If your business has been impacted by the coronavirus pandemic and you’re looking for loans specific to COVID-relief, refer to our coronavirus business loans guide.
At one point or another, most business owners have asked themselves: How do I get a small business loan?
Getting a business loan can be intimidating. Even if you have narrowed down a lender, you might be confused about where to go from there, especially if this is your first time looking for financing. Luckily, we’re here to help. Figuring out how to get a business loan is as easy as these six steps:
1. Determine why you need a business loan.
When applying for a business loan, the first thing you should ask yourself—and the first thing that every lender will ask you—is:Why?
Some owners of small businesses require working capital for a variety of reasons, while others require it specifically for a specific piece of equipment. You should take some time to determine the reason you require capital because it will influence your choice of lender and type of loan.
Having said that, you should also keep in mind that the purposes for which these loans are used may occasionally blur. For instance, you might want to refinance existing debt while also borrowing additional funds for working capital or you might need capital to purchase equipment for the startup business you’re starting. Numerous lenders assist borrowers who require business loans for a variety of reasons.
Keeping this in mind, the most common reasons you might want to get a small business loan are as follows:
2. Calculate how much debt you can afford.
The next step in getting a small business loan is figuring out how much debt you can handle once you know why you need money.
Unfortunately, the amount of capital you need to achieve your company’s objectives may not always match your financial resources.
Having said that, if you take on too much debt financing, you might end up with a mountain of difficult-to-pay-off debt that hurts rather than helps your business.But naturally, if you take on too little debt, you might miss out on opportunities.
To ensure that you can afford a business loan, you should therefore take the following steps:
Utilize a Business Loan Calculator A business loan calculator can be a useful tool for determining how much debt you can afford in advance and even more so when you are actually considering a loan offer.
You can estimate the monthly payment on your loan with a business loan calculator, allowing you to evaluate your long-term debt cost and how this payment will or won’t fit with your other expenses.
You will need to enter the loan’s interest rate and term into the calculator in order to use it. After that, you can play around with the loan amount to see how it affects your monthly payment.
3. Determine your eligibility for a business loan.
An important step in getting a business loan is knowing what kind of financing is a realistic option for you.
In other words, before you start a broad search, you’ll want to take a look at your eligibility and determine what funding options you’ll be likely to qualify for.
So, what qualifications do business lenders typically look at? Here are three of the most important business loan requirements:
Time in Business
Borrowers with at least two years in business will have the most affordable small business loans available to them—like long-term loans, bank loans, or SBA loans.
If you have at least one year in business, you may not be able to qualify for the most competitive loan products, but you should still be able to qualify for a variety of options—particularly from online lenders. On the other hand, if you have less than a year in business, your options will be more limited—however, there are certain types of loans that are well-suited for startup funding.
Next, you’ll want to look at your business finances. A second important eligibility factor in getting a business loan is your annual revenue.
Overall, lenders will work with a variety of businesses in terms of this qualification.
Lenders work with a variety of businesses in this regard. For instance, a company like Fundbox (offering invoice financing and lines of credit), will work with business owners who only have $25,000 in annual revenue. Other lending options, however, will require hundreds of thousands in annual revenue in order to qualify.
Generally, if you have at least $100,000 in annual revenue, you’ll be able to qualify for a wide variety of business loan products.
Personal Credit Score
Personal credit scores also play a large part in what business loans are available to business owners.
As you can imagine, the higher the personal credit score, the better. Lenders want to see a track record of on-time, full payments. If your personal credit score is strong and indicates that you can be trusted to pay back your debts, (i.e. 700 or higher) you’ll likely be able to shop for top-tier lending products when looking for a business loan.
This isn’t to say there aren’t business loans for bad credit available, they’ll just be slightly more limited. Therefore, before you dive headfirst into a business loan search, you should know where your credit score stands so you aren’t considering options that aren’t feasibly available to you.
4. Browse different types of business loans and lenders.
Your next step for figuring out how to get a small business loan is to determine which loans to apply for. A decade ago, your local bank was the only place you could really go to if you had a small business and needed a loan—now, there are many more options.
Therefore, you’ll need to decide which type of business loan meets your financing needs (and make sure you can qualify) and then find the right lenders to apply with. Ultimately, you’ll want to compare multiple different options of the same type—considering factors such as interest rates, terms, amounts, fees, etc.—to find the best deal for your business.
