How to Get a Small Business Loan in 6 Simple Steps

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Your Guide to Getting a Business Loan

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.
  2. Calculate how much debt you can afford. 
  3. Determine your eligibility.
  4. Browse the different types of business loans and lenders. 
  5. Get your loan documents in order. 
  6. Apply for and close your business loan.

Read on for more details on the best way to get a business loan.

See Your Business Loan Options

1. Determine why you need a business loan.

The first question you should ask yourself (and that every lender will ask you) when you’re trying to get a business loan is: Why?

Some small business owners need working capital to cover a range of purposes, and others have a very specific need, like a certain piece of equipment. The reason you need the money will drive your choice of lender and loan type, so you’ll want to take some time to figure out why you need capital.

This being said, you’ll also want to remember that sometimes, the lines between these loan purposes might blur a little. For instance, you might need capital to purchase equipment for the startup business you’re getting off the ground, or you might want to refinance existing debt, but also borrow additional funds for working capital. Many lenders work with borrowers who need business loans for multiple reasons.

With this in mind, here are some common reasons why you might be looking to get a small business loan:

    Starting a Business

    • To start a business
    • To buy a business
    • For day-to-day working capital
    • To cover cash flow gaps
    • To grow your business
    • For emergency spending
    • To finance an equipment purchase
    • To refinance debt

2. Calculate how much debt you can afford.

Once you’ve determined why you need financing, the next step to getting a small business loan is figuring out how much debt you can afford.

Unfortunately, the amount of capital you want to meet your business’s goals might not necessarily match up with how much you can actually afford.

This being said, if you take on too much debt financing, you could find yourself caught under a pile of debt that’s difficult to get out of—hurting your business instead of helping it. On the other hand, of course, if you take on too little debt, you might end up missing opportunities.

Therefore, you’ll want to do the following in order to ensure that you can afford to get a business loan:

Use a Business Loan Calculator

A business loan calculator can be a helpful tool to help you get a better sense of how much debt you can afford ahead of time—and even more useful when you actually have a loan offer on the table. 

With a business loan calculator, you can estimate the monthly payment on your loan—so that you can evaluate your cost of debt on a long-term basis—and how this payment will or won’t fit amongst your other expenses.

To use the calculator, you’ll need to plug in the loan’s interest rate and term—you can then experiment with the loan amount and see how your monthly payment changes based on the size of the loan.

Then, you can check your business’s profit and loss statement, and determine if the incoming revenue is enough to cover the monthly payment. You should also have a “cushion” to comfortably cover other business expenses.

Calculate Your DSCR

Next, you can check your debt service coverage ratio (DSCR)—which is a number that small business lenders use to see whether or not you can afford to pay back a loan. 

To calculate your DSCR, you can take your average monthly net income and divide it by your monthly loan payment.

Ideally, you get a number above one, which means you have enough cash on hand to cover your loan payments and have some left over for other expenses. If your DSCR is below one, then you’ll either need to find a way to increase your business’s income or decrease your monthly payment (i.e. by requesting a smaller loan or qualifying for a better interest rate).

Conduct a Loan Performance Analysis

Finally, another way to evaluate how much debt you can afford is to conduct a loan performance analysis.

This process will allow you to see, after taking on a potential loan, how much you’ll need to increase your revenue each year to break even and then become profitable.

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.

 

Annual Revenue

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.

Before we break down the different types of loans that you can consider in detail, you can find an overview in the chart below:

