Small business owners wear a lot of hats, but arguably the most important task is to obtain capital for your company. Without financing, it can be difficult to leverage your business toward growth and success.

But getting a business loan can be difficult, especially if you’re a startup. Here’s how to get a business loan in six steps and what to consider along the way.

1. Understand the Things That Banks Look For

Whether you’re applying with a bank, credit union, online lender, or some other financial institution, eligibility criteria can vary. However, there are common factors that commercial lenders consider when determining whether or not to lend you money.

Your Credit Scores

Your creditworthiness is a significant component in the application process. Lenders may look at your personal credit scores, business credit scores, or both. 

If your business is relatively new, lenders will likely lean more heavily on your personal credit scores. But your business credit scores can be just as important.

Your credit scores provide lenders with a snapshot of your overall credit health, and if they’re too low, it can be challenging to get approved for affordable financing options.

Your Credit History

Your credit scores can give lenders a good idea of your credit health, but they’ll also dig into your credit reports to look at the full picture. 

This is primarily because there are several different factors that influence credit scores and while two business owners may have similar credit scores, the reasons for those scores can be different.

In other words, even if you meet the minimum credit score requirements for a lender, it’s still possible to be denied if there are certain negative items on your credit reports.

As with your credit scores, commercial lenders may review your personal credit history, business credit history, or both.

Cash Flow

In addition to your creditworthiness, lenders also want to gauge your ability to repay any debts you incur. As a result, your business cash flow is a major aspect of the underwriting process. 

Lenders will review your income and expenses to get an idea of how likely you are to pay your bills on time and whether there are any irregularities in your cash flow that could make it difficult to keep up with your monthly payments.

Lenders may also consider the sources of your cash flow to determine the likelihood of there being potential issues down the road.

Time in Business

How long your business has been operating is another important factor that lenders consider. Again, the requirements can vary depending on the lender and the type of financing you’re trying to obtain. 

For example, long-term business loans from banks and credit unions require more time in business, while others, such as credit cards and microloans, might not have any minimum requirements.

How long you’ve been in business is important because the longer your company has been around, the more likely you are to stay in business. Many small businesses fail within the first couple of years, so being able to prove your longevity is a big plus.

Collateral

With some types of business financing, the lender may require you to use collateral to secure your loan. This may not be necessary for business credit cards, microloans, and certain online lending options, but expect many lenders to require it with other loan types.

Collateral is especially necessary with equipment financing, as you usually use the equipment you’re purchasing to secure the loan. With other types, you may be asked to use other types of assets to secure your loan.

In some cases, you can avoid collateral if your business credit scores are in good shape.

Industry

While it might not seem fair to some, the simple fact is that some industries are riskier than others. Your chances of failing can be higher in the restaurant, casino, liquor, and pawnshop industries than in others.

As a result, it’s important to recognize that if you’re in a risky industry, you may need to compensate in other areas of your business credit and financial profile to overcome the risks inherent in your industry.

Also, some lenders may specialize in working with certain industries, so do your research to find the right fit.

Loyalty

As a consumer, it may be appealing to choose your financial products, such as bank accounts, credit cards, and loans, based on who will give you the best features and benefits. But as a business owner, it can pay to stay loyal to one bank or credit union.

If you’ve been with a financial institution for a while, they have more information on how your business operates, and if you’ve proven yourself to be a good customer over and over again, it can make it easier for you to obtain financing when you need it.

2. Make a Decision on the Type of Lending You Need

There are many different types of financing options for small business owners, but they all serve different purposes and different audiences. Before you apply, it’s important to understand your needs and find the type of financing that best fits them.

You’ll also want to consider which types of loans would be a better fit for you based on how long your business has been around and your eligibility. Here’s a quick summary of some of the more common types of business loan options.

SBA Loan

SBA loans often have affordable interest rates and favorable repayment terms, but they’re typically reserved for small businesses that have been around for a while and have excellent credit histories.

What’s more, SBA loans can take months to fund. So if you need funding fast, they’re not for you. But if you believe that your business is eligible for an SBA loan, take some time to research the different types of SBA loans that are available and their requirements. 

You’ll also want to seek out SBA lenders — the SBA insures loans but doesn’t originate them — to research and compare your options.

Traditional Bank Loan

A traditional bank loan is an installment loan that can offer mid- or long-term repayment. If you’re trying to make some big investments to grow your business, this can be a good option. These loans also typically come with lower interest rates, though you’ll likely need to provide collateral.

