Steps to getting a Business Loan
- Learn how banks assess you. Know the factors to creditworthiness.
- Decide what type of loan or long-term financing you need. Not all loans are the same.
- Decide on the lender. Each bank will bring different benefits to your loan.
- Determine your chances of getting approved. Know how likely a loan approval is before you apply.
- Gather your documentation. Know what paperwork and records will help prove your case.
- Fill out the application. Whether on paper or online, this is how you finish the process.
No matter what stage of growth your small business is in, there’s going to come a time when a little extra cash could come in handy. This may be particularly true right now as many businesses crawl out of the COVID-19 crisis. Many businesses, both large and small, use borrowed capital to fuel growth and fund other business initiatives. Whatever the need, a small business loan is one of the most sought-after methods of funding.
1. Learn how banks assess you.
Before you apply for a loan, it’s important to understand how any lender is going to evaluate your loan application. Lender profits are based upon whether or not borrowers will make each and every periodic payment. With that in mind, they consider your personal credit score, business credit history, cash flow, time in business, collateral, industry, and loyalty.
As a small business owner, in addition to your business credit profile, your personal credit score will likely always be a part of any creditworthiness decision. That’s because lenders are trying to determine whether you will make your daily, weekly, or monthly payments now, 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.
Fortunately, there are several places to see what the credit bureaus are reporting. All the major credit bureaus offer you the ability to see your credit scores. Personal bureaus like Experian, TransUnion, and Equifax all make it possible to monitor your score, either for free or for a small fee. The major business credit reporting bureaus, Dun&Bradstreet, Experian, and Equifax offer the same service. With a Nav account, you can monitor both your business and personal credit in one place for FREE.
Your credit profile will matter—and many lenders will look at your personal credit score as a go-no-go metric before they decide to proceed with your loan application. Most traditional lenders, like banks and credit unions want to see personal credit scores in the 700s, thought they will sometimes go as low as 680. The threshold for SBA loans can vary by lender, but 640-680 is typical. (Keep in mind financial institutions may require a personal credit check for each owner with 20% or greater ownership.) Many online lenders will work with borrowers that have personal credit scores of around 600, but there are some that will work with you if you have a lower score. Merchant Cash Advance ( or cash advance) providers, as well as other alternative financing options will sometimes work with a borrower who has a score as low as 500.
In other words, the better your personal credit, the more options you may have looking for a small business loan.
Although it is reflected by your scores, the length of your credit history is also a consideration for most lenders. In addition to the length of your history, this detailed explanation of your credit usage, provided by the credit bureaus and other suppliers, shows everything from the age of accounts to how much of each credit line you’ve used. Think of your score as a snapshot of this longer, more comprehensive explanation of how you’ve handled your credit, both business and personal.
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. Lenders will look at past sales, expenses, and future reporting, too. Don’t be surprised if they want to see things like unpaid invoices or an explainer of what your money situation will look like two years from now.
Many business lenders now will also want to review at least three months worth of your bank statements before they will approve a term loan, a line of credit, or even a business credit card.
Time in Business
Startups may find it a bit tricky to get business financing from many major lenders. These lenders want to see a track record of successfully servicing debt as well as running a business. Traditional lenders will want to see a few years under your belt, but many online lenders only need to see a year in business. Idea-stage startups have the most difficult time qualifying for term loans or lines of credit, with these lenders, but a business credit card 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.
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.) Whether you agree to allow your business assets to be liquidated in case of non-payment, or you put up your personal property to cover a loan, you’ll get further in the application process if you can guarantee your loan with real, tangible items. In the truest sense, an unsecured loan doesn’t really exist anymore, but many online lenders will secure your loan with a general UCC lien and a personal guarantee.
Because the loan isn’t secured with any specific asset or collateral, but rather a general lien, these loans are often referred to as unsecured loans. In reality though, truly unsecured loans are very rare and only offered to a lender’s most creditworthy customers.
Some industries are more difficult to finance than others. Industry is usually identified by the SIC or NAICS code. While most lenders will offer a loan to any legal, qualified company, some small business lenders have preferences that influence their financing decisions. If your business is in a niche such as gambling, adult entertainment, or unproven tech, your options will be more limited than someone in a more widely-accepted field.
Many lenders publish a list of their restricted industries you can review online before you apply.
If you already bank with a major lender, you could be more likely to have a loan application approved. We saw this to be true during the first round of the Paycheck Protection Program as many banks approved the PPP coronavirus loan to their current customers before they considered a small business they were unfamiliar with. Consider where you already have existing, well-built relationships when you start choosing lenders. Credit unions, in particular, have favorable terms for their members.
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 options available, it’s important to become an expert at choosing the type of financing that will best meet your business needs and will accommodate your business’ credit situation. The options include:
Small Business Administration (SBA) Loan
SBA loans are available in amounts from $50,000 – $5 million, you’ll get lower rates and favorable repayment terms. The loan process can take weeks or months, depending on the type of SBA loan you are trying to obtain. Only SBA Disaster Loans are made by the SBA. All others are made by participating lenders.
Traditional Bank Loan
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 rats of all the options—if you meet the often rigid criteria. Loan amounts vary, and repayment terms range from one to twenty years. Get an answer in less than four months with approved personal or business credit.
