How To Get a Business Loan
How To

How To Get a Business Loan

Getting a business loan can help you start or grow your business, but managing the loan process, as well as stricter lending rules, can be difficult.

Breaking it down into simple parts, such as understanding eligibility, looking for lenders, and understanding how to apply for a small business loan, will help you get a loan for your business.

Business loans include the following:

  • Bank loans
  • Business lines of credit
  • U.S. Small Business Administration (SBA) loans
  • Equipment loans
  • Business credit cards
  • Merchant cash advances
  • Invoice financing

Installment loans and revolving credit are two types of business loans. Revolving credit allows you to either pay the loan off each month or roll it forward.

As you repay the loan balance, you can continue to borrow against it up to the predefined limit.

An installment loan will allow you to borrow a sum of money and repay it over time by making fixed monthly payments.

Online lenders rarely have APRs as low as traditional banks, but approval rates are generally higher and funding is faster — as fast as 12 hours — than with banks.

How To Get a Business Loan: 5 Easy Steps

Here’s how to get a small business loan in five simple steps.

Step 1

Determine if you qualify

Ask yourself these questions to determine if you qualify for a business loan:

  • What is your credit score?
  • How long have you been in business?
  • Can you afford the repayments?
  • Do you have collateral?

These are the most common requirements when applying for a business loan.

You can check your credit score for free at the major credit bureaus: Equifax, Experian, and TransUnion. Most banks prefer to offer loans to borrowers with credit scores of at least 680.

Many lenders also have a minimum annual revenue requirement, which can range from $50,000 to $250,000. Before you apply, calculate your income, and find out what the minimum annual revenue requirement is for each lender.

Step 2

Choose the type of loan you need

The reason you need a business loan will likely fall into one of these three categories: you want to start a business, you want to manage your day-to-day expenses, or you want to grow your business.

Lenders will ask what type of business you operate and why you need the loan, so you should determine which type of business loan is right for you.

Step 3

Compare small-business lenders

When it comes to getting a business loan, there are four types of lenders: online lenders, banks, credit unions, and the SBA. Online lenders normally offer small business loans and credit lines ranging from $1,000 to $5 million.

The average annual percentage rate (APR) on these loans ranges dramatically. Rates could be anywhere from 6% to 99%, depending on the lender, loan type and amount, payback term duration, borrower credit history, and whether collateral is required.

Step 4

Prepare the documentation

Make sure you have all the necessary paperwork before applying. Depending on the lender, you may be required to submit the following documents:

  • Personal and business tax returns.
  • Bank statements for both business and personal use.
  • Financial statements for businesses.
  • Legal documents such as articles of incorporation, commercial leases, and franchise agreements.
Step 5

Apply for a business loan

You did it! Now it’s time to apply. Begin by comparing two or three similar loan terms and annual percentage rates (APRs). The APR is the easiest way to compare the overall cost of a loan for the year because it includes all loan expenses in addition to the interest rate.

Most often it makes sense to choose the loan with the lowest APR (as long as you can afford the loan’s regular payments) and apply with the documentation you’ve prepared.

How to Get a Startup Business Loan

If you are wondering how to get a loan to start a business, the process is much less complicated than you might think.

Lenders that offer startup finance options like personal loans or business credit cards often require cash flow to ensure that the loan will be repaid. This explains is why companies often struggle to get a startup business loan in their first year.

SBA Loans

You can apply for an SBA loan, which has different options, depending on your unique business needs. The Small Business Administration offers loans that make it easier for you to get the capital you need for your business.

SBA loans are offered in amounts ranging from $50,000 to $5 million, with lower interest rates (compared to private lenders) and flexible repayment terms. Depending on the type of SBA loan you want, the process can take weeks or months.

Options include a 504 loan that offers fixed-rate, long-term financing or go for a microloan of up to $50,000 to help you get started.

How to Get a Business Loan with Bad Credit

If you have bad credit you may find most loan offers won’t apply to you. While you can still apply for an SBA loan, you may need to pay a premium if approved.

You may also have to pay a higher interest rate to mitigate the risk you pose to the lender. This is why it’s important to choose the right business loan if you are applying with bad credit.

What is Considered a Bad Credit Score?

Credit scores of 800 to 850 are seen as exceptional, while scores of 670 to 739 are seen as good. Bad credit refers to scores below 579, with scores under 500 being very poor.

Remember that all lenders assess loan applications differently, so what may be a non-starter for one lender may be acceptable to the next.

Finding a Business Loan with Bad Credit

Step 1

Review your credit profile

It pays to keep an eye on your credit profile – this includes your business and personal credit profiles. All major credit bureaus give businesses the opportunity to see their profile.

Step 2

Search and compare

Limit your search to lenders that are likely to offer you a loan. The SBA will often approve borrowers with credit scores as low as 640, while banks typically need a score of 680 or higher. You may also find online lenders that offer business lines of credit for scores under 600. Merchant cash advances may be available even if your score is as low as 500, but always consider the cost. 

Step 3

Consider the repayment

Make sure your business has the cashflow to support loan repayments. Having a bad credit score may indicate previous financial stress on the business, so ensure that you will be able to repay the loan you choose. You can choose from a list of online lenders even if you have bad credit but be aware that you may have to approve daily or weekly debits from your bank as repayment.

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Lorien is the Country Manager for Financer US and has a strong background in finance and digital marketing. She is a fintech enthusiast and a lover of all things digital.

Financial information reviewed byRoss Loehr - CFP®, MBA
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Last Updated: August 22, 2022

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