, and collateral.
Invoice Financing
Invoice financing is an option for businesses that regularly bill or invoice their customers. Companies can borrow against unpaid invoices, with the invoices serving as collateral. If your customers may take a long time to pay their bills and you need working capital in the meantime to cover payroll costs, supplier payments, and other expenses, this type of funding can provide assistance. However, invoice financing may have high fees compared to other types of loans.
Merchant Cash Advance
A merchant cash advance allows your business to exchange your future earnings for immediate cash. With MCAs, you receive a lump sum of cash from a merchant cash advance provider, which you pay back using a percentage of your daily sales.
Commercial Real Estate Loan
A commercial real estate loan, also called a commercial mortgage, is a loan used to purchase or develop commercial property such as office space, retail shops, factories, restaurants, warehouses, or hotels. A commercial mortgage can be used to purchase existing property, perform renovations or expansions to an existing building, construct a new property, or refinance debt.
Personal Business Loan
A personal business loan is a personal loan used for business purposes, including inventory purchases, payroll, or marketing initiatives. For new or small businesses, personal business loans may be the ideal route for funding because it can be difficult to obtain a loan with little to no operating history. With no established track record to refer to, approval for a personal business loan is based on your personal financial history instead.
Business Acquisition Loan
A business acquisition loan is a loan used to fund the purchase of an existing company. Loans can be used to purchase an existing business, buy a franchise, or buy out a business partner. Business acquisition loans are typically structured as medium- or long-term loans.
3. Compare small business lenders.
Business loans are available from a variety of lenders, and it’s a good idea to understand the pros and cons of each type of lender. Generally, lenders fall into three main categories: traditional banks and credit unions, online lenders, and microlenders.
| Lender | Best For | Description |
|---|---|---|
| National Business Capital | Overall | National Business Capital is a financing marketplace that specializes in connecting small businesses with a variety of loan products and over 75 lenders. |
| Rapid Finance | Short-term Loans | Rapid Finance is an alternative lender known for offering a variety of short-term loans targeted at small and midsize businesses. |
| Lendio | Startups | Lendio is a financing marketplace that works with a variety of lenders, many of whom offer loans specifically for startups. |
| Fundbox | Lower Credit Scores | Fundbox is an alternative lender that is best known for offering lines of credit and invoice financing for small businesses. |
| Accion Opportunity Fund | Microloans | The Accion Opportunity Fund is a non-profit lender focused on providing funding to small businesses, particularly business owners who are underrepresented minorities and women who may not qualify with other traditional lenders. |
Traditional Banks and Credit Unions
Traditional banks and credit unions are some of the most popular choices for business loans, as they typically offer lower interest rates and more favorable terms. In addition, banks that you have an established relationship with are likely to offer special rates. However, these lenders have stricter requirements and not all small businesses will qualify. Because of their more involved application process, it can take longer to receive a loan from a bank or credit union.
Traditional lenders are a good choice for businesses that have been operating for at least two years and have strong business and personal credit scores (often above 680). Loan types offered include term loans, business lines of credit, and commercial mortgages. SBA loans are also offered through banks and credit unions.
Online Lenders
Online lenders can be a good choice for newer, less-established businesses. They offer more flexible requirements and may lend to companies that have been in business for as little as six months, companies with lower credit scores (500 and up in some cases), and companies with lower annual revenues. Online lenders are also faster than traditional lenders and can usually approve loans and disburse loans within a matter of days. However, online lenders generally offer higher interest rates and fees than traditional lenders.
If you need to secure funding quickly or don’t meet bank qualifications, online lenders can be a good choice. Online lenders offer common loan types such as term loans, business lines of credit, and commercial mortgages, but they may also offer other types of funding such as invoice financing and merchant cash advances.
Microlenders
If your business needs a small amount of capital—less than $50,000—a microlender could be a good source. Microlenders may approve startup businesses that have no credit history, lower credit scores, limited time in business, or no available collateral. The SBA offers microloans, but there are other nonprofit programs that offer them as well.
4. Understand the requirements to qualify for a business loan.
Before you apply for a loan, it’s important to understand the requirements for approval. Lenders typically look at these factors when qualifying businesses for a loan:
Business and Personal Credit Scores
Business and personal credit scores are critical factors in determining whether you qualify for a loan. Many banks and credit unions require a personal credit score of 680 or higher, while online lenders may have less stringent criteria.
Annual Revenue
Lenders generally have a requirement for minimum annual revenue that your company must meet, such as $50,000 or $100,000. For newer or smaller businesses that don’t meet these requirements, online lenders or microlenders may still be an option.
Length of Time in Business
Businesses that have been operating successfully for a longer period of time are likely to find it easier to qualify for a loan and receive favorable terms. Many lenders require you to have been in business for a minimum of one to two years, but some online lenders have a minimum of six months, and microloans may also be an option for new businesses.
