How to Get a Business Loan | Business Financing Guide 2023
No matter what stage of growth your small business is in, there’s likely going to come a time when you’ll need access to more funds. Many businesses, both large and small, use borrowed capital to smooth out uneven cash flow, fuel growth and fund other business initiatives. Whatever the need, a small business loan is one of the most sought-after methods of funding. Here’s how to get a small business loan.
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6 Steps to Get a Business Loan
- Learn what lenders look for.
- Decide what type of financing you need.
- Find out how to get approved.
- Gather documentation.
- Find a lender.
- Fill out the application.
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1. Learn What Lenders Look For
Before you apply, it’s helpful to understand how lenders are likely to evaluate your business loan application. Lender profits are based upon whether or not borrowers pay back loans. With that in mind, they may consider a number of factors including revenue or cash flow, time in business, personal credit scores, business credit scores, collateral, and industry.
Some lenders dig deeper and may require detailed financial statements and tax returns. (This is especially true of traditional lenders such as banks or credit unions.)
Time in business
It can be difficult to find business loans for startups because lenders prefer a track record of successfully servicing debt as well as running a business. Traditional lenders will often require two years in business, but some online lenders only require a year in business. Idea-stage startups (businesses without revenues) have the most difficult time qualifying for term loans or lines of credit, but a business credit card or crowdfunding could be a good option.
Don’t ignore trade credit from your suppliers either, that is one of the most underused types of business credit available to businesses.
Personal credit scores
As a small business owner, your personal credit score will often be a part of an evaluation of your creditworthiness. This is especially true for younger businesses or those without significant revenues. That’s because lenders are trying to determine whether you are likely to make payments on time, based upon what you’ve done in the past. Before you apply for small business financing, it’s critical that you understand your credit profile.
The better your personal credit, the more options you may have looking for a small business loan.
Business credit scores
Some lenders will check business credit reports and/or business credit scores from the major business credit bureaus. In many cases, they want to see a positive payment history as well as avoid lending to businesses with a negative payment history, including late payments, collection accounts or judgments. They may also check business credit to determine the number of UCC filings. Too many UCC filings may be considered high risk. You may be able to find no credit check business loans, especially if you decide to try finding financing with online lenders or through lines of credit or merchant cash advances.
Sign up for a Nav account and see if the business credit bureaus already have you on file. Signing up and checking won’t hurt your business credit scores.
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Cash flow
Lenders want to confirm that you have the ability to make periodic payments. Your cash flow is a good indication of whether or not your business has the financial ability to make payments on a small business loan. Many business lenders now will also want to review at least three months worth of your business bank statements before they will approve a term loan, a line of credit, or even a business credit card.
Collateral
Traditional lenders, including banks, credit unions, as well as those that make SBA loans, will likely require collateral for most small business loans. (Note, though, most SBA loans can’t be declined solely because the applicant doesn’t have collateral.) You’ll have more choices if you can guarantee your loan with real, tangible items such as real estate, equipment or other collateral.
Loans not secured with any specific asset or collateral, but rather a general lien, may be referred to as unsecured loans. In reality though, truly unsecured loans are rare and only offered to a lender’s most eligible customers. Even an unsecured loan that doesn’t require collateral may result in the lender placing a UCC lien and or requiring a personal guarantee.
Industry
Some industries are more difficult to finance than others. Industry is usually identified by the SIC or NAICS code. Some small business lenders have preferences that influence their financing decisions. Some lenders publish a list of their restricted industries you can review online before you apply.
2. Decide What Type of Loan or Financing You Need
Although you don’t necessarily need to be a small business financing expert, with so many loan options available, it’s important to at least be familiar with the types of financing that will best meet your business needs. These options include:
Small Business Administration (SBA) loans
SBA loans are available in amounts from less than $50,000 up to $5 million, and offer low rates and favorable repayment terms. Only SBA Disaster Loans (including Economic Injury Disaster Loans or EIDL) are made by the U.S. Small Business Administration. All others are made by participating lenders. The loan process can take weeks or months, depending on the type of SBA loan you are trying to obtain.
Pros
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Low rates
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Favorable terms
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Borrow as much as $5 million
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Backed by the U.S. government
Cons
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Difficult to qualify for
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Long application process
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Long wait for funding
Traditional bank loans
Get a term loan or business line of credit from a bank you already do business with (or a new one) and pay some of the lowest rates of all the options—if you meet the often strict criteria. Loan amounts vary, and repayment terms range from one to twenty years. It may take a few weeks and significant documentation to get approved.
Pros
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Good interest rates
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Favorable terms
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Stable and trustworthy lenders
Cons
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Lots of documentation and paperwork required
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May take a long time to fund
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Longer application process
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Rates and terms depend on qualifications
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May be difficult to qualify for
Microloans
Lenders that make microloans are often nonprofit lenders trying to help underserved entrepreneurs. As a result they are often more inclined to work with new businesses or businesses that otherwise are having trouble meeting eligibility requirements. They may also be more flexible when it comes to less than perfect credit scores. Loan amounts are much smaller ($500— $50,000), hence the “micro” name. Rates are comparable to business credit cards.
