Banks issued $114.3 billion in loans to small businesses in 2020, according to data gathered by the Small Business Administration. And this number does not include loans issued by banks that didn’t report to the SBA, credit unions or online lenders — all of which offer many business loan options.

If you want in, know that getting a business loan requires lots of time and intensive documentation. Set aside time to research lenders and the application process before you start applying.

1. Choose a type of loan

The most common types of business loans are term loans and lines of credit, but many other types also exist. Term loans have set repayment terms and are ideal for fixed expenses like equipment. Lines of credit are flexible and work similarly to credit cards. You can borrow up to your credit limit and can borrow again as you pay back what you owe.

You should choose your loan based on what your business needs.

  • Equipment or supplies. Many banks and online lenders offer term loans specifically designed for equipment. But a general-purpose term loan will also be useful if you are furnishing an office or need to replace older equipment.
  • Inventory. A line of credit is good if you frequently need to restock inventory and have tight cash flow. But an inventory or term loan may be more suitable if you’re just starting out or planning a large purchase.
  • Expansion. If you plan on adding to your payroll, a term loan may be better because you can borrow more. But if you need marketing or new advertisements, a line of credit could offer you the flexibility to continually take advantage of new opportunities.

Other options include merchant cash advances, invoice factoring, microloans and more.

If you do decide on a term loan, look into loans from the SBA. SBA loans can be used for almost every business expense and may be easier to qualify for if your business has not received much funding in the past. However, qualifying for and receiving an SBA loan may take longer than borrowing other funds.

2. Decide how much money you need — and how much you can afford to borrow

Your actual and projected revenue will impact how much you can afford to borrow. This is especially true for seasonal businesses. When your cash flow fluctuates downward, you may be unable to afford a fixed monthly payment.

Most small business loans start at $5,000 — but the average amount borrowed is much higher. A business plan and projected finances will go a long way in preparing you for a business loan and proving to a potential lender that you can repay it.

Consider seasonality, inventory, payroll costs, equipment maintenance and regular bills when determining how much debt your business can afford to take on. It may also be wise to consult a business advisor to help navigate your budget, especially if this is your first time taking on a large debt.

3. Determine your eligibility

Each lender has eligibility criteria that will determine if your business is a good fit. The requirements your business and its owners will need to meet depend on how much you need to borrow, your time in business and other factors.

  • Annual revenue. A strong annual revenue is critical for most forms of credit. Your application will not be approved if your business is not profitable and does not make enough to cover a loan.
  • Time in business. Most lenders will require your business to have been established for at least one to two years, although a few will accept businesses at least six months old.
  • Credit score. Your business credit score will be an important factor if you have had previous business loans or credit cards. Lenders will also use your personal credit score to determine eligibility.
  • Debt-to-asset ratio. If you already have business debt, it should not outmatch your owned assets. You should calculate your debt-to-asset ratio before you apply — lenders will want to ensure your business can handle new debts.

Research lenders’ other business loan requirements before you apply. Your application will be rejected if your business does not meet the minimum criteria a lender sets.

4. Compare lenders

Banks, credit unions and online lenders all offer a variety of business loans. Your options and how much you can borrow will depend on the specific lender.

If you have a business banking account, see what financing your bank offers. Having an established relationship may help your application. If not, cast a wide net. Depending on your business and personal finances, you may be able to qualify for multiple types of business loans.

There are a few factors you should consider when sorting through lenders.

Interest rate, fees and loan term impact your business loan’s total cost. A fixed interest rate remains the same throughout the loan’s life, while a variable rate changes with market forces. But reviews from other business borrowers and the resources available to you through your lender should also help guide your decision.

If you are considering an SBA loan, use the SBA Lender Match tool. You can also browse the SBA’s Weekly Lending Reports to see how many businesses receive funding and how much they receive.

5. Gather documentation

The exact documents you will need depend on the lender and the type of business loan you are applying for. According to the Minority Business Development Agency, there are a few documents that you should have handy.

  • Personal documentation. Your lender will likely request information about your finances, background, other sources of income and resume. If you have a business partner or co-owner, you must include their information too.
  • Business plan. Almost every lender will require a business plan outlining how you intend to use your loan funds and how additional financing will benefit your business. You should also include how the funds will improve revenue and your ability to repay the loan.
  • Business financial documentation. Most lenders require two years of income tax returns, balance sheets, profit and loss statements, bank statements and cash flow projections to determine if your business can repay a loan.
  • Legal documentation. To prove ownership and your business’ status, you’ll need to provide business insurance, business license and any other legal documents pertaining to your business.

Other documents — like commercial leases, payroll records, etc. — may also need to be submitted. Your lender should have a full list of required documents when you apply.

6. Apply for a loan

Most lenders — both banks and online lenders — offer online applications that require minimal initial paperwork. Once your application is received, the lender should be in contact within a few days to discuss your business’s eligibility and additional paperwork that may be required.

But since the average application requires basic documentation, you can have a Small Business Development Center review it. They should be able to give you tips, advice and strategy on how to improve your application — and thus your chances for approval.

Every lender is different. Some may take only a few days to complete a review of your application. Others may take weeks. For an SBA loan, you may need to follow up frequently to ensure you have everything you need. 

The bottom line

Business loans are complicated. If you are considering applying, you need to know what type of loan your business needs, how much you can afford and if you — and your business — meet the eligibility requirements.

Reach out to lenders you have worked with in the past or banks you already have an established relationship with to discuss the application process. You may also want to meet with a business advisor or a member of a Small Business Development Center in your area to learn more about what your business may be able to qualify for.

FAQs about getting a business loan

How much income do you need to get a business loan?

It depends on the loan size, type of loan, the age of your business and how you plan to use your loan funds. Every lender has its own income requirement, so it is best to compare before applying.

Regardless of the minimum income criteria, your lender will want to see positive cash flow alongside projections for future revenue and profit.

Can I get a business loan with a 500 credit score?

Some lenders will work with business owners who have poor personal credit scores. However, it will be much more difficult to qualify for competitive rates — even if your business is otherwise healthy. Since most lenders require a personal guarantee, your credit score matters. A credit score of 500 will likely make lenders cautious when approving you for a business loan.

Do business loans look at personal credit?

Yes, lenders look at both personal and business credit for business loans. A lender will want to ensure that you and your co-owners are responsible with your personal debts. If you have poor credit or a history of nonpayment, it will be much more difficult to get approved.