5 Steps to Getting a Small Business Loan

Learning how to get a business loan can help you secure the capital you need to start and grow your business. Business loans can cover immediate needs like payroll and finance large projects like remodeling a facility.

To help you secure the best loan for your needs and qualifications, you’ll need to know your credit score, choose the right loan type and lender and gather the necessary documents.

How to get a business loan in 5 steps

Understanding the steps involved in how to get a small business loan can help you obtain the best loan for your situation.

  1. Check your credit.
  2. Decide what type of business loan you need.
  3. Choose a lender.
  4. Make sure you qualify and gather the required documents.
  5. Submit your business loan application.

1. Check your credit.

Lenders will review your personal and business credit score to assess your ability to repay a loan. For newer companies that don’t have much business credit history, the lender would place more weight on their personal credit.

Before applying, make sure your credit score is at least 680. Generally, a FICO Score below 680 can make it difficult for you to get approved — in which case, a bad-credit business loan may be a better fit.

You can use My LendingTree to check your personal credit score for free but you may need to pay to access your business credit score.

2. Decide what type of business loan you need.

There are several types of business loans, each with its own terms and requirements. From general-purpose loans like lines of credit to specific loans like equipment loans, you’ll need to research which best fits your needs.

Small Business Administration (SBA) loans can cover a host of financing needs — from general operating costs to securing real estate. Loan amounts can range from $25,000 to $5 million, with rates around 10%. Applicants with a personal credit score of 680 or higher are more likely to qualify for an SBA loan.

Term loans are funding in lump-sum amounts that business owners repay in installments over time. Depending on whether they are short or long term, loan amounts can rise to $5 million, with interest rates starting around 5%. Lenders usually require a 600 to 700 minimum credit score.

Business lines of credit provide business owners access to capital up to $250,000 on an as-need basis. Interest rates start at 4.80% and apply only to the amount borrowed. Borrowers with credit scores as low as 650 and below may qualify.

Equipment loans provide financing up to $1 million for assets like commercial ovens or office furniture. Because your lender is likely to require you to use the equipment you’re buying as collateral, your loan is less risky and interest rates can be as low as 3.00%. Borrowers should strive for a 620 minimum credit score before applying.

Invoice financing offers financing as a loan or line of credit for 60% to 97% of the value of your unpaid invoices. Instead of interest rates, the lender typically charges a flat, upfront fee plus an ongoing processing fee. Lenders can consider credit scores as low as 530.

Merchant cash advances are lump-sum payments up to $500,000 issued in exchange for a portion of future earnings — ideal for business owners who need quick access to funds for immediate needs, such as meeting payroll. Lenders typically calculate the cost of a merchant advance by multiplying your factor rate (typically between 1.1 and 1.5) by your advance amount. Lenders may accept bad-credit borrowers if the business has a high volume of credit card transactions.

3. Choose a lender.

Business owners can secure a business loan from banks and credit unions or online lenders. When choosing a lender, consider the following factors:

  • Eligibility requirements: Banks typically have stricter requirements, which can make it difficult for newer businesses with bad credit to secure funding. Online lenders are generally more lenient and require less documentation.
  • Time to funding: Online lenders typically have automated application processes with streamlined paperwork demands, leading to shorter application times. Online lenders generally issue funds faster than banks, too.
  • Loan amounts: Borrowers are more likely to find loans as small as $5,000 from alternative lenders. If you seek a larger loan, banks are more likely to issue loan amounts into the millions.
  • Rates and terms: Although more difficult to qualify for, banks generally offer more favorable rates and terms. The tradeoff for online lenders’ lenient requirements is often higher costs and stricter repayment terms.

4. Make sure you qualify and gather the required documents.

Applying haphazardly for business loans you don’t qualify for can rack up excessive credit inquiries that may harm your credit score. Learning how to qualify for a business loan can increase your chances of getting your application approved.

Be sure to review the lender’s requirements, including:

  • Time in business: Most lenders prefer to finance seasoned companies with a track record of repaying debt. You may need six months to three years of time in business, depending on the lender.
  • Revenue: Businesses with consistent annual revenue are more likely to receive loan approval.
  • Credit score: A credit score of at least 680 is the minimum most banks and credit unions require. If you do not qualify for a bank loan, online lenders will usually accept business owners with lower credit scores.

During the underwriting process, your lender might request certain documents; business plans, income tax returns and your personal and business balance sheet are common requirements. For secured loans, you’ll need to pledge certain assets as collateral that the lender can seize if you default on loan payments.

Different lenders or loan types may require additional qualifications. For instance, the SBA enforces small-business size standards and may request a vendor quote for equipment loans.

5. Submit your business loan application.

Applying for online business loans is often quick and automated — you may receive immediate approval if you meet the requirements. If approved, you may see the funds deposited into your account as quickly as the same day.

Applying with a traditional bank is generally more time-consuming because the process may involve meeting with a loan officer and waiting for approval from a committee. Time to funding may take a few days to multiple weeks. SBA loans can sometimes take over two months.

Dan Marticio is a freelance writer specializing in small business and personal finance. He works with FinTech and B2B companies and has written extensively about small business, from startup guides to payment processor reviews. Dan can be reached through LinkedIn or his website.