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How to get a business loan
Follow these steps to find a business loan — even if you run a startup, no money to invest or bad credit.
The process of getting a business loan is generally the same if you want to start a business or grow your business — and the loan application is only one part of it.
First, you'll need find the right type of loan for your small business based on factors like your business needs, credit score, time in business and revenue. Comparing lenders is also key to finding the lowest interest rate and most favorable terms available to your small business.
1. Assess your eligibility
The first step to getting a small business loan is to take a look at your small business from the perspective of a lender. Knowing following information about yourself and your company is key to choosing which type of loan to apply for.
Check your credit scores
Almost all lenders look at your personal credit score, and some will consider your business credit score as well.
- A personal credit score of 760 or higher can help you qualify for the best business loans — though there are options for scores under 500.
- A business credit score of around 80 or higher from Dun & Bradstreet or Experian Intelliscore Plus can help your application. But some business lenders won't check this credit score at all.
- Check your personal credit score for free through a credit scoring website, app or a nonprofit credit counselor. Many banking apps offer free access to personal credit scores.
- Check your business credit score by signing up for subscription service through Dun & Bradstreet or Experian — there are free and paid options.
Bad credit or no credit history won't disqualify you from getting a business loan. But it will limit your options and business financing may be expensive.
Lenders also prefer to work with a small business owner who has at least three years of personal credit history. Check your credit history by requesting a free credit report through AnnualCreditReport.com. If you notice any mistakes, contact the creditor responsible for the error before you apply for a loan.
Asses your revenue
Most lenders have a minimum revenue requirement, even if they don't advertise it.
- Most lenders require at least $100,000 in annual revenue to qualify for a business loan.
- Startups less than a year old are typically required to bring in at least $10,000 a month.
- Generally, your annual revenue needs to be worth around ten times the amount you want to borrow to qualify for a loan.
Note your time in business
Most small business loans are available to businesses that have been around for at least two or three years. But the best business loans to firms that have at least five years of business history. That's because businesses are more likely to fail within the first five years, according to the US Bureau of Labor Statistics.
It's possible to find financing for businesses that have been around for less than a year — or finance a new business you're starting from scratch. But only a handful of lenders offer startup loans with bad credit.
Consider your collateral
Not all business loans require collateral, but having business assets to back the loan can help your chances of getting approved for a low rate. Common types of collateral that lenders accept include:
- Real estate.
- Equipment or vehicles.
- Accounts receivables.
- Stocks and bonds.
In some cases, lenders require a blanket lien on your business assets, rather than specific collateral. In addition to collateral, almost all require a personal guarantee from all business owners with a 20% stake in the company or higher. This means that you're responsible for paying the loan if your business defaults on the loan.
2. Choose a type of business loan
The type of business loan and lender you choose depends on your business needs and requirements.
- For a one-time purchase or debt refinancing, consider a business term loan.
- For revolving credit to cover working capital or ongoing projects, consider a business lines of credit. A business line of credit can also be a good resource for emergencies.
- For buying new machinery, furniture or fixtures, look for a lender that offers equipment financing, including equipment loans and leases.
- For businesses that can't qualify for a traditional bank loan, Small Business Administration (SBA) loans offer government-backed financing at low rates.
- For startups and bad credit borrowers that need less than $50,000, a microloan might offer the lowest rates available.
- For consumer-facing businesses with poor credit or little time in business, merchant cash advances offer an advance on future sales — but watch out for sky-high fees.
- For business-facing business with cash flow gaps, invoice financing and factoring offers an advance on your unpaid invoices — but also at a higher cost than a traditional term loan or line of credit.
3. Find the right type of lender
The type of lender you choose to borrow from depends on your eligibility, financing needs and the type of loan you're looking for. Here are your main options.
- Banks and credit unions have the lowest rates available — but also the toughest requirements. These are best for established businesses and small business owners with high credit scores. Being an existing customer also helps.
- Online lenders offer financing within a few business days and often accept businesses that can't qualify for a bank loan. But they can come with short loan terms, high rates and daily or weekly payments.
- Microlenders and community development financial institutions (CDFIs) offer low-cost financing to startups and borrowers with bad credit. They also typically offer training for entrepreneurs.
If you're not sure where to start or don't have the time, you can use a connection service like Lendio to help you find the right provider.
4. Compare providers
Fill out our the form to compare business loan providers your company may be eligible to borrow from.
For a more accurate comparison, it helps to get a quote after narrowing down your choices. Look for a lender with requirements you can meet, the type of loan you want and amount of funding you need. Also consider the following factors:
- Annual percentage rate (APR) tells you the cost of interest and fees per year. If a lender offers a fee instead of APR, ask for an APR quote so you can make an apples-to-apples comparison.
