How to get a business loan
Follow these six steps to apply for financing — even with bad credit, if you run a startup or have no money to invest.
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. Determine the type of financing you need
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 line 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 or a personal loan from a lender like Upstart 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.
Female entrepreneurs and business owners from a marginalized group may want to consider working with a Community Development Financial Institution or local business development center to guide them through these steps. These typically offer support with the needs of women- and minority-owned businesses to help find the right option.
2. Check your eligibility
The second step to getting a small business loan is to take a look at your small business from the perspective of a lender. Knowing the following information about yourself and your company is key to understanding how much you can borrow in business loans and 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.
Other factors, like your industry or business structure can affect your ability to qualify for a loan. For example, corporations and LLCs can find financing almost anywhere but partnerships and sole proprietors may have fewer options.
3. Find the right type of lender
The type of lender you choose to borrow from depends on your eligibility, financing needs, preferred loan repayment terms and the type of loan you’re looking for. Here are your main options.
- Banks have the lowest rates available — but also the toughest requirements. Banks are best for established businesses and small business owners with high credit scores.
- Credit unions have low rates and more flexible requirements than a bank. But only a few credit unions offer business loans.
- Online lenders offer financing within a few business days and the best online business lenders 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. Online lenders may also be your best chance at getting a same-day business loan if you need quick funding.
- 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, use a connection service like Lendio to help you find the right provider.
Fill out the form to compare business loan providers your company may be eligible to borrow from.
4. 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.
5. Complete the application
Now that you’ve found the right lender and gathered your documents, you’re ready to start the application.
Here’s how to apply for a business loan:
- Fill out 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.
- Provide additional information. 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. Check the application carefully for any errors before you send it over to the lender. Mistakes are one of the top reasons lenders reject business loan applications.
6. Ace the interview
Not every lender requires an interview, but if you’re shooting for a bank loan, you may have to do one. To help you sail through with flying colors, here are seven business loan interview questions to prepare for.
- Why does your business need a loan? You’ve probably already answered this in your business plan and loan application, making it an easy one.
- How long will you need to pay back your loan? Come up with a realistic term, and back your answer with numbers and research.
- What makes your business unique? Try modeling your answer on an elevator pitch. It should highlight your business’s strengths and how it fits in your industry’s market.
- How would you explain any past business failures? Prepare to explain any financial hardships that may set off alarm bells with the lender.
- Can you show me a clear history of your accounts payable and receivable? Have documents at the ready along with explanations for any discrepancies within them.
- What kinds of insurance do you have? Bring along your insurance cards and make sure you meet your lender’s coverage requirements if it has any.
- What is your personal credit rating? An interview gives you the opportunity to give context to any negative marks on your credit report. Banks may be willing to overlook less-than-stellar credit if you have an explanation.
What happens next?
After you’ve submitted your loan application and documents — you don’t have much else to do but wait while your eligibility and documents are verified by a loan officer and or the lender’s algorithm. This process is called loan underwriting.
Typically, underwriters look at the following factors when determining the rates, fees and terms your business qualifies for:
- Monthly revenue. Many lenders require businesses to make at least $10,000 a month.
- Personal credit score. Traditional lenders prefer to work with owners who have a personal credit score over 670, but some online lenders don’t have a minimum score.
- Debt-service coverage ratio (DSCR). Underwriters divide your business’s net operating income by its debts to evaluate its ability to pay off another loan. Many have a DSCR between 1.2 and 1.25, with a DSCR of 2 considered very strong.
- Value of collateral. With a secured business loan, your collateral typically must be worth at least the amount you want to borrow — ideally, 125%.
- Personal equity. Did you help finance your small business? Lenders like to see that you have something at stake when you’re applying for a loan.
If you’re worried about presenting a complete picture of your past, consider going with a lender that uses manual underwriting instead of an algorithm. 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.
What to do if your application was rejected
It was tougher to get a business loan in 2021 compared to previous years, according to the Federal Reserve. Some 68% of business loan applicants were approved for at least partial financing — down from 76% in 2020.
So, if your application was rejected on the first try, you’re not alone. However, you may have better luck if you resubmit your application or simply choose another lender or type of financing.
Here are six steps for handling a rejected application:
- Find out the reason you didn’t qualify. Contact the lender and find out why your application was rejected. Sometimes it might be a simple error or omission in your paperwork that you can correct.
- 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.
- Choose a different lender. Online lenders like OnDeck and SmartBiz may be easier to qualify with if you’re only starting out or have a lower credit score. But rates may be higher than a traditional bank. Compare the best online and no-doc business lenders.
- Look into crowdfunding. Crowdfunding sites like Kickstarter, Indiegogo, and GoFundMe can help you spread the word on social media and other channels to raise funds from multiple sources.
- Build your business credit. Staying on top of payments, maintaining good relationships with vendors and knowing your score and actively trying to improve it can help you secure financing in the future.
- Go with a different type of financing. Some nontraditional business financing options backed by collateral are easier to secure, such as invoice factoring or financing, and merchant cash advances. Here are the most popular 10 types of business loans and financing.
How to get the most out of a business loan
Getting the most out of your business loan can give your business a leg up when money is tight. After getting a loan, consider paying off your debt early if there’s no prepayment penalty, and if you need to miss a payment, take corrective action.
If you think you might miss a payment, see if your lender will push back your payment’s due date. You could also try renegotiating your business’s loan terms to avoid missing any more repayments — but you’ll likely need to provide documentation proving that you can’t repay.
If you miss a payment, stay in contact with your lender throughout the collections process. No matter what stage you’re in, keeping communication open with your lender is key to making the best of the situation and help prevent your lender or the government from taking more drastic measures.
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.
Assessing your eligibility and considering all financing options is key to getting competitive interest rates on business loans 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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