Pros
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Easier to qualify for than traditional loans
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More likely to work with startups and new businesses
Cons
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Smaller loan amounts
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Less favorable rates and terms
Online loans
Because of the quick response to a loan application and the speed with which they can fund them, non-bank online lenders are the first choice for many small businesses today looking for loan amounts of $25,000 – $500,000 or more in some cases. Credit may still count, but revenues are often most important. Many lenders can approve your loan the same day and deposit funds available in your account within a day or two.
Pros
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Fast application process
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Quick funding time
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Less focused on credit scores
Cons
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Often have high interest rates and less favorable repayment terms
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Can come with higher fees
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Need to ensure the lender is reputable
Lines of credit
A business line of credit offers funds that can be borrowed again and again. This is traditionally a popular source of borrowed capital for many business owners and can be useful for short-term needs such as inventory, uneven cash flow, working capital etc. Credit profile and revenues are often major factors for these loans, which range from $1,000 – $100,000 for qualified borrowers.
Pros
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Easier to qualify for than traditional loan
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Can borrow up to credit limit repeatedly when paid off
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Great for short-term needs and cash flow
Cons
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Can have higher interest rates
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May have higher annual revenue qualifications
Business cash advances
With a business cash advance (or merchant cash advance) financing is based upon monthly or annual revenue and can range from $5,000 – $500,000 or more. Even applicants with less-than-perfect credit may qualify, provided the business meets minimum requirements for sales or transactions (often averaging $10,000 to $15,000 or more each month). The turnaround time is very quick— often within 24 hours. Costs can be high and aren’t likely to be expressed as an annual percentage rate. Use a free business loan calculator to help understand the cost.
Pros
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Easier to qualify for, even with poor credit
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Fast application process and funding time
Cons
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Higher interest rates and fees
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Somewhat complicated repayment structure
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May have high annual revenue requirements
Cash flow loans
As the name implies, cash flow loans are based on cash flow. Although there may be a soft credit check, these lenders want to confirm you have the cash flow you’ll need to service debt. Get approved within minutes from some lenders for amounts of up to $100,000. Be prepared to pay a minimum of APR of 25% or more.
Pros
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Tend to only do soft credit check
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Fast approval times
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Can loan up to $100,000
Cons
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High interest rates (25% or more)
Business credit cards
Business credit cards are one of the best ways for a newer business to access borrower capital (and can be a great tool for mature businesses as well). Pay industry-standard rates of up to 25% for business credit cards that offer between $1,000 – $25,000. Look for a 0% introductory rate for a flexible, low-cost short-term loan.
Personal credit is a major approval factor, but most issuers don’t have industry restrictions or time in business requirements, making it easier to qualify for a business credit card than a term loan or line of credit. Find out if you’re qualified within hours of applying.
Pros
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Easy to qualify for (no minimum time in business)
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Fast approval time
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Can help build credit (business and personal)
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Can earn perks and rewards
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Often have introductory rate offers
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Can re-use funds up to credit limit when paid off
Cons
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Personal credit is a major factor
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May be more expensive in terms of APR
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Can’t use to pay for all business expenses
Business credit cards can help you when your business needs access to cash right away. Browse your top business credit card options and apply in minutes.
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Vendor financing
One of the most under-rated and often-overlooked financing options, you can get between $1,000 and $100,000 from a vendor you already work with. (Find new vendor accounts at Nav.com/vendors.) Some charge no interest, but the repayment time is short (as little as ten days). Those with a good business credit history might get approved within hours.
It might not be a small business loan, but 30- to 60-day terms can also be a great way to build or strengthen your business credit history while improving cash flow.
Pros
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Work with vendors you already do business with
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May not have an interest rate
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Fast approval time
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Can help you build business credit
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Can help with cash flow
Cons
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Quick repayment time
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May rely on good credit history with the vendor
3. Find Out How to Get Approved
Some lenders can prescreen your application with a few questions. You’ll get a “yes” or “no” within minutes, and then will have to provide additional information to find out how much you’ll get and what you’ll pay in interest and fees. If you have personal credit scores of less than 680, you probably won’t have success at a bank. An online lender may be more likely to say yes.
4. Gather Documents
In the case of a more formal business loan, including those offered through the SBA, you’ll need quite the stack of documentation to get through your approval. Here are just a few of the most common things they’ll ask for, but this is not an exhaustive list:
- Business and personal credit scores (the lender will purchase them)
- Business bank account statements
- Tax returns and supporting IRS documents for both your business and personal tax accounts
- Any applicable licenses and registrations for doing business in your state
- Other financial documents deemed relevant (i.e.d credit card sales, unpaid invoices, and accounts receivable due to you)
- Any legal contracts that would be relevant (franchise, incorporation, leasing)
You may also need:
- Business forecast with details on future cash flow and costs
- Documentation of underserved representation (for loans aimed at women-owned businesses, for example)
- Updated business plan with details on your growth and marketing strategies
The short answer to “what should I bring?” is that you need to be prepared to include documents that you used when coming up with your business plan. Banks won’t take your word for it that you will be profitable and can pay the money back. They want evidence.