- Loan term is the period of time have to repay your loan. A longer term gives you a lower monthly payment but higher total cost.
- Turnaround time tells you how quickly you'll receive the funds after applying. Online loans can have a turnaround time of one business day. SBA loans can take a few months.
- Customer reviews on sites like the Better Business Bureau and Trustpilot give you an idea of the quality of customer service.
Consider a lender you already have a relationship with
Working with a company you already use for your small business can be a great option for some small businesses. Banks and even online lenders often offer discounts to current customers. Some e-commerce platforms and vendors also offer financing — and may require a relationship to qualify.
Also, cut down on paperwork and shorten the turnaround time by working with a company you already have a relationship with — they already have information your business in their records. They can be more flexible with requirements if your relationship is in good standing.
5. Gather documentation
After you pick a lender, the next step is to gather the documentation you'll need before you complete the full application. You'll often need to refer to them as you're filling out the form. Ask your lender what you'll need. Typically, it includes some or all of the following documents.
- Copy of a state-issued ID, like a driver's license
- Business and personal bank statements
- Business and personal tax returns
- Financial statements, such as profit and loss reports and balance sheets
- Business legal documents, such as articles of incorporation and leases
- A current business plan
At this point, you might also need to get your collateral appraised by a third party if you're applying for a secured loan. Unsecured loans or loans secured with a lien on business assets can usually skip this step.
It's possible to find a business loan with few or no document requirements. But these loans are often more expensive than business loans that require documents.
6. Complete the application
Now you're ready to fill out the application form.
If you accept a prequalification offer, you can move on to the full application. This can take anywhere from a few minutes with an online lender to a few days with an SBA lender. If you need help with the application, some lenders and brokers offer packaging services — though usually for a fee.
Typically, you need to provide more details and documents to verify the information on the application form. Many lenders also consider the personal finances and personal assets of all business owners with a 20% stake in the company.
Review the application for errors before you send it over to the lender. Mistakes are one of the top reasons lenders reject business loan applications.
Get free assistance with an SBA partner
Get free assistance from an SBA resource partner during any stage of the loan application process. These local nonprofits also offer training to entrepreneurs and can point you toward other financing options. Find an SBA resource partner near you on the department's website.
How does loan underwriting work?
After you’ve submitted your loan application, documents, sweat and tears — then what? You don’t have much else to do but wait, but the lender’s job is just beginning.
First, everything goes to an underwriter. An underwriter determines the risk of offering you a loan and then compares this risk against a lender’s parameters to decide whether it’s acceptable.
There was a time when lenders evaluated applications manually, but many lenders today automate the process with underwriting software and proprietary algorithms. Automated underwriting means that lenders can approve your application in a matter of minutes — rather than in weeks or months.
What factors do small business loan underwriters consider?
Underwriters take into account a lot of different criteria, depending on who you’re borrowing from and the type of loan you’re looking for.
- Your business’s monthly revenue. Lenders don’t want to lend you money if you’re unable to prove that your business brings in enough money to pay it back. Many require businesses to make at least $10,000 a month.
- Your personal credit score. To a lender, having good credit proves you have experience managing debt. Some online lenders don’t pay as much attention to credit scores as banks will, but solid creditworthiness never hurts.
- The value of your collateral. If you’re taking out a secured business loan, lenders want to make sure that your collateral is at least worth the amount you’re asking to borrow.
- Other sources of repayment. Underwriters will consider other ways you could repay your loans like personal or government guarantors and insurance.
- Personal equity. Did you help finance your small business when it was just starting up? Maybe you invested your own personal assets. Lenders like to see that you have something at stake when you’re applying for a loan.
How do I explain financial gaps to a lender?
Automated and electronic approvals typically require your information to fit in specific fields and boxes, squeezing out the ability to explain financial gaps or clarify information.
If you’re worried about presenting a clear, complete picture of your past, consider going with a lender that uses manual underwriting. Keep in mind that a manual process can require more time than one that’s automated — and that your explanation might still not be enough.
Leverage your loan application with a business plan
Revenue, tax forms and other documentation might not tell your business’s whole story. If that’s the case, a business plan can make all the difference. This document is where you get to make a case for yourself when you’re borrowing from a lender that uses manual underwriting.
Understanding underwriting ratios
Underwriting ratios are frequently the most important criteria lenders use when deciding whether to lend you money. The idea is to tell your lender that you have enough assets to pay back your loan if you default.
Four financial ratios to know:
- Debt service coverage ratio. This ratio compares your business’s income and assets with the total amount of funding it’s already borrowed. You might have trouble with approval if your DSCR is below 1.25.
- Debt-to-asset ratio. Underwriters often consider this if you’re applying for a loan without collateral. They want to make sure you have enough in assets — usually equipment or property — to cover the cost of the loan in the event that you default. Lenders typically look for a ratio of more than 1.0.