That said, traditional bank loans usually have more stringent eligibility requirements than other forms of business financing. 

So consider them only if your business has been around for several years and has strong revenues. If you can qualify, though, these loans can be a great way to expand your business.

Microloan

Microloans are small loans — usually up to $50,000 — designed specifically for startups and other new businesses and nonprofit organizations.

Depending on where you look, these loans typically don’t require a lot of time in business or even strong revenues. They can also be relatively affordable, especially compared to other options available to new business owners. 

But they can also come with shorter repayment terms, which can make it more challenging to pay them back. And in the case of SBA microloans, you may be restricted on how you can use the loan funds.

Online Loan

Because traditional bank loans have such high standards for approval, many online lenders have joined the fray to offer an alternative option for new and established businesses alike.

These loans can come in the form of term loans or lines of credit, and online lenders often have lower requirements for creditworthiness, time in business, revenues, and other factors.

That said, online loans often charge higher interest rates than traditional bank loans. Additionally, they can have much shorter repayment terms. As a result, it’s important to compare all of your options to avoid paying too much for the privilege of borrowing money.

Business Credit Cards

Business credit cards offer a revolving line of credit that you can use to cover everyday business expenses. In addition to that line of credit, many also offer rewards on your spending and other benefits and features that can help your business.

Business credit cards can be a great way to get your business off the ground because they typically don’t have time-in-business and revenue requirements. But expect your approval to be based solely on your personal credit history. 

Also, most business credit cards require a personal guarantee, which means that your non-payment could damage your personal credit scores, and your personal assets may be at risk if you can’t repay the debt.

Cash Flow Loan

A cash flow loan is typically an unsecured loan that’s designed more for day-to-day working capital needs than long-term financing needs. 

Instead of basing your eligibility primarily on your credit history, lenders in this space will look mostly at your cash flow to determine whether or not to provide you with funds.

So while you don’t necessarily need to have a strong business credit history, you’ll need a good track record of profitability and strong cash flow. 

Additionally, these loans typically have higher financing costs because they’re not strongly tied to your creditworthiness like other forms of business financing.

Vendor Financing

If your business is relatively new, you can start building your business credit history immediately through vendor financing. Depending on which vendors you choose, you can opt to pay for supplies, inventory, and other goods and services 30 days or longer after you make the initial purchase.

What’s more, the vendor may report your payments to the commercial credit bureaus.

Vendor financing can be inexpensive or even interest-free as long as you pay within the prescribed amount of time. In some cases, though, you may need to already have some credit history before you can qualify for longer repayment periods.

Line of Credit

Like a business credit card, lines of credit offer a revolving credit line that you can use, pay off and use again. They may also offer the chance to make interest-only payments for a period, which can help if you want to leverage your cash flow for other things.

Lines of credit can come from traditional banks and credit unions, as well as online lenders. Depending on the lender and your track record, a line of credit may or may not require collateral. 

Interest rates and other terms can also vary wildly depending on the type of lender and your credentials.

3. Decide on the Lender

Now that you’ve got an idea of what type of loan you need, it’s time to shop around and compare different types of lenders. In addition to looking at banks, credit unions, online lenders, and other institutions, you’ll also want to consider how those lenders originate their loans.

Shopping around is crucial because it helps you secure the best offer available to you. As previously mentioned, each lender has its own criteria for determining eligibility and loan terms, so even though your credentials are the same with each application, they’ll be viewed differently.

Direct Lender

Direct lenders are commercial lenders that lend directly to their borrowers. This makes up the majority of small business lenders. There’s no middleman, so you don’t have to go back and forth between a broker or a marketplace. 

What’s more, applications can be simpler, and these types of loans can have higher approval rates. 

That said, looking only at direct lenders can limit your options, and they may not always be the best fit for what you need, especially if your track record isn’t as strong as other small businesses.

P2P

Peer-to-peer (P2B) lenders act as a middleman between borrowers and individual lenders. In other words, if you apply with a P2P lending platform, the platform will underwrite the application, but it won’t actually fund the loan.

Startups can benefit from P2P business loans because they tend to have lower credit standards than traditional business financing options. These loans are often provided by online platforms, so the funding time can be faster, making it better if you need the funds quickly.

That said, you may end up with higher interest rates compared to a direct loan, and you may need to pay a fee to the platform for its part in the process.

Lending Marketplace

Like a P2P lender, lending marketplaces act as a middleman between borrowers and lenders. The difference is that the lenders you’ll be working with are financial institutions, not individual investors.

