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- The type of business loan you choose depends largely on why you need the loan and what you'll be using it for.
- Lenders set their own qualifications for business loans, including time in business, personal and business credit score, annual revenue and collateral.
- The application process may vary depending on the lender and type of loan, and the funding time can range from a few days to 90 days or more.
Getting a business loan requires careful research and consideration to make sure you’re choosing the best funding option for you. Different loans serve different purposes, so researching loan options is a good starting point.
You’ll also need to make sure that you meet the lender’s requirements for credit score, time in business and cash flow, ensuring that your business can easily handle loan repayments. Let’s walk through the process of choosing and applying for a business loan step by step.
Choose a type of loan
The type of business loan you choose depends largely on why you need the loan and what you’ll be using it for. You might need a business loan to:
- Purchase equipment, assets or real estate
- Restock inventory
- Fund the development of a product
- Pay for an emergency expense
- Keep payroll and accounts payable up to date despite gaps or delays in revenue
- Draw from as needed for small- or medium-sized purchases
You’ll see many types of business loans on the market, and each comes with its own advantages and disadvantages. Take a look at some of the most common business loans and what they’re best used for.
|Loan type||Best for||Pros||Cons|
|Long-term loan||Large purchases and businesses with strong credit||
|Short-term loan||Fast funding for small- to medium-sized purchases||
|SBA loan||Long-term affordable loans||
|Business line of credit||Accessing funds as needed||
|Equipment loan||Purchasing or upgrading equipment||
|Business credit cards||Paying for small expenses||
|Invoice factoring / financing||Using outstanding client invoices to secure funding||
|Merchant cash advances||Using future sales to secure funding||
Decide how much you can afford to borrow
At the end of the day, how much you can afford to borrow depends on the wiggle room in your business finances. You want to use business profits to make repayments on the loan.
To find out whether your business can afford a loan, many lenders will use something called a debt service coverage ratio (DSCR). The ratio essentially figures your business’s yearly cash flow divided by the cost of the loan.
DSCR = annual net operating income / total annual debt, including principal and interest
Many lenders won’t consider any business with a DSCR below 1.25, and the higher the number, the stronger you look.
For example, let’s calculate your DSCR if your annual net operating income is $500,000 and your loan’s yearly principal and interest is $225,000.
Step 1. Find your annual net operating income. Calculate your business revenue minus operating expenses.
Step 2. Calculate the yearly cost of your loan, including principal and interest. Use our business loan calculator to help you.
Step 3. Divide the annual net operating income by the annual loan cost.
$500,000 / $225,000 = 2.2222222
Here, your DSCR is 2.2, a number that shows a strong ability to repay the loan you’re vying for.
Check your eligibility
Requirements across lenders vary widely because lenders set their own qualifications for business loans. Brick-and-mortar banks tend to work with businesses that have a strong financial profile. Alternatives like online lenders may lower their qualifications, helping startups and business owners with subprime credit get a business loan.
Lenders may set requirements for:
Time in business
Traditional banks may require one to two years of business under your belt to qualify. Alternative and online lenders may fund businesses as young as six months old. Taking time to get your business on solid financial ground will help when making loan repayments.
Personal and business credit score
Since many small businesses don’t have established credit, lenders often use your personal FICO score to get a picture of your creditworthiness. For the best interest rates, most banks will look for a score of 680 or higher. Online lenders may drop to the 500s to approve businesses with bad credit for a loan.
Once you’ve built up your business’s credit profile, lenders may rely on your business credit score to approve a loan. Your business credit score will range from 0 to 100 (or 0 to 300 with the FICO Small Business Scoring Service). The score factors in your company’s size, payment history, industry and other debts. A strong business credit score could mean that you don’t need to guarantee the loan with your personal assets.
Most lenders require you to meet a minimum amount of revenue to prove you have enough cash flow for a loan. Requirements are different based on the lender and type of loan. Some lenders go as low as $40,000, while others set the annual revenue at $100,000 or more.
