This article was reviewed by Doug Noll, a member of the Finder Editorial Review Board and award-winning lawyer, mediator and author with over 40 years of experience in the legal field.
Getting a business loan can take a little more work the first time around. You need to make sure you’re applying for the right type of loan and have the credit score, income and cash flow to qualify.
These steps can help to set your small business up for success. But if you feel stuck, don’t be afraid to get professional help.
Step 1: Make sure a loan is the right choice
Business loans are designed to cover an expense that will create enough revenue to cover the cost of the loan. This is what lenders often call a self-liquidating asset.
For example, getting a loan to buy inventory or equipment is beneficial because it allows you to increase sales and — ideally — make a higher profit than you would have before.
A loan can be a risky choice for some startups because businesses have a high rate of failure in the first five years, according to the US Bureau of Labor Statistics.
Small business loans are also not a good idea if you’re in an unpredictable market or there isn’t enough demand for your product or services.
Get expert advice if you need help
If you’re not sure if a loan is right for you, set up an appointment at a local small business nonprofit, like a small business development center (SBDC).
These often offer free, expert advice to first-time business owners and can outline all of your options. You can find a business center near you on the Small Business Administration (SBA) website.
Step 2: Determine what you need
Go into your comparison armed with specific details about the small business loan you need.
- Know what the funds are for — even if you’re just covering general operating expenses.
- Calculate exactly how much you need to borrow to avoid overborrowing, and to show lenders you’ve done your homework.
- Determine if you need to fund a one-time expense or recurring expense. Knowing this can help you choose the right type of loan.
- Estimate how fast you need the funds. If it’s an emergency, stay away from banks, credit unions and SBA loans — they can take weeks or even months to fund.
Writing or revising your business plan is a great way to analyze your business’s needs. Many lenders will ask to see a business plan, especially if you’re applying for a bank loan or SBA loan.
Step 3: Assess your eligibility
Before you decide on a type of loan or lender, see how well you meet these six typical business loan requirements.
- Personal credit score. Banks and many other lenders require all owners with a 20% stake in the company or higher to have good credit. That’s usually a credit score over 670, according to FICO.
- Annual revenue. You often need at least $100,000 and have sales that are at least 1.25 times your operating expenses to qualify for most business loans.
- Cash flow. Lenders often run a cashflow analysis when you apply for a small business loan. You generally need to show you have enough cash coming in each month to afford repayments.
- Time in business. Banks prefer to work with businesses that have been around for at least three to five years. Online lenders usually require six months to a year, while microlenders can offer seed funding to start a business.
- Collateral. While not always required, backing your loan with an asset your business already owns, like real estate or financial accounts, can help you qualify
- Industry. Lenders often prefer to avoid high-risk industries, such as real estate, financial services and trucking. While you can still get a loan, you might not get the most competitive rates and terms as other industries.
Lenders want to see that you have the means to repay your loan. That’s why it’s more difficult to qualify for a business loan from a bank if you don’t have a credit score over 670, aren’t profitable, have low cash flow and are less than three years in business.
But first-time business owners with bad or no credit can still find financing. You don’t always need to meet such strict requirements to get a small business loan from online lenders or microlenders.
Step 4: Find the right type of business loan
Use your needs and how well your business fits basic business loan requirements to help you choose the right type of small business loan.
- Microloans are best for if you have a startup, bad or no credit or aren’t yet profitable enough to qualify for a term loan. They can usually fund up to $50,000 in expenses.
- Lines of credit are best for covering a long-term project or regular access to working capital financing. Taking out a business line of credit gives your business regular access to cash.
- Term loans are best for covering a large one-time expense, like purchasing equipment.
- Equipment loans are designed to cover the cost of new machinery or equipment and use your purchase as collateral. Some require a down payment of up to 20%.
- SBA loans are best for small businesses that have been around for a few years that can’t quite qualify for a bank loan. Usually SBA loans require a personal credit score of at least 620.
- Bank loans usually offer the most favorable rates and terms. They’re best for businesses owners with good credit, a net operating income (NOI) over 1.25 and at least five years in business.
- Online loans can get your business money as soon as the next day and are more flexible when it comes to time in business, credit and revenue. But they have higher interest rates and fees than banks.
- Short-term loans give you quick access to cash for emergency working capital or other expenses. Usually these come with high interest rates and fees but are available to people with bad credit — a credit score below 580.
- Business credit cards — though not technically a small business loan — a business credit card can help cover small, recurring expenses like office supplies.
What’s the best first-time business loan?
Often, businesses start with microloans or online loans to help them get to the place where they can qualify for an SBA loan. SBA loans can help your business grow until it’s ready to qualify for a bank loan.
But you can skip these steps if you’ve relied on other types of financing during the startup phase, like investor funding. If you think you can qualify for a bank loan, consider a community bank. These are often more friendly to small businesses than large national banks.
Step 5: Compare lenders
Look at multiple lenders that offer the type of loan you’re looking for. Compare factors like the interest rate, fees, loan terms and how often they charge repayments.
One of the fastest ways to compare cost fo a small business loan is to look at the annual percentage rate (APR), which tells you the interest rates and fees you pay over one year.
Many lenders don’t offer this kind of information online — especially banks. Calling customer service is a great way to get an idea of the rates, fees and terms your business will qualify for.
If you’re applying for a bank loan, consider setting up a meeting with commercial loan officers at several banks in your area.
Compare business loans
Get started on your search by comparing lenders that your business can qualify for.
Step 6: Prequalify
Fill out a prequalification application with your top picks if they have one. This gives you a more personalized idea of the interest rate, loan amount and loan terms your business will get, though it’s not a guaranteed offer.
If you don’t have the option to prequalify, consider calling the lender and speaking to a representative — they can often give you a ballpark estimate of what your business might qualify for.
Step 7: Gather your documents and get your collateral appraised
After you prequalify, your lender often lets you know what types of documents you need to provide.
Typically these includethree years of business and personal tax returns, financial statements, bank statements, profit and loss statements and articles of incorporation. Personal financial documents are usually required for every owner with at least a 20% stake in the company.
If you’re backing your loan with collateral, you might need to get it professionally appraised. Your lender can often put you in touch with an appraisal service.
Step 8: Apply for a business loan
Follow the lender’s instructions to fill out the application. Many allow you to get started online, but often you’ll need to speak with a representative before you can fully complete it. You may also be required to visit a branch or hold a business bank account with the lender — which can further limit your loan options.
Double-check your answers to make sure there are no inconsistencies. Mistakes are one of the top reasons loan applications get rejected.
How to get an SBA coronavirus loan
You can get a paycheck protection program (PPP) loan by applying through a bank, online lender or any other lender that has been approved by the SBA to offer PPP loans. But first, make sure you meet the requirements for a PPP loan. Generally, you must have fewer than 500 employees and be established before February 15, 2020.
You can also get an Economic Injury Disaster Loan (EIDL) by filling out an application directly on the SBA website.
Take the time to understand what you need — and what you can qualify for — when you need a first-time business loan. Get started by learning more about how the process works and comparing business loan providers.
Frequently asked questions
Answers to more questions you might have about how to get a business loan.
Can I get a business loan without a down payment?
You can get a business loan even if you don’t have the money to make a down payment. Often, get a business loan without a down payment by securing your loan with an asset other than the one you’re financing.
Consider putting up real estate or equipment down as collateral to make up for your lack of cash.
How does applying for an SBA loan work?
Since SBA loans are backed by the government, the steps it takes to apply are a little different. Learn about the application process by checking out our step-by-step guide to applying for an SBA loan.
Can I get a business loan with bad credit?
You can get a small business loan with, though your options are often expensive. Check out lenders like OnDeck that use alternative data such as your business’s shipping records instead of focusing on your credit score, revenue and time in business. Or read our article on business loan options for bad-credit owners.
Which banks offer loans to startups?
Community banks sometimes offer business loans to startups and entrepreneurs that need seed money to get things up and running. Usually, startup bank loans are based on the business owner’s personal credit and assets.
If you don’t have the money to personally guarantee the loan or have bad credit you might not be able to qualify for a startup bank loan. But you could still get financing from a microlender.
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