How to Get a Business Loan in 7 Easy Steps
A small business loan can provide the financing your company needs to cover daily expenses, purchase inventory, invest in equipment or expand with a franchise. You can apply for small business financing via a traditional bank, credit union or online lender.
1. Decide what type of business loan you need
Finding the right small business loan for your company depends on multiple factors, such as whether you need one-time or ongoing funding, how quickly you need funds and your business’s credit profile. Common types of small business loans to consider include:
- Term loans: Term loans provide a lump sum of cash that can be used for a wide range of business expenses, including marketing, payroll, renovations and expansions. Borrowers typically repay their loan in monthly installments.
- Lines of credit: A business line of credit functions like a credit card, providing access to flexible, revolving funds businesses can borrow against as needed for a set period of time. As the balance is paid off, borrowers can borrow against it again.
- Equipment financing: Used for purchasing or updating business equipment, these asset-based loans typically use the equipment itself as collateral. If borrowers fail to make payments on their financing, the lender can seize the equipment.
2. Determine your eligibility
Each lender has specific business loan requirements, often outlined on their website. In general, you can expect lenders to review the following criteria when applying for small business financing:
- Credit score: To get the best interest rates and most flexible terms, you typically need a personal FICO Score of 670 or higher and a business credit score above 80. You can use LendingTree Spring to monitor your credit score for free.
- Time in business: Alternative lenders typically require your business to operate for six to 12 months before extending credit, while traditional banks may require a minimum of two years. Early-stage companies can consider startup financing.
- Annual revenue: Many lenders require reliable income for small business financing. Annual minimums tend to range from about $30,000 to $250,000 or higher.
- Repayment terms: The amount of money you need, especially in relation to your annual income, can affect your odds of approval. If you’re considering a first-time business loan, aiming for a lower amount can help you keep up with payments while building your business credit.
- Collateral and/or personal guarantee: Secured business loans reduce a lender’s risk by requiring collateral, such as real estate, equipment or cash. If you default, the lender can repossess your collateral as a form of payment. A personal guarantee might also be required, allowing a lender to seize your personal assets if you fail to repay the debt.
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 open a business checking account with a desired lender. Some lenders even offer rate discounts or rewards when banking members get a business loan.
Offer collateral: Collateral reduces lender risk since your lender can seize your collateral to recoup its losses if you default on your loan. If your company is new and you don’t have business assets yet, you may be able to pledge personal assets, such as home equity or a retirement account — though this does put your personal assets at risk if your business fails.
3. Gather required documents
While every lender will have its own list of required documents, you can help speed up the application process by having the following paperwork ready to go:
- Business plan. A strong business plan outlines your company’s mission and goals, including financing and marketing strategies. This reassures lenders you’ll put their money to good use.
- Business licenses. Each state has different requirements for business licensure. Make sure all required documents are up-to-date before applying for business financing.
- 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. Your and your business partners’ personal financial information can help lenders determine your overall creditworthiness for a business loan.
- Personal and business tax returns. Personal and business tax returns are needed to show your overall net profit. Eligible business partners will likely need to provide this information as well.
- Articles of Incorporation, bylaws or operating agreement. You may need to provide these legal documents depending on your type of business entity.
- Building lease. If applicable, have any building leases on hand, including your monthly payment.
An executive summary is a three- to five-page document outlining your business’s needs and the project’s relevance to your company’s success, anticipated costs and timeline. You should also include recent revenue and profit numbers, current market dynamics and your overall growth plan for the next one to three years.
The more details you can include in your executive summary, the better. You want lenders to see your business as well organized and stable, with the potential to grow.
4. Get quotes
It’s important to get multiple quotes from different lenders when you’re considering financing options. Even when lenders advertise rates online, there are multiple factors that go into the rates that they actually offer you. You may be offered a rate that’s several percentage points higher than what’s listed online.
It’s also essential to consider the full financing offer. Some lenders may have additional fees that affect the total cost of the loan. Ultimately, the lender advertising the lowest rates may not be the lender that can offer you the best overall deal.
How getting quotes works
Requesting a quote from a lender typically involves a credit pull, and business loans may require pulls of both your business and personal credit, though this depends on the loan type and lender in question. While both soft and hard credit pulls can temporarily lower your credit score, the rate shopping exception makes it possible for borrowers to get multiple quotes in a short time frame and only have it count as a single inquiry. This specifically applies to certain types of business loans (as opposed to credit cards), and the rate shopping exception window may be as short as 14 days.
You can get quotes from individual lenders or use a marketplace like LendingTree to quickly assess potential financing options from multiple lenders at once.
Rate shopping can save you thousands of dollars in interest alone. For example, if you’re comparing quotes for a $50,000 business loan with a 10-year term, the first lender may offer you a 12% annual percentage rate (APR). Your monthly payment would be $717.35, and you’d pay a total of $36,082.57 in interest throughout the duration of the loan.
If, however, you shop around for better rates, you may find a 10-year loan with a 10% interest rate. A 2% decrease in interest would lower your monthly payment to $660.75 and reduce your total interest paid to $29,290.44, saving you $56.60 a month, and $6,792.13 over the course of the loan.
5. Compare lenders
Banks, credit unions and online lenders offer various types of small business financing. Here are some types of lenders to consider, including details on how each type works.
Tips for choosing the right lender
When comparing lenders, pay attention to the following factors to find the best deal for your business:
- Watch out for fees: Some lenders include additional fees, such as origination fees, maintenance fees, late charges and prepayment penalties. Calculate the total cost of borrowing, including any fees, before signing any paperwork.
- Consider term lengths: Find out when your repayments start and how long you have to repay the debt. While a longer loan term typically means lower payments, you can save interest by opting for a shorter term.
- Look at funding speed: A same-day business loan could get you funds within 24 hours, but the rates will likely run high. Traditional bank and SBA loans tend to have the lowest rates but the longest wait times.
- Understand rate types: Interest can be charged as fixed or variable. While variable rates may be lower, fixed rates can make it easier to stick to a budget. Some lenders charge a factor rate instead of an interest rate, making it more difficult to compare offers. To better compare options, convert interest or factor rates to the APR, which includes the cost of all interest and fees.
- Beware of scams: Some lenders claim to offer no-credit-check business loans or guarantee approval before submitting any documentation. Such loans often come with high fees and unfavorable terms. Look for signs of predatory lending and read small business lender reviews before proceeding.
6. 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.
Consider asking a business colleague or your local Small Business Development Center (SBDC) to review your business loan application before submitting it. Having a polished loan application can help avoid 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 and Social Security number
- Business name or DBA name
- Business street address
- Phone number
- Type of business
- Date the business was established
- Employer identification number (EIN)
- Annual net profit
- Number of W-2 employees (if applicable)
7. Receive your funds and begin repayment
Once you sign a loan agreement, your lender will disburse your funds. The exact time it takes to receive your financing will depend on the lender and the loan type, but once you get your funds, you’ll need to begin making payments.
Loan payments may be required on a daily, weekly or monthly basis. Your repayment schedule will be detailed in the loan agreement, so be sure to pay close attention to what is expected. If possible, consider setting up autopay to ensure you never miss a payment. Timely loan payments can boost both your personal and business credit scores, making it easier for you to find financing in the future.
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 the first lender rejects your request for funding, there are several options available to you:
- Apply with a different company. One lender may approve your application even if another has already said no, especially if you’re able to find a lender with less strict eligibility requirements or ask for a smaller loan. While this could help you acquire the funding you want now, there’s a risk that the second lender will deny your application for the same reasons the first lender gave.
- 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 lead to better success. Improve both your personal and business credit scores. While this may be one of the most effective ways to increase your odds of future loan approval if low credit was the reason for rejection, it can be difficult to wait if you need funding fast.
- Consider other types of funding. If a loan isn’t an option, you may 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 free money for specific business types or industries, they tend to be very competitive.
- Business credit cards: Business credit cards are convenient for financing everyday expenses, like low-cost inventory and supplies. However, compare interest rates when considering business credit cards versus business lines of credit since credit cards typically have higher rates. Plus, carrying a significant monthly balance on your credit cards could negatively impact your credit score.
- Crowdfunding: Raise funds from your customer base using crowdfunding platforms like GoFundMe for business. While crowdfunding platforms generally don’t have business requirements, they typically take a percentage of all donations you receive.
- 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 ensure you don’t strain the relationship.
- Personal loans for business: You can technically use personal loans for business purposes, which are typically easier to get than business loans. However, loan amounts often cap at $50,000 with higher APRs. Additionally, you can’t claim interest on personal loans as a business tax deduction.
Frequently asked questions
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 like a direct deposit — much like how you get a paycheck with most companies.
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.
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 even months) to approve and process your loan application.
The credit score you need to qualify for a business loan will depend on the lender and the loan type. Traditional lenders, like banks and credit unions, 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, it’s important to note that 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.
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 8%. Anything at or around this industry average is typically considered a low rate, though starting rates for some types of financing (like SBA loans or merchant cash advances) may be higher.
Your interest rate will also largely depend on your credit profile, funding needs and business, 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.
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 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 is typically 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.
Banks typically offer the lowest rates on business loans, but these loans can be difficult to qualify for — they’ll typically require a high credit score and time in business and annual revenue minimums.
However, it may be easier to get approved if you have an existing relationship with the bank or credit union, so it may make sense to start by getting a quote with your current bank. Just keep in mind that having an existing relationship does not guarantee loan approval.
Compare business loan offers
- 1. Decide what type of business loan you need
- 2. Determine your eligibility
- 3. Gather required documents
- 4. Get quotes
- 5. Compare lenders
- 6. Apply for a business loan
- 7. Receive your funds and begin repayment
- What to do if you’re rejected
- Alternatives to small business loans
- Frequently asked questions