Collateral or personal guarantee
Since small businesses pose a higher risk to lenders, many lenders require you to secure the loan with assets like business equipment. Another way to secure the loan is to sign a personal guarantee, which allows the lender to seize your personal assets if you default on the loan. Some lenders require both.
Relationships can make a big difference in managing your business finances and getting a loan. If your business finances are in a gray area, having an established bank relationship can help your business get approved for a loan.
And if you find yourself in a tight spot with repayments, your lender may be willing to work with you to defer payments or restructure the loan. You can start your banking relationship by opening a business bank account at your preferred bank.
Once you’ve narrowed down the type of loan you need, you can compare lenders side by side to find the best small business loan for you. Take a look at the following types of lenders that offer small business loans.
Both traditional banks and online lenders offer wide-ranging loan amounts, anywhere from $5,000 to $600,000 or more. However, the interest rates are where you’ll see a real difference. Maximum interest rates for online lenders can range from 30 percent to 100 percent — much higher than you’ll see with banks.
Banks and credit unions
Banks and credit unions can offer APRs between 5.5 to 12 percent for conventional loans and lines of credit, though the exact rate varies based on your business’s financial standing.
Many banks also offer loans backed by the U.S. Small Business Administration. As of October 2023, SBA loans have interest rates between 11.50 to 16.50 percent, and you can secure loan amounts up to $5 million. Repayment terms may also stretch out longer than conventional loans, ranging from five to 25 years.
Community Development Financial Institutions
Community Development Financial Institutions (CDFIs) are a network of organizations that offer financial services and educational support to underserved communities. Each CDFI serves a specific target group for the purpose of building up the community, and they often accept customers with poor or no credit history.
If you’re part of an underserved community, working with a CDFI could help you build a sustainable business through funding, mentorship and additional resources.
Minority Depository Institutions
Minority Depository Institutions (MDIs) are financial institutions in which minority individuals own most of the stock or the board of directors are mostly minority individuals. Many MDIs focus on serving minority communities, providing business loans to entrepreneurs who are historically underserved in the banking industry.
Gather required documents
Lenders not only need to know your business’s financial standing and legal status, but they also want documentation on how you plan to use the loan and its expected effect on your business. Your lender should have a full list of required documents for the business loan when you apply. Some of the documents you should have ready to go include:
- Personal documentation. Your lender may 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. While not every lender will require a business plan, having one is beneficial. Your business plan should outline 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 statements. 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 documents. To prove ownership and your business’s status, you’ll need to provide business insurance, business license and any other legal documents pertaining to your business.
Apply for a loan
Most lenders — both banks and online lenders — offer online applications that require minimal initial paperwork. With some banks, you’ll go in person to apply for the loan. In this case, you may want to contact the bank for a list of required documents ahead of time.
Once your application is received, the lender should be in contact within a few days to discuss your business’s eligibility and any additional paperwork required. But, the exact amount of time until you get the funding can vary depending on the lender and type of loan.
Every lender is different. Some may take only a few days to review your application. Others may take weeks. Many online lenders boast funding in as little as one to two business days. An SBA loan can take 30 to 90 days or more to fully process.
However, since the average application requires basic documentation, you can have a Small Business Development Center review it. They can give you tips, advice and strategies on improving your application — and thus your chances for approval.
If you’re considering applying for a business loan, you first need to decide what type of loan your business needs, how much you can afford and if your business meets the minimum qualifications.
Reach out to lenders you have worked with in the past or banks you already have a relationship with to discuss the process. You could also 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 qualify for.
Frequently asked questions
You can get a business loan with bad credit, but a poor personal credit score will likely make lenders cautious when approving you for a business loan.You also won’t qualify for competitive rates, even if your business is otherwise healthy.
Online lenders may grant you a business loan in as little as 24 to 48 hours after receiving your application. However, most lenders take weeks to process your application. If you apply for an SBA loan, you can expect the process to take 30 to 90 days or longer.
Yes, banks offer startup business loans, though you’ll need to find a lender that requires little to no time in business and little credit history. The lender may set low caps on the loan amount you can borrow, such as $1 million or less. You should also expect to pay high interest rates since your business is at a higher risk for default than an established business.