By understanding all your business loan options and not rushing the process, you’ll be in the best position to apply and get approved — as well as avoid wasting time or money.
To apply for and get a business loan in 6 steps, follow these steps:
Determine what type of loan and how much you need:
Assess your financial requirements and calculate the amount of money needed for your business. The right type of business loan for you depends on what you’re hoping to accomplish. In general:
If you want to finance a large purchase or business expansion: Traditional term loans are lump sums that you pay back over time with interest and often have high borrowing maximums — SBA loans can reach $5 million, for example. Many lenders also offer specific products to fit a growing company’s needs, such as loans for equipment or vehicle purchases.
If you need funds for day-to-day expenses: Business lines of credit are a flexible kind of funding that lets you tap into capital as you need it to cover expenses such as payroll or unexpected repairs, offering a useful safety net.
If you’re looking to fund a startup: It can be tougher for new entrepreneurs to get a traditional business loan, but business credit cards and personal business loans can be good options if you haven’t been in business long enough to qualify for a line of credit or term loan.
Review your credit score and history:
Check your credit score and address any issues that may negatively impact your loan application. A number of places offer business loans, including banks, online lenders and microlenders. Answer these questions to help determine at which type of lender you’ll meet the eligibility requirements to qualify for a small-business loan:
What’s your credit score?
You can get your personal credit report for free from each of the three major credit bureaus: Equifax, Experian and TransUnion. You can also get your credit score for free from several credit card issuers and personal finance websites.
Banks prefer to offer their low-rate business loans to borrowers with credit scores in the good and excellent ranges, or 690 and above.
If your credit score falls below that threshold, consider nonbank lenders. Online business loans can be a little easier to qualify for. You may also want to consider microloans or small-business loans for bad credit.
How long have you been in business?
You need to have been in business for at least six months to one year to qualify for most online loans and at least two years to qualify for most bank loans.
Do you make enough money?
Many lenders require a minimum annual revenue, which can range anywhere from $50,000 to $250,000, for business loans and lines of credit.
If your revenue isn’t high enough to qualify for those loan products, consider looking into business credit cards or SBA microloans.
Can you afford loan payments?
While looking at your annual revenue, you should also consider your cash flow — and evaluate how much you can afford to apply toward loan repayments each month.
As a general rule of thumb, your total income should be at least 1.25 times your total expenses, including your new repayment amount.
For example, say your business’s income is $10,000 per month. That’s 1.25 times $8,000 of expenses. If you already pay $7,000 in rent, payroll and other costs, you should be able to afford a $1,000 monthly loan payment.
Some online lenders require daily or weekly repayments, so make sure to factor that in — you’ll need enough cash flow to make payments at the time they’re due.
Estimate the cost of getting a business loan.
Review your loan options: Research different types of loans, such as traditional bank loans, SBA loans, online lenders, and nonprofit lenders.
- Traditional bank loans: These loans are offered by banks and credit unions and typically require collateral and a good credit score. They offer competitive interest rates and terms, but the application process can be lengthy and require extensive documentation.
- SBA loans: These loans are guaranteed by the Small Business Administration and are designed to help small businesses access funding. They offer low-interest rates and flexible terms, but the application process can be complex and require a lot of paperwork.
- Online lenders: These lenders offer fast and convenient access to funding, with a streamlined application process and quick approval times. However, they often charge higher interest rates and fees than traditional lenders.
- Nonprofit lenders: These lenders offer loans to underserved communities and often provide additional resources, such as business training and coaching. They may have more flexible requirements than traditional lenders, but their loan amounts may be smaller.
Gather the required documents: Collect necessary documents, including business licenses, permits, ID, financial statements, business plan, and tax ID number.
Each lender may require different documentation for its small-business loan application. Most will likely want some form of the following:
Information about your business. These items will range from the basic — like your business’s name, address and employer identification number — to more detailed documentation. For example, a lender may want a business plan or proposal outlining how you’ll use the loan.
Financial statements for you and your business. These may include documentation of your annual revenue, such as profit and loss statements, plus tax returns and bank account statements for business owners and the business itself.
Details about the business’s owners. You may need information like the names, Social Security numbers and addresses for anyone who owns more than a certain percentage of your company, typically 20% or 25% depending on the lender or loan.
Information about your collateral. Some lenders may require you to put up collateral, such as real estate or equipment, to secure your loan. You should provide information about the type of collateral you’re offering and how much it’s worth. It can be helpful to get an independent auditor to value your collateral before applying for a business loan. Bank and SBA lenders are more likely to require collateral than online lenders.
Personal guarantee. Most lenders will require you to sign a personal guarantee when you apply for a small-business loan. A personal guarantee is an agreement that states you, the borrower, are responsible for paying back the loan with your personal assets if your business defaults. Other business owners may be required to sign personal guarantees as well.
If you’re not sure what you need, you might start with the SBA loan application requirements. Government small-business loans typically require more paperwork than other options, so if you have everything the SBA wants, you should be well-prepared for whatever a lender asks for.
Apply for a business loan by Submitting your application:
Depending on the lender, you may be able to apply online, over the phone, or in person. Provide all required information and ensure that your application is complete and accurate.
More traditional financial institutions, such as banks and credit unions, may make you apply at a branch or over the phone. For example, Bank of America accepts online applications for some of its products — like its business auto loans — but requires an in-person or phone appointment for others.
Before submitting your business loan application, consider having someone else look over it, such as a professional from your local Small Business Development Center, or SBDC.
These business professionals can help you double-check that your application includes everything the lender asked for and in the appropriate format. The lender may have questions as it evaluates your application, but by reducing unnecessary back and forth, you’ll get a decision as quickly as possible.
Review your loan agreement and get funds
After submitting your application, wait for the lender’s decision. The processing time can vary depending on the lender and the type of loan.
Once your business loan application is approved, you’ll receive a loan agreement from your lender. This business loan agreement will lay out all of the terms and conditions of your lending arrangement, including the loan amount, repayment terms and schedule, interest rates and fees, among other items.
You should review your loan agreement thoroughly, taking note of anything that’s unclear and writing down any questions you have. Then, you can reach out to your lender for clarification and/or answers to your questions.
It can also be helpful to have a business attorney review the agreement. Organizations like SCORE can provide low- or no-cost access to small-business legal services.
Next, you’ll sign the loan agreement and return it to your lender. The lender will disburse your funds, usually by transferring them directly to your business bank account.
If your loan application is not approved, consider reapplying later or trying a different loan type. Additionally, you can seek assistance from local Small Business Development Centers (SBDC) or ask a business colleague to help with the application process.