A lending marketplace can help you find all sorts of small business loans, depending on your needs. They can also do a lot of the legwork when it comes to shopping around, making it easier to make side-by-side comparisons with multiple lenders in one place.

In many cases, these platforms make money from the lenders, not you, so you don’t have to worry about added fees. That said, some may charge a fee, so make sure you read the fine print before you use one.

4. Figure Out Your Chances of Being Approved

Now that you know which type of loan you need and the type of lender you want to work with, do some research to find out what the eligibility requirements are for the loan you’re planning to get.

In many cases, especially with online lenders, you can find eligibility requirements on the lender’s website, but not always. In situations where you can’t find eligibility information online, contact the lender directly to find out what their criteria looks like.

Then take a look at your financials and credit history to get an idea of how likely it is that you’ll be approved. 

This can take some time, as you’ll need to check your credit scores and credit histories — possibly both business and personal — and you’ll also want to run some numbers on your cash flow to assess your ability to repay.

Again, it’s important to do this with multiple lenders because some will have less stringent requirements than others. 

At the same time, you’ll want to compare the lenders’ interest rates, fees, and other terms. While some lenders make it easier to get approved, they may charge more to compensate.

5. Ready Your Documentation

Depending on the type of business loan you’re seeking, you may need to provide a lot of documentation about your business. 

Certain financing options, such as business credit cards, don’t require a lot. But traditional term loans, lines of credit, and other loan types may require a lot. 

Regardless of which type of loan you’re thinking of getting, here are some documents you may need to provide during the application process:

• Bank statements
• Tax returns
• Proof of business registration and license
• Other legal documents
• Employer identification number
• Articles of incorporation
• Income statement
• Balance sheet
• Budget
• Cash flow projections

Additionally, some lenders may require a business plan, which lays out how you plan to use the funds and financial projections to show your ability to repay the loan. 

It’s crucial that you take your time when developing your business plan. Many business owners may have already done this, but make sure that the plan is up to date and specific to your current financing needs and plans.

While you might consider waiting until you apply to figure out which documents you need, it’s best to put these together now because it speeds up the application process and can help you get the funding you need more quickly.

6. Apply for a Business Loan

All the work you’ve done so far will make the application process go much more smoothly. You’ll typically apply for your business loan online, but depending on the lender, you may also be able to do it over the phone or in person.

Answer all of the questions on the application accurately and completely to ensure that you don’t run into any problems. There’s also no harm in double- and even triple-checking your application before you submit it.

Once you’ve submitted your application, the lender will review it and let you know which documents you need to provide. Some lenders will allow you to upload them to a secure website, but you may also be able to fax them or share them in person.

Once you’ve done all of the work, sit back and wait until the lender has made a decision. If you’ve been approved, you can review the final offer from the lender and decide whether or not to accept. 

If you accept, read the loan agreement carefully and thoroughly before you sign to make sure the terms and conditions are satisfactory.

Then sign, either in person or electronically, to complete the loan process. Once that’s occurred, the lender will disburse the loan funds to you, and you can use them as you planned.

FAQs

What Credit Score Is Needed For a Business Loan?

There’s no minimum credit score to obtain a business loan because there are loan options for small business owners across the credit spectrum. The key is to understand where your credit stands and to apply with a lender that provides loans for borrowers in your credit score range.

In some cases, though, it may make sense to work on improving your credit before you apply.

How Much Income Do You Need to Get a Business Loan?

As with your credit score, there’s no specific income requirement for all business loan options. That said, you’ll typically need some income to be approved because it shows your ability to repay the debt.

When you’re just starting out, lenders may rely on your personal income to determine your approval. But over time, your business revenues will be more important in helping lenders decide whether or not to lend you money.

How Hard Is it to Get a Business Loan?

Some business loans are harder to get than others. For example, if you’re looking for a traditional term loan or line of credit from a bank or credit union, it can be challenging to qualify unless you’ve been operating for several years and have strong revenues. 

That said, business credit cards, microloans, and online loans can be easier to get if you don’t meet the requirements for other traditional business financing options.

Again, the important thing is to know where you stand and to apply for financing that fits your needs and eligibility.

The Bottom Line

Getting financing for your business can be a difficult process, especially when you’re just starting out, but as you take these steps, you’ll be in a better position to find the right form of financing for your business that’s obtainable and can help meet your needs.
In some cases, it may make sense to build business credit before you apply, but base that decision on your company’s needs and ability to grow your business with or without financing.

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