A business loan can provide the funds you need to expand operations, cover day-to-day expenses and purchase equipment or inventory. If you’ve never applied for a business loan, you might be unsure about where to begin or which documents are required.
Here’s a simple guide that walks you through the process of evaluating your options and preparing your business loan application in five easy steps.
Decide Why You Need Financing
There’s more than one kind of small business loan. Deciding why you need financing will help you choose the right kind of loan. Here are a few common scenarios:
- Buy new equipment Some lenders offer equipment loans. This type of loan is designed to help you purchase business equipment, like machinery or office furniture. The loan is secured by the equipment, so the lender can seize it if you fail to repay the loan.
- Borrow a small amount of money. If you need to borrow a small amount of money, consider applying for a microloan. The U.S. Small Business Administration (SBA) has a Microloan program that allows qualified applicants to borrow up to $50,000. In addition, there are not-for-profit organizations that offer microloans, such as Kiva and the Women’s Microfinance Initiative.
- Establish a business. Since most lenders have minimum time in business requirements, it can be tough to find one that will issue you a startup loan for a new business. If you’re just starting out, you may have to apply for a microloan or a business credit card. You may find it easier to qualify for a business credit card than other types of business loans since approval is based on your personal credit score.
- Pay for day-to-day operations. A working capital loan—a short-term loan used to cover daily expenses, like rent and payroll—can help you cover temporary cash flow problems.
- Borrow money on an as-needed basis. If you don’t know the exact amount you need to borrow, a business line of credit could be a good option. Once a lender issues you a line of credit, you can withdraw funds up to a certain amount to cover business expenses and only pay interest on the amount you borrow.
Funding Turnaround Time
As you consider different types of financing for your business, consider how quickly you need to receive your funding. Each loan option will have different turnaround times once you submit an application, and if you need your funding quickly, some options may be better than others.
Many loans, including loans from banks and credit unions, can take 30 or more days to be funded. Yet, this can vary based on the lender and your application, including if any asset backing the loan needs to be assessed.
If you need a quick turnaround time for funding, some SBA loans can be funded within 10 days, and there are online lenders that offer fast business loans. These loans, which include both traditional loans and equipment loans, can be funded within a day in some cases.
Check Your Eligibility
Although business loan requirements vary, here are four things lenders are likely to consider when reviewing your small business loan application:
- Credit score. When you apply for a business loan, a lender will review your personal and business credit scores. They help the lender assess the likelihood you’ll repay your loan. In general, the higher your credit score, the greater your chances of loan approval and receiving a low interest rate.
- Collateral and/or personal guarantee. Some lenders require you to pledge collateral—something of value, such as equipment or inventory—it can seize if you default on the loan. Some lenders may also require a personal guarantee, meaning you have to secure the loan with personal assets, such as your savings, home or other valuable possessions.
- Time in business. A traditional bank typically requires a business to have been in operation for at least two years, while an online lender usually requires only one year. If you’ve been operating your business for less than one year, don’t get discouraged. Some online lenders will approve qualified applicants who have only been in business for six months.
- Annual revenue. Your total annual sales are also a relevant factor. Before applying, ask a lender what the requirements are and review your business finances to see if you meet them.
Compare Business Lending Options
There are several places you can find small business loans. Here are three of the most common types of lenders.
Online Lenders
Online lenders offer a variety of loan products to small business owners, including term loans, merchant cash advances, lines of credit and microloans. Loan approval rates were lower for online lenders than traditional banks as of 2022—71% versus 82%, respectively—according to the 2023 Small Business Credit Survey (SBCS) by the Federal Reserve.
Nonetheless, online lenders often have less stringent requirements than traditional banks. As a result, you may find it easier to get approved for a business loan with an online lender if you have less-than-stellar credit. In addition, online lenders often have much faster turnover—some may issue funds as soon as the same business day.
A major downside of taking out a business loan with an online lender, however, is that it often charges higher interest rates than a traditional bank.
Traditional Banks
Traditional banks provide many of the same types of business loans as online lenders. The main advantage of applying for a small business loan with a bank versus an online lender or microlender is that it typically offers lower rates for well-qualified applicants.
One disadvantage of applying for a business loan with a bank is that it often has more stringent eligibility requirements. If you have a bad personal credit score (a FICO score less than 580), you will likely have a hard time qualifying without a co-signer—someone who agrees to repay the loan if you fail to meet your payment obligations.