- Loan-to-value ratio. In this case, value refers to your collateral. Make sure that it’s worth at least the amount you’re taking out. It should be at 0.8 or lower — meaning that your collateral is worth at least 20% more than the amount you want to borrow.
- Ratio of net worth to loan size. Comparing your company’s or personal net worth — meaning financial assets and debt — to the loan amount is another way that underwriters make sure you can afford the loan. Something close to 1.0 is ideal, but some lenders might be more forgiving.
Business credit score
Your business's credit score is another factor that some lenders consider — though it's not as important as your personal credit score. Your business credit score is a number between 0 and 100 based on your past relationships with banks, lenders and vendors. Equifax, Experian and Dun & Bradstreet are the three major credit bureaus that calculate your business's credit score.
One of the reasons business credit scores aren't as widely used as personal credit scores is because they aren't standardized. Different credit bureaus use different algorithms to calculate your score, meaning it can vary depending on which bureau you go to. Generally, the higher your business credit score, the better.
Over 75% of business loan applicants were approved in 2020
It was more difficult to get a business loan in 2020 compared to the past five years, according to the Federal Reserve. Some 76% of business loan applicants were approved for at least partial financing — down from 83% in 2019.
But only 37% of small business owners received the full amount of funding they applied for — down from 51% in 2019. This was mostly due to COVID-19.
Lenders were more conservative about issuing loans during the first few months of the pandemic. But many have started to approve more applications as the economy reopens and stabilizes.
My application was rejected. What can I do?
- Find out the exact reason you didn’t qualify. The first thing you should do is contact the bank or lender and find out specifically why your application was rejected. Business loans are usually rejected because the business doesn’t meet the eligibility criteria. But it could be a simple error in your paperwork that you could correct.
- Build your personal credit. Other than shopping around for loan criteria that you do meet, an advantageous thing you can do is make sure that you’re in a position to make repayments and that you have a positive credit profile.
- Build your business credit. Next, work on building your business’s credit by staying on top of payments, maintaining healthy relationships with vendors and knowing your score and actively trying to improve it.
- Put up collateral. Unsecured loans put the responsibility of your debt on the lender if your business goes under, they often come with tighter eligibility requirements. Putting up collateral can ease that responsibility.
- Look into crowdfunding. Crowdfunding can offer multiple benefits for your business, like spreading the people talking about your company in addition to raising additional funds.
- Raise funds from family and friends. Finally, you could reach out to family and friends. They may be excited and truly believe in the direction you want to take your business. This option has the possible advantage of no interest but can sometimes damage relationships if what has been lent isn’t paid back in time.
My business is struggling. What can I do?
No matter what stage you’re in, staying in communication with your lender is key to making the best of the situation. It’ll give you a better grasp of what your options are moving forward and help prevent your lender or the government from taking more drastic measures.
Before you miss a payment
Reach out to your lender as soon as you think your business won’t be able to make a repayment on time. If it’s a one-time incident, there’s a chance your lender agrees to push back your payment’s due date. Or you might just need to pay a late fee and move on.
Otherwise, you could try renegotiating the terms of your business’s loan to avoid missing any more repayments. Typically, you need to provide documentation proving that you aren’t able to repay the loan according to its current terms. This can include balance sheets, tax returns, financial projections and profit and loss statements.
After you miss a payment
Stay in contact with your lender throughout the collections process. If your business and its owners really can’t pay off the loan with their assets, you might want to take steps to negotiate a settlement before it goes to the SBA.
Can’t negotiate a settlement with your lender? In this case, consider hiring a lawyer that specializes in business debt settlement to help you build a strong OIC and navigate the next steps. Otherwise, you could end up losing your future wages and retirement savings if the SBA sends your case to the US Treasury Department for collections.
Business loan alternatives for startups and bad credit
Sometimes a business loan isn't the right financing option for your company. If your business is still in the startup phase or you have a low personal credit score, you may want to consider these alternatives.
- Personal loans are a good option for entrepreneurs with a steady source of income and good credit that need funding to start a small business. These loans are based on your personal finances, rather than your business.
- Business credit cards are faster line of credit alternatives for small, day-to-day expenses. And if you pay the card off each month, you won't pay interest.
- Crowdfunding offers an almost-free way to raise money from fans to launch a new product or service. Typically you only need to pay a percentage of the funds you raise as a platform fee.
- Investor financing offers funds you don't need to repay in exchange for a share of your business. It's a popular option for startups, but you'll lose some control over the direction of your business.
Read our guide to alternative business loans for details on more ways to fund a small business.
Assessing your eligibility and considering all financing options is key to getting the most competitive interest rate and terms for your business. Ready to apply for a business loan? Read about our picks for the best loans for small business or compare more business loan providers.
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