Bank loans are by far the most affordable loan option on the market. If you have an offer from a bank, you should probably take it.
Wondering how you can get a business loan from a bank?
Well, getting an offer from a bank can be a long and strenuous process, and it’s difficult to qualify. Banks tend to transact in large loans (over $250,000) because it’s not as profitable for them to underwrite small loans. You need a great personal credit score to qualify, but that’s a bare minimum—ideally, your business should be profitable, and you should have personal or business assets that can serve as collateral.
This being said, it doesn’t hurt to have a conversation with a banker to see if their bank can give you a loan. Sometimes, small business owners find that local community banks and credit unions, which are more in tune with the local economy, are more receptive than national banks.
However, if you need money fast, relying on a bank might not be the best way to get a business loan. Their applications can take several weeks to complete, and it could be weeks or months before you hear back from them.
Popular Lenders Offering Bank Loans
Almost all of the recognizable, national banks offering lending products. Wells Fargo, Chase, and PNC are popular lenders among small business owners.
SBA loans are slightly more expensive than bank loans, but they are still very affordable and easier to qualify for than bank loans. There are SBA loans you can apply for online, making for an easier and faster loan process.
With SBA loans, the Small Business Administration (SBA) partially guarantees a portion of the long-term financing that banks and other SBA lenders make. The guarantee makes the loan less risky for the lender, so they are more likely to approve the borrower. The SBA also sets maximum interest rates for these loans, and the rates range from 5% to 10%.
Although SBA loans still can be tough to qualify for, there are programs designed to meet a variety of business needs. The 7(a) loan program is the SBA’s most popular program, which offers loans up to $5,000,000 that can be used for general working capital purposes. The SBA microloan program issues loans under $50,000 and is a great option for startups. Finally, the CDC/504 loan program is for commercial real estate and other capital intensive purchases.
If you have a good credit score, solid business financials, and at least two years in business, then you could be a good candidate for an SBA loan.
Popular Lenders Offering SBA Loans
Both national and smaller banks offer loans through a variety of the SBA’s programs. Wells Fargo is consistently among the top SBA lenders in the nation. Fundera also helps borrowers apply easily with top SBA lenders like BayFirst and Celtic Bank.
Medium-Term Online Loans
Medium-term loans are a faster online counterpart to SBA loans and bank loans. Terms range from two to five years in length, and the rates are competitive, starting in the single-digit range and going up to about 30%. Although this is roughly double bank loan and SBA loan rates, medium-term loans are often a much more practical option for small business owners.
With these loans, you simply apply online, and you can get approved and have the funds in your account in fewer than two weeks (sometimes even as fast as a few days). Loan sizes range up to $500,000, so they’re great for small and major business expenses.
Popular Lenders Offering Term Loans
Funding Circle and Credibility Capital are two online business term loan lenders that are a great option to turn to if you’re looking to get a business loan but can’t qualify for one from a traditional bank.
Short-Term Online Loans
The repayment terms on short-term loans are just three to 18 months, and borrowers usually pay them back with daily or weekly repayments. APRs can get very high on short-term loans, ranging anywhere from 10% to 80% depending on the lender and the borrower’s credit profile.
These high APRs, however, are the price you pay for convenience. Short-term lenders can approve and fund your loan very quickly—often as soon as the same day you apply. In addition, these lenders charge higher rates because they have more flexible eligibility requirements—borrowers with just one year in business or weak credit scores can qualify.
Popular Lenders Offering Short-Term Loans
PayPal and OnDeck are three of the top online lenders offering fast access to short-term capital at an affordable rate.
Business Lines of Credit
Business lines of credit are a very popular product among small business owners, and for good reason. They make a great safety net in case of emergency—offering a pool of capital that can act like a cushion on your cash flow.
With a business line of credit, the lender approves you for a pool of funds that you can draw on whenever you need for your business. You pay interest only on the money that you draw. Once you pay back what you borrow (plus interest), those funds are available for you to use again. This works a lot like a small business credit card.
You can find a good mix of lenders for business lines of credit. Some are more difficult to qualify for than others, and some are more expensive than others.
Popular Lenders Offering Business Lines of Credit
Bluevine is one of the most popular lenders offering short-term lines of credits to borrowers.
Invoice financing is a specific type of business funding product that can be particularly useful for businesses that invoice other businesses. With invoice financing options, you can receive an advance of capital for your outstanding invoices, helping smooth out your cash flow while you wait for your customers to pay.