Outstanding Debt
If you are already paying off a substantial amount of loans, lenders are unlikely to want to extend another loan to you. Your debt-to-income ratio should be less than 50 percent.
Collateral
If you’re seeking a loan to finance new equipment or buy commercial real estate, the property itself will serve as collateral. However, other types of loans may also be secured by collateral. In this case, you will need to identify valuable assets such as accounts receivable, equipment, or inventory, and provide a valuation to the lender.
Business Plan
Business plans are very important for newer businesses and startups, as these companies don’t have a track record of financial success to assure lenders that a loan can be repaid. Lenders will want to see the qualifications of your business’s leaders, financial projections, business goals, marketing plans, and a plan for repaying the loan.
Industry
Some industries, such as cannabis, firearms, adult entertainment, and gambling, are considered higher risk, making it trickier to secure funding for companies in those industries. Before applying for a loan, make sure you check what industries the lender considers ineligible.
5. Calculate the cost of a loan and determine affordability.
Before you go forward with a particular business loan, make sure you understand the full cost of a loan and what your payments would be. Look at your income, cash flow, and expenses, calculate your loan payments, then make sure the amount fits comfortably in your budget. You’ll need to have sufficient funds left over to cover other expenses.
You can use our online calculator to determine what your payments would be, including interest. Lenders will likely look at your debt service coverage ratio. To find this number, divide your average monthly net income by your monthly loan payment. The number should be greater than one if the loan is affordable for you.
Estimate the cost of a business loan
Calculate your estimated payments and find a business loan you can afford.
Find a small business loan and compare rates
How to Compare Loans
It’s a good idea to compare loans from several lenders. When you evaluate different loans, consider the length of the loan terms, interest rates, cost of added fees, APR, how quickly you can receive funding, and the amount of funds available. You will need to calculate what your loan payments would be and make sure that you would be able to repay the loan comfortably.
Some loans have restrictions for how they can be used, so you should make sure that the loan you are considering will permit you to use it as planned.
It’s also important to consider whether collateral is required. If a loan is secured with collateral, the lender can repossess the collateral if you fail to repay the loan. Loans without collateral often have higher interest rates. Even if a loan does not have collateral, small business owners will likely have to sign a personal guarantee, which makes them personally liable for repaying the loan.
If you may want to pay your loan off early, make sure that your loan provider will allow this, as many lenders charge prepayment penalties.
Compare Lenders
There are a variety of loan options and lenders in the market, and it may be difficult sorting through all of the options. AdvisorSmith analyzed over 30 different lenders and determined the top lenders for small businesses. To determine the best lenders, AdvisorSmith considered a number of factors, including financial strength ratings, customer satisfaction data, complaint ratings from the Better Business Bureau, available terms and loan amounts, and availability of information and ease of use of the lender websites.
| Lender | Best For | Description |
|---|---|---|
| National Business Capital | Overall | National Business Capital is a financing marketplace that specializes in connecting small businesses with a variety of loan products and over 75 lenders. |
| Rapid Finance | Short-term Loans | Rapid Finance is an alternative lender known for offering a variety of short-term loans targeted at small and midsize businesses. |
| Lendio | Startups | Lendio is a financing marketplace that works with a variety of lenders, many of whom offer loans specifically for startups. |
| Fundbox | Lower Credit Scores | Fundbox is an alternative lender that is best known for offering lines of credit and invoice financing for small businesses. |
| Accion Opportunity Fund | Microloans | The Accion Opportunity Fund is a non-profit lender focused on providing funding to small businesses, particularly business owners who are underrepresented minorities and women who may not qualify with other traditional lenders. |
6. Gather documentation.
When you are ready to apply for a loan, you’ll need to gather a range of documentation. Bank and SBA loans in particular require large amounts of information, while online lenders typically require less extensive documentation. Many banks will require you to provide three years’ worth of financial information.
Commonly required documents and information include:
- Business and personal credit scores
- Financial statements
- Tax returns
- Lease information
- Business licenses
- Information about collateral, if the loan requires it
- Business plan
- Personal financial statements
7. Apply.
After you have completed the previous steps, you are ready to submit documentation to your chosen lender and apply for your loan. It’s best not to apply for too many loans at once—lenders will do a hard pull on your credit history, which can lower your credit score.
Once the lender reviews your documents and approves your application, you will receive a loan agreement. Once you have confirmed that the loan terms are acceptable, you can sign the agreement and receive the funds.
Final Word
Business loans can provide invaluable funding to help small businesses thrive, but the process of obtaining a loan can be confusing and complex. It’s critical that you have a clear idea of the amount and purpose of the funds and carefully research your loan options. Once you have targeted the type of loan that suits your needs, you can evaluate offers to find a favorable loan that will benefit your business.
