How to Get a Small Business Loan in 4 Steps

Finding a small business loan is a necessity during business growth, but it can be difficult to find a loan you qualify for. The four basic steps for how to get a small business loan include evaluating your loan options, determining your eligibility, finding the right lender, and applying for the right loan.

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How to Get a Small Business Loan

The four steps for getting a business loan are to choose the right small business loan, determine your eligibility, find a lender experienced in your industry, and submit your loan application.

1. Choose the Right Small Business Loan

Finding the right loan for your small business is easier if you understand the various types of available funding options. The purpose of your loan often dictates the type of loan needed and the available financing options. The three primary loan types are long-term loans, short-term loans, and asset-based loans.

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Small Business Loan Options

The qualifications for each loan type are different, and the loan you need is unique to your specific situation. Therefore, it’s important to evaluate all of your options before you apply for a loan. You don’t want to waste time or money applying to loans you either don’t qualify for or that won’t help your business succeed.

The loan options available to small business are Small Business Administration (SBA) loans, short-term loans, business lines of credit, equipment loans, invoice factoring, accounts receivable financing, merchant cash advances, and business acquisition loans.

SBA Loans

SBA loans are long-term loans from a traditional lender that are partially guaranteed by the SBA. The SBA guarantee allows lenders to offer lower rates and longer terms than other long-term business loans. The rates for the best term loans, vary from 8% to as high as 70%, depending on the length fo the repayment term.

Short-term Loans

Short-term loans are easier to qualify for than most other small business loans, and they typically have much faster funding times. In exchange for those benefits, short-term lenders also typically carry a larger annual percentage rate (APR) than a general business loan. Nearly one in four applicants sought short-term funding from online lenders in 2017.

Business Lines of Credit

Lines of credit typically offer smaller funding amounts than term loans up to $250,000. They are best for working capital and recurring expenses because they are revolving. This means that once you repay a draw, your credit line is available to borrow from again.

Equipment Loans

Equipment loans use the equipment you are purchasing as collateral for the loan. Banks and online lenders like National Funding offer these loans, and you can only use the proceeds for the purchase of equipment. If you default on your loan, the lender claims the equipment, making the loan less risky and leading to an 80% approval rate in 2018.

Another way to finance equipment is through an equipment lease, which allows you to use the equipment with an opportunity to purchase it at the end of your lease term. Although this can typically have a higher overall cost, it requires less upfront capital like down payments.

Invoice Factoring

Invoice factoring allows businesses to sell their invoices in exchange for up to 85% of the value upfront. Only commercial or government invoices qualify, and a lender like Paragon Financial Group will collect the invoices from your customers directly. Once the invoice is collected, your business receives the remainder of the invoice value less a small fee.

Accounts Receivable Financing

Invoice financing, or accounts receivable (A/R) financing, providers will pay you or give you a line of credit for a percentage of the amount owed to you from unpaid customer invoices. Invoice financing is offered by alternative lenders like Fundbox and is a great way to collect the value of your unpaid invoices in advance without having to wait for your customers to pay.

Merchant Cash Advances

Merchant cash advances are an expensive form of funding that is typically used by borrowers unable to qualify elsewhere. Your funding amount depends on the revenue your business earns from credit card transactions and payments are made daily as a percentage of your credit card settlement. Some merchant cash advance providers like National Funding also don’t have a minimum credit score requirement.

Business Acquisition Loans

Loans used to acquire businesses typically come from traditional lenders like banks and credit unions. These loans require additional paperwork and often require collateral in the form of assets from the acquired business. It’s difficult to qualify for these loans due to their size and complexity. However, they offer long repayment terms and low interest rates.

2. Determine Your Eligibility

Every lender has its own set of parameters for determining whether you qualify for its loan products. When comparing small business lending options, it’s important to understand the six primary factors that lenders evaluate you on. Understanding these eligibility requirements will help you determine which loan products are best for your business’s situation.

The six business loan qualifications are the time in business, credit score, repayment ability, collateral, customer payment processing, and what the loan qualifications are by loan type.

Time in Business

It’s tough to get funding for a startup unless you’re rolling over your retirement money. Business lenders that lend to startup businesses typically only provide small amounts of funding with high-interest rates. The best option for startup owners is to get a startup business loan or use personal assets like your retirement account.

Established businesses have more financing options available to them. If you run an established and profitable business and have good personal credit, you will be a good candidate for an SBA or bank loan, which are typically the least expensive forms of business financing.

Credit Score

Your personal credit is evaluated by most lenders as one of the most important factors for qualifying for a small business loan. If you have a credit score of 680 or higher (check your score for free), it’s easier to qualify for most loans. Knowing your credit score will help determine which loan options you may be eligible for.

“A bad credit score is one of the most common reasons that SBA loan applications get rejected. Also, a lack of adequate collateral can kill your chances at approval. Your lender wants to be assured that you will be able to continue repayment when your cash flow slows down, whether that be through real property or some other form of collateral.”

―Jacob Dayan, co-founder and CEO, Community Tax

Having less than perfect credit doesn’t make it impossible to find a business loan, but it makes it harder. In a recent Federal Deposit Insurance Corporation (FDIC) survey, 91.6% of banks considered the business owners credit score an important factor in a lending decision. Instead of a traditional bank, borrowers with lower credit scores will need to seek costlier alternatives.

Repayment Ability

To get a loan, you must be able to prove to the lender that you have adequate repayment ability and can afford your loan payments before the lender will issue a small business loan. One way that lenders evaluate your repayment ability is by calculating your debt service coverage ratio (DSCR).

It’s important that you know your total business revenues for the last two or three years―if you’re starting a new business, you will need to project these numbers based on expected performance―this information will help you calculate your DSCR before you