In this arrangement, an invoice financing company advances you a certain percentage of the value of your outstanding invoice (usually 50-90%), holding the remaining amount in reserve.
Each week it takes your customer to pay, the invoice financing company will charge what’s called a “factor fee” on the reserve amount (usually about 1%). Once your customer pays, you’ll get the remaining reserve amount (minus any fees that the company charges).
This business funding option tends to be easier to qualify for than, say, a term loan or SBA loan because the invoice serves as collateral for the capital.
Popular Lenders Offering Invoice Financing
Fundbox offers an invoice financing product for borrowers with lower credit.
Equipment financing is a great option for business owners who need to purchase new or used equipment, but can’t afford to pay for it all upfront. With this option, lenders will loan you cash to cover the upfront cost of the equipment.
Typically, you’ll then pay back your equipment financing with fixed, monthly payments—with interest on top. Some lenders also offer equipment leases with lower monthly payments. Interest rates for this type of funding range from 4% to 40%.
Since the equipment serves as collateral for the loan, it’s relatively easier to qualify, even if you have struggling credit history or low business revenues. You can receive equipment loans for almost any type of machinery or equipment, including commercial vehicles and trucks.
Popular Lenders Offering Equipment Financing
Balboa Capital offers an equipment financing product for borrowers with at least a 600 credit score. Although it can be challenging to qualify for, Balboa Capital offers relatively low rates as business financing goes.
Merchant Cash Advances
Merchant cash advances (MCAs) are probably the easiest way to obtain a business loan, but they are also the most expensive product on the market.
With a merchant cash advance, the merchant cash advance company purchases a portion of your future credit card sales. They advance you an amount of money, which you pay back with a small percentage of your daily credit card sales.
These companies can usually move quickly and have the most flexible eligibility requirements of any online lender.
MCAs can be the right product in specific situations—like for those with bad credit scores or little business history—but you should always ensure there isn’t a lower-cost loan you qualify for first. You should also be aware that some MCA companies might quote their rates in a way that makes them seem more affordable than they actually are.
Therefore, if you’re evaluating an MCA, you should use this merchant cash advance calculator first.
5. Gather your loan application documents.
The next step in learning how to get a business loan is gathering the documents for your application. This is the next step in learning how to get a business loan after you have looked at all of your options and decided which kind of financing—along with potential lenders—will work best for your company.
Although almost every type of loan and small business lender will require a few pieces of information that are similar, the specific documentation that will be required and the procedure that you will need to follow will be unique to the lender you are working with.
Additionally, keep in mind that the more documents you need to submit, the harder it is to qualify for the loan.Banks have the highest rates on the market, but they require the most documentation because they carefully vet borrowers and only approve the most qualified ones.
Online lenders, on the other hand, require less documentation.They typically base their approval decisions on fewer pieces of information because they have incorporated more technology into the application process.
Having said that, the best thing you can do at this point is to group all of your documents together in one place, like a file on your computer.You should also respond as quickly as you can when lenders ask for more documentation because doing so will help you finish the application process and get your loan faster.
Again, although the list of requirements varies greatly from lender to lender, the following information is typically required:
Basic business information—entity type, address, industry, founding date, etc.
Basic personal information about the applicant, as well as other owners
Business financial statements
Business bank statements
Personal and business tax returns
Personal and business credit scores
Existing debt schedule (if applicable)
Business legal documents
6. Complete your loan application.
The application process is the final step in obtaining a small business loan.
Because each lender will likely conduct a hard pull on your credit history, which can lower your credit score, we recommend that you do not apply for more than one or two loans at once.
You can also use a marketplace like Fundera, which combines all of your options into a single app.
The lender will let you know if you qualify for a business loan after you submit your application, either online or on paper, depending on the lender.After that, the lender will go through all of your documents and verify all of your information before approving your loan.
The lender will give you the loan agreement if you pass the underwriting.Make sure you understand the loan’s terms, including any fees that will affect your APR, before signing the agreement.
An application fee, an origination fee, a guarantee fee for SBA loans, a fee for your credit report, a prepayment fee if you repay the loan early, and a late payment fee are all possible fees.Before closing on the loan, you should check that the lender has answered all of your questions about the cost and the structure of the loan. You might even talk to an accountant or business attorney to look over the agreement.