If you opt for funding from a bank, a small bank may be a better option versus a larger one. A majority of borrowers were satisfied with their experience and few were frustrated by long wait times, according to the 2023 SBCS survey. Fewer borrowers who worked with large banks were satisfied with their experience and more were frustrated by long waits for funding.
Microlenders
Microlenders are typically not-for-profit organizations that issue microloans up to $50,000 to qualified applicants, often designed to provide financing for business owners who don’t qualify for traditional business loans. Microlenders usually have less stringent eligibility requirements.
For example, the microlender Kiva does not have a minimum credit score requirement. Instead, it approves applicants based on “social capital.” To qualify, you have to get a certain number of people to lend money to you through Kiva’s platform before your loan request becomes public on their website.
Comparing Offers
As you shop for loans from various lenders, use a business loan calculator to calculate the costs of each loan. This can help you find the lowest cost financing option.
4. Gather the Required Documents
Once you understand your lending options, gather the required documents. A lender will likely ask for these items:
- Personal and business tax returns
- Business licenses
- Articles of incorporation
- Personal and business bank statements
- Profit and loss statements
- Financial statements
- Business plan
- Building lease
If you’re unsure what documents are needed, contact the lender before applying.
Submit Your Application
The final step is to submit your small business loan application. Depending on what lender you’ve decided to work with, you can do this online or in person.
Here’s some information a lender might ask for:
- Your name
- Business name
- Social Security number (SSN)
- Desired loan amount
- Loan purpose
- Business Tax ID
- Annual revenue
Once you submit your application, you’ll have to wait for an approval decision. If your loan is approved, a lender will send you a loan agreement to sign before issuing your funds or a line of credit you can draw from.
How To Choose the Best Business Loan
Choosing the best business loan comes down to comparing loans you qualify for and determining which loan is the right fit. Here are loan factors to weigh across many loans.
- Annual percentage rate (APR). A loan’s APR represents what a loan costs on an annualized basis, including interest and fees. Comparing APRs can give you an apples-to-apples idea of which business loans will be the most and least affordable.
- Fees. Lenders may charge upfront fees to process your loan application. Projecting these fees and factoring them into the equation can also help you compare costs.
- Repayment terms. Terms for business loans can range from one year to 25 years. Choosing a long loan term can decrease your monthly payments but increases how much interest you’ll pay over time. The right loan term for you depends on your goals and what installment payments you can afford.
- Funding speed. While business loans from major banks might provide competitive rates for borrowers with strong credit, the application process can be cumbersome. If funding speed is a high priority, online lenders may offer faster funding.
Types of Business Loans
Depending on your business’s needs, one loan type may work better than another. Before accepting any financing, consider various business loans so that your business is best served by the loan.
- SBA loans. SBA loans are small business loans guaranteed by the Small Business Administration. These loans include SBA 7(a) loans, 504 loans, CAPlines, Microloans and others, each of which serve different purposes. SBA loans often come with lower interest rates and down payments than other options, but you’ll often need to be an established business to qualify.
- Term loans. Term loans are traditional installment loans that are repaid over predetermined terms. Banks, credit unions and online lenders all offer these loans and while some have limited uses, many can be used for most business-related expenses. They’re typically available up to $500,000 with APRs starting around 9%.
- Lines of credit. A business line of credit is a form of financing that your business can draw from on an as-needed basis, making it a good option for ongoing cash flow issues. The borrower has access to the line of credit for a set period of time up to a predetermined limit. Once that draw period is over, the borrower has to repay the loan, with interest. APRs are typically anywhere between 10% and 99%.
- Invoice factoring and financing. With invoice factoring, your business sells outstanding invoices to a factoring company at a discount. This can be an effective way to get paid for outstanding invoices quickly, rather than waiting for customers to pay. APRs for invoice factoring are typically between 10% and 79%.
- Merchant cash advance. A merchant cash advance works by giving a lender a portion of your future sales, making this a good option for businesses that have a high volume of sales and need cash quickly. A lender will lend your business money and then that money will be repaid with a percentage of your sales on a daily or weekly basis.
- Equipment financing. Equipment financing funds the purchase of equipment or machinery, with the purchased equipment backing the loan. These loans can be used for anything from office furniture to manufacturing equipment, and terms can be as long as 25 years with limits of up to $1 million.
