How to Get a Business Loan in 6 Steps
- Expertise: Personal finance, small business loans
- Education: Whitireia Community Polytechnic, University of North Carolina at Chapel Hill
Jill A. Chafin is a staff writer at LendingTree, where she covers a variety of personal finance and small business topics. Her work has appeared on the Motley Fool’s Blueprint, How-to Geek’s Life Savvy, as well as her own blog.
Before joining LendingTree, Jill spent 20+ years as a freelance writer and editor. She has received multiple awards for her creative writing, with pieces published in literary anthologies such as the Personal Story Publishing Project. She has experience running her own business and loves helping others pursue their entrepreneurial dreams.
Jill earned a writing certification from the Whitireia Community Polytechnic in New Zealand and a bachelor’s degree from the University of North Carolina at Chapel Hill.
- Expertise: Personal finance, small business, credit cards, travel rewards, mortgages
- Education: American University, Princeton University
Kurt Adams is a Senior Editor at LendingTree, where he manages our network of freelance contributors. He also oversees small business content and frequently edits mortgage and credit cards content.
Before joining LendingTree, Kurt spent a past life as an academic, studying U.S. history. He now brings that near-decade of teaching, writing and editing to help people better understand personal finance.
Kurt earned a BA from American University and a PhD from Princeton University.
Janet Schaaf is a freelance writer, editor and proofreader who considers reader advocacy to be her calling. After taking a few roads less traveled, Janet completed a bachelor’s degree in English Literature from the University of Missouri-Kansas City, with English Department Honors. She has been correcting grammar and checking facts since she could string a sentence together. For the past three years, Janet has focused on making personal finance topics understandable and relatable. Loan terms and credit card agreements can look overwhelming, but understanding what you’re agreeing to is paramount in grasping the impact debt can have on your life.
Find the ideal business loan for your qualifications and company’s needs by comparing offers before applying.
1. Decide what type of business loan you need
Whether you want to buy commercial real estate or just need working capital loan to keep your business afloat during a seasonal lull, there are many types of business loans to consider. Answer the following questions to nail down the business loan that best suits your company’s unique needs.
How often do you need funds?
Consider your current business needs and how often you anticipate needing extra capital.
- One-time funding: Short-term business loans provide an upfront lump sum of cash, helping you tackle bigger purchases, expansions or renovations.
- Ongoing funding: A business line of credit offers flexible financing, allowing you to withdraw what you need when you need it for day-to-day expenses.
How much do you need to borrow?
The amount you want to borrow will help narrow down your business loan options. You could find a microloan for as little as $500, while SBA loans offer up to $5.5 million.
If you need to buy business equipment, such as computers, vehicles or large machinery, an equipment loan might be able to finance the entire cost.
How quickly do you need the funds?
The timeline to process your business loan application and disburse funds will vary by lender and loan type. For example, SBA loans come with comparatively lower interest rates, but funding may take two months or longer.
If you an emergency business loan, an SBA loan is probably not the best choice. An online, alternative lender could be a better option for more immediate needs since some offer same- or next-day funding. However, these fast turnaround business loans usually come with higher rates than traditional banks or SBA lenders.
2. Determine your eligibility
Each lender will have specific business loan requirements, often outlined on their website. Here are the most common eligibility criteria for small business financing:
- Credit score: To qualify for the best rates, you typically need a FICO Score of 670 or higher and a business credit score above 80. Check your personal credit score before applying to know where you stand. You can build your business credit by responsibly opening accounts with vendors and paying off invoices promptly.
- Time in business: You typically need to be in business for six months to one year to qualify for an online business loan, and at least two years with traditional banks. If you don’t qualify yet, you could wait until you become eligible or look at startup business loans.
- Annual revenue: Many lenders require a reliable income stream for small business financing, with annual minimums as low as $36,000 up to $480,000. If your revenue is on the lower side, consider applying for business credit cards or microloans.
- Collateral and/or personal guarantee: Collateral, such as real estate, equipment or cash, reduces a lender’s risk with secured business loans. If you default, the lender can repossess your collateral as a form of payment. A personal guarantee allows a lender to go after your personal assets if you fail to repay your debt.
- Repayment terms: Most lenders limit your loan to 30% of your annual revenue to ensure you can manage repayments. LendingTree’s business loan calculator can help estimate your business loan payments with added interest, keeping in mind that some lenders require weekly or even daily repayments. Whatever the payment schedule, review your budget in advance to make sure you can keep up.
3. Compare small business lenders
Some lenders might be a better fit for your business than others. Our catalog of small business lender reviews is a great place to start comparing business loan options.
Traditional banks
You can apply for a range of small business loans with a traditional bank, including term loans, commercial real estate loans, lines of credit and SBA loans.
While traditional banks tend to offer the lowest business loan interest rates, they usually have stricter criteria and a longer application process than online lenders. You will likely need to be in business for at least two years, plus have collateral and consistent revenue to gain approval for a small business loan.