These lenders don’t consider your credit to be as crucial as others, but your credit profile still matters. These lenders are also more inclined to work with younger businesses with loan amounts much smaller (up to $50,000), hence the “micro” name. Get an answer within three months for these loans with rates that are comparable to the better credit cards.
Non-Bank Online Loan
Because of the quick response to a loan application and the speed with which they can make funds available, online lenders are the first choice for many small businesses today. If you’re willing to pay up a higher APR and pay your debt in less than five years, you could possibly get a loan for between $25,000 – $500,000. Credit may still count, but revenues are often more important. Many lenders can approve your loan the same day and have funds available in your account within a day or two.
Business/Merchant Cash Advance
Post PPP, a business cash advance will likely be one of the only available financing options for many businesses for the next several months. Available amounts are based upon revenues and can range from $5000 – $250,000 or more. Even those with less-than-perfect credit can get approval, provided they have the transactions to justify the advance, and the turnaround time is often within 24 hours.
Cash Flow Loan
As the name implies, cash flow loans are very focused on your cash flow. Although your credit profile will be part of the equation, these lenders want to confirm you have the cash flow you’ll need to service debt. Get approval within minutes from some lenders for amounts of up to $100,000. Be prepared to pay a minimum of 25% APR and up to 90% APR or more.
Business Credit Cards
Business credit cards are one of the best ways for a younger business to access borrower capital (and are a great tool for mature businesses as well). Pay industry-standard rates of up to 25% for business credit cards that offer between $1000 – $25,000. These make good short-term funding solutions, and although your credit profile is a major approval factor, it is often easier to qualify for a business credit card than a term loan or line of credit. Find out if you’re qualified within three weeks of applying.
One of the most under-rated and often-overlooked 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 soon as ten days.) Those with a good business credit history might get an approval within hours.
It might not be a small business loan, but 30- to 6-day terms are a great way to build or strengthen your business credit profile.
Lines of Credit
One final option for an existing business is the line of credit, which can generally be borrowed against again and again. This is traditionally a popular source of borrowed capital for many business owners, but depending on the lender can be more difficult to qualify for. Credit profile and revenues are often major factors for these loans, which range from $1,000 – $100,000 for qualified borrowers.
3. Decide on 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:
These are your banks, credit unions, online lenders and investors. You won’t go through a third-party intermediary to make your loan application, receive funds, or make your periodic payments.
This option helps you find lenders based on your qualifications. You can 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.
Short for “peer-to-peer,” the P2P lending space has been growing in recent years and may be a good option for someone who has been turned down by a traditional lender. 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, you might be able to find funding even with less-than-perfect credit. Many P2P lenders are also business owners.
Ask the following questions to better determine which lender is right for you?
- Do I have good credit?
- Can I pay the money back right away?
- 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?
- How much money do I need?
- Am I willing to put up personal or business assets for collateral?
Remember that some lender characteristics are things you can work around, while others will be considered closed doors. A bank only giving loans to those with an 700+ FICO is an actual barrier to getting financing. A bank offering a higher rate of interest than what you ideally want isn’t a closed door, but it may not be favorable. Make a list of those things that you can compromise on if you have to, and understand that some factors are non-negotiable.
4. Determine your chances of getting approved.
While some lenders will prequalify you based on basic information, the actual loan application process will likely require a hard inquiry on your credit report. Filter your initial loan applications to those lenders where you are most likely to find success.
If you have personal credit scores of less than 680-700, you probably won’t have success at a bank. An online bank with a higher-interest rate, may be more likely to say yes, and could be a good decision based upon what you are borrowing for. Try to understand your odds before you take the time and effort to apply.
Some lenders can tell you your chances within a few brief 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.
5. Gather your documentation.
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 (note the bank will pull their own copies of these)
- 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 any piece of paper or electronic document that you used when coming up with your business plan and financial statements. Banks won’t take your word for it that you will be profitable and can pay the money back. They need to see some kind of evidence that validates your creditworthiness.
6. Fill out the application.
The rules for applying are 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 six months – depending on the loan type you chose.
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—provided you qualify.
How to get a business loan to start a business
One of the most common questions people ask when launching a start-up business is “how can I pay for it?” When looking for a loan to start a business, without a track record or revenue, it will be difficult. You can demonstrate your business acumen with a well-written business plan, and secure your loan with collateral—which will improve the odds, but it will still be challenging. Since you don’t have a business yet, your personal credit score will be the only thing a lender has to evaluate your creditworthiness.
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 a loan approval.
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. While it may take longer to get approval, there are some products available that weight your credit profile differently than others are are willing to work with borrowers who don’t have a perfect profile (provided they can demonstrate a healthy business and the ability to successfully service debt). They include merchant credit accounts, business cash advances, 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 card sales. These are easy to document and show a bank or other lender an average of your incoming cash and overall revenue. It can help establish that you are making enough to repay them. Whether they use it to give you a traditional loan or provide you with a working capital loan, it’s possible to use your credit card transactions as a way of getting financing to get through a rough patch.
- Bank deposits. You should have a separate business checking account you can use as proof of an established pattern of your deposits and withdrawals. Some lenders will give you a loan based on deposits made over a period of time.
- Co-sign. If you have a friend, relative, or business partner that will vouch for your creditworthiness and co-sign on 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 create more options and improve the odds of a successful application.