5. Choose a Lender
Now that you know what qualifications you’ll need to bring to the table—and what loan product is best for your needs—you can start with the next step of picking a lender. Not all lenders provide all of the services mentioned, so you’ll want to narrow your search to those that offer the type of financing you are looking for and will be likely to approve your loan application based upon your creditworthiness.
Lenders usually fall into one of the following categories:
Direct lenders
These lenders make loans directly and include banks, credit unions and online lenders.
Lending marketplaces
This option helps you find lenders based on your qualifications. You enter your information one time and get matched to the best choice for your credit situation and financing needs. These marketplaces exist online and applications are relatively quick compared to more traditional lending scenarios.
Don’t waste hours of work finding and applying for loans you have no chance of getting — get matched based on your business & credit profile today.
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P2P
Short for “peer-to-peer,” the P2P lending space has been growing in recent years and can be a good option for a business with a great product or service (or even idea) but limited funding options. Crowdfunding is an example of P2P lending. Since you have a chance to share your story, explain your case, and get funding from a lender who is genuinely interested in your business. Good credit is rarely required.
Ask the following questions to better determine which lender is right for you:
- Do I have good credit?
- How much money do I need?
- Do I need access to a continuous line of credit?
- Will I need my funds in cash? Or will credit or charge accounts work?
- Which banks do I have an existing relationship with?
- Am I willing to put up personal or business assets for collateral?
Regardless of the option you choose, remember that some lender requirements are things you can work around, while others will be considered closed doors. A lender with a 680+ minimum FICO score requirement will be a barrier if your credit scores are low. A bank offering a higher rate of interest than what you ideally want isn’t a closed door, but it may not be ideal. Make a list of those things that you can compromise on if you have to, and understand that some factors are non-negotiable.
6. Fill Out the Application
The process for applying is pretty much the same whether you’re sitting in an office somewhere with pen and paper or typing on your computer from home. Filling out the application may take time, but thanks to the documentation you gathered in step 5, it won’t be nearly as laborious as it might have been. Once you’ve done it, expect to wait between 24 hours and several weeks depending on the loan type you chose. If the lender requests additional documentation be sure to respond quickly.
How to get a business loan from a bank
By following the steps above, you’ve already learned how to apply for a business loan from a bank. Banks have some of the strictest application requirements, but you will likely pay lower interest rates and fees than other financing options if you qualify.
How to get a loan to buy a business
It’s not always necessary to start a company from scratch these days. If you see a promising business for sale, it may be a good investment to buy it. You’ll likely need a business acquisition loan to finance the endeavor, however. Use the steps above for this type of loan, as well. Instead of providing all the documentation for your own business, however, you’ll need to include the same type of information for the company you’ll be buying.
How to get a business loan with no money
Getting funding can seem like a catch-22. You wouldn’t need the loan if you had money, but the bank needs to see that you have good revenue to consider you a wise risk. How can you possibly qualify when cash is tight? This is where the bank will be impressed by collateral and an excellent credit history. These two factors are perhaps the most important when cash is tight.
Start with a business credit card and trade credit with your vendors. Spend time improving your business credit profile and demonstrating a track record of reliably making periodic payments. If you can demonstrate that you have the ability to service debt, you will be more likely to get approved.
How to get a business loan without collateral
No collateral? If your credit is good or excellent, you have the revenue to support debt, and you have a good track record, there are lenders that will work with you. Unsecured loans generally have higher interest rates and origination fees, however, so become familiar with what you’ll pay out of pocket for the privilege.
How to get a business loan with bad credit
Whether you’re new to building credit, or you’ve made some mistakes in the past, it can be frustrating to apply for business credit with a poor credit profile. Bad credit doesn’t have to keep you from getting funding, however. Certain types of financing are available to borrowers who don’t have a perfect profile (provided they can demonstrate a healthy business and the ability to successfully service debt). They include invoice factoring, business cash advances, crowdfunding, secured business credit cards, and some microloans.
You can also work to establish your ability to repay a business loan by other means. These include:
- Credit and debit card sales. These are easy to document and it’s possible to use your credit card transactions as a way of getting financing to get through a rough patch. (Costs will likely be higher.)
- Bank deposits. You should have a separate business checking account you can use as proof of revenues.
- Co-sign. If you have a friend, relative, or business partner that will vouch for your creditworthiness and co-sign a loan, this can increase your chances of getting approved. Note that they will be held responsible if you can’t make monthly payments; only do this if it’s worth the risk to your business and personal relationships.
The best way to get a loan with bad credit is to start taking steps now to improve your credit. While this will take time, it’s the most effective way to get approval for the kind of credit that will be both affordable and most profitable for your business. Although there are options to get funding with bad credit, establishing yourself and your business as a good credit risk will open up more options and improve the odds of a successful application.
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