SBA lenders
The Small Business Administration (SBA) partners with lenders nationwide to offer various loans for small businesses. The most popular option for general business expenses is the SBA 7(a) loan, with funds going up to $5 million and an interest rate that is capped based upon loan amount, repayment term and whether you opt for a fixed or variable rate.
If you want to finance major fixed assets, an SBA 504 loan can provide up to $5.5 million with repayment terms of up to 25 years. SBA microloans offer up to $50,000 and focus on underserved business owners and offer less-strict credit requirements than other lenders for women-owned business loans, veteran business loans and minority business loans.
Online lenders
Online lenders, also called nonbank or alternative lenders, utilize digital underwriting technology to approve or deny business loan applications with record speed. For example, Fundbox claims to make a funding decision in as little as three minutes. If you can’t gain approval from a traditional bank, you might have a better shot with an alternative lender since they tend to look beyond credit scores.
However, online lenders rarely offer rates as low as traditional banks, with APRs ranging from 4.66% to 48.9% or higher. Your final business loan rate will be based on the loan type and size, repayment term, credit score and whether you can provide collateral.
Microlenders
A business microloan can help startups, low-income businesses or those with a damaged credit history access the cash they need to launch, grow or expand their business. Nonprofit organizations and government agencies typically fund microloans, providing up to $50,000 with flexible terms, low-interest rates and minimal fees.
Some popular microloan lenders include Accion Opportunity Fund, Grameen America, Kiva and LiftFund.
4. Gather required documents
Before you apply for a business loan, your lender will likely request some of the following documents. By having these common documents at the ready, you’ll help speed the process along.
- Business plan. A business plan outlines your company’s mission and goals, including financing and marketing strategies. This can help lenders see how you plan to utilize the business loan.
- Business licenses. Each state has different requirements for business licensure. Make sure everything is in order before submitting your business loan application.
- 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. It’s common for lenders to request your and your business partners’ personal financial information to determine your overall creditworthiness for a business loan.
- Personal and business tax returns. Your personal and business tax returns are needed to show your overall net profit. Eligible business partners will likely need to provide their personal tax returns as well.
- Articles of Incorporation, Bylaws or Operating Agreement. Depending on your business entity, you may need to provide these legal documents.
- Building lease. If applicable, have any building leases on hand, including your monthly payment.
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.
It’s worth having someone review your business loan application before submitting it to ensure you haven’t overlooked any errors. Consider asking a colleague or contacting your local Small Business Development Center (SBDC). Having a polished loan application can help avoid any 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
- Business tax ID
- Annual net profit
- Number of employees (if applicable)
6. How to pick the best business loan
If you get multiple business loan offers, you’ve got the advantage and can choose the best small business loan. Here’s what to consider before signing the dotted line:
- Interest rates. Is the rate variable or fixed? How much interest will you pay over the life of the loan?
- Fees. Are there additional fees, such as origination, prepayment and late penalties? Add these to the loan amount to ensure the loan is worth the total cost.
- Terms. How long do you have to repay the loan? Do repayments start immediately?
- Funding speed. How quickly will the funds hit your bank account? Can you wait if the funding time is exceptionally long?
Frequently asked questions
Figuring out how to get a loan to start a business or expand a low-income business can be tough since most lenders require some form of business revenue before they take a risk on you. However, some lenders offer “no doc” business loans, requiring less documentation than traditional business loans. For example, you might not need to provide proof of revenue if you have a credit score of 680 or higher.
Alternatively, you can apply for a small business grant or launch a business crowdfunding campaign to raise the funds you need to get your business off the ground.
Yes, there are startup business loans with no collateral where certain lenders prioritize credit scores, expected cash flow and a personal guarantee.
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.
Credit score requirements vary greatly based on the lender and loan type. Some lenders disclose minimum credit score requirements on their website, helping you determine your eligibility before completing the application process.
Here are some typical personal credit score requirements for a small business loan:
- Bad credit business loan: Can range from 500 to 625
- SBA business loan: Varies, though having a score of 680 or higher can improve the likelihood of approval. The SBA also uses the FICO Small Business Scoring Service (SBSS) for 7(a) loans, with a minimum score of 155 required.
- Alternative lenders: Can range from 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.
Business owners with credit scores of 670 or higher are more likely to qualify for the most competitive interest rates on business loans. If your score falls below that or you have a limited credit history, consider a lender offering bad credit business loans — which might accept scores as low as 500.
Some lenders tend to place less emphasis on creditworthiness if your business has a steady stream of revenue and you can offer collateral, such as equipment or real estate. However, be prepared to pay a higher interest rate as a tradeoff for getting a business loan with a poor credit score.
If you have a low credit score or your business is relatively new, you might find it hard to get a business loan. Here are some ways to improve your chances of approval:
- Open a business bank account. Opening business bank accounts with a lender or bank can help establish a relationship, demonstrating that you are a reliable customer.
- Check your credit report before you apply. It’s crucial to fix a credit report error as quickly as possible before applying for a business loan. While the credit agency’s disputing process can vary, most investigations finish within 30 days.
Boost your revenue. Lenders may hesitate to lend to you if your expenses are high in relation to your income. Boosting your income is one of the key steps to get a business loan.