Best Options for Getting a Business Loan

Loan Type Typical Amounts, Rates, & Terms Speed Typical Minimum Credit Score Top Lenders Best for
Up to $500,000; 5 – 10 years; 3% – 5% APR
A few weeks to a month
680+
Wells Fargo, Chase, PNC
Highly qualified, established businesses
Up to $5 million; 5 – 25 years; variable based on the prime rate
Average of two to three months
640 – 670+
Wells Fargo, First Home Bank, Celtic Bank
Qualified businesses who can’t qualify for bank loans
Up to $500,000; 2 – 5 years; 7% – 30%
As fast as a few days
600+
Funding Circle, Credibility Capital
Faster alternative to SBA loans for qualified businesses
Up to $250,000; 3 – 18 months; starting at 10%
As fast as one day
600+
PayPal, OnDeck, BlueVine
Short-term funding needs for newer or less qualified businesses
Up to $250,000; up to 2 years; 7% – 25%
As fast as one day
 600+
Kabbage, BlueVine, Fundation
Flexible financing for a variety of businesses
Up to 100% of the invoice value; until the customer pays the invoice; about 3% processing fee, plus factor fee (~1%) each week until the invoice is paid
As fast as one day
600+
BlueVine, Fundbox
B2B businesses with capital held up in outstanding invoices
Up to the amount of the equipment; 5 – 6 years; 4% – 40%
As fast as two days
600+
Balboa Capital
Businesses looking to finance a large equipment purchase
Up to $250,000; paid daily via your merchant account; factor fee of 1.14 – 1.18
As fast as two days
550+
CAN Capital, Rapid Finance, Reliant Funding
Businesses who can’t qualify for any other types of financing

Bank Loans

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

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 First Home Bank 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, BlueVine, 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

Kabbage and BlueVine are two of the most popular lenders offering short-term lines of credits to borrowers. For more qualified borrowers, Fundation offers a line of credit product with lower rates.

Invoice Financing

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

BlueVine offers an invoice factoring product that’s a good option for borrowers with lower credit. Another popular company is Fundbox, which also offers an invoice financing product.

Equipment Financing

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.

Once you’ve explored all of your options and determined the type of financing (and potential lenders) that will be best for your business, the next step of learning how to get a business loan is gathering the documents for your application.

Overall, the specific documentation that will be required and the process you’ll need to follow will be unique to the lender you’re working with—however, almost every loan type and small business lender will require a few similar pieces of information.

Additionally, it’s important to note that typically, the harder it is to qualify for the loan, the more documents you’ll have to submit. Banks require the most documentation because they closely vet borrowers and approve only the most qualified—their rates, however, are the most affordable on the market.

On the other hand, online lenders require less documentation. They have brought more technology to the application process and usually base their approval decisions on fewer pieces of information.

This being said, the best thing you can do at this point is to organize any and all documents in a single location, like a file on your computer. You’ll also want to be as prompt as possible when lenders request more documentation—this way, you can complete the application process and receive your loan more quickly.

Again, although the list of requirements can vary significantly by lender, here is a list of information you’ll commonly need to provide:

    • 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 final step to getting a small business loan is completing the application process.

We recommend that you don’t apply for more than one or two loans at once, because each lender will likely perform a hard pull on your credit history, and this can damage your credit score.

You can also use a marketplace like Fundera, where your options are aggregated with just one single application.

Once you submit your business loan application (either online or on paper, depending on the lender), the lender will let you know if you’ve qualified. Then, your loan enters underwriting, and the lender will review all your documents and verify all your information.

If you pass underwriting, the lender will provide you with the loan agreement. Before signing on the agreement, you should make sure you understand the terms of the loan—including any fees that will impact your APR.

Fees might include an application fee, origination fee, guarantee fee (for SBA loans), credit report fee, prepayment fee (for if you repay the loan early), and late payment fee. You should make sure that the lender has answered all your questions regarding cost and loan structure—you might even consult with a business attorney or accountant to review the agreement before closing on the loan.

The Bottom Line

At the end of the day, learning how to get a small business loan isn’t always easy.

This being said, however, if you take the time and effort necessary to get your personal and business financials in shape, your chances of getting a business loan—and a well-priced one at that—increase substantially.

With this in mind, once you’ve prepared as well as you can and you’re ready to start your search, remember to compare loans and lenders to ensure you’re getting the best and most affordable loan available to your business.

Compare Your Business Loan Options
Vice President and Founding Editor at Fundera

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. She launched the Fundera Ledger in 2014 and has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending. She is a monthly columnist for AllBusiness, and her advice has appeared in the SBA, SCORE, Yahoo, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, StartupNation, and more. Email: meredith@fundera.com.
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