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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.
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.
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. You can 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.
You can 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 also 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. 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.
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
You can 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. You can find an SBA resource partner near you on the department's website.
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 is 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.
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 a faster alternative to a line of credit for small, day-to-day expenses. And if you pay it off each month, you won't pay interest.
- Crowdfunding offers an almost-free way 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 small business loans or compare even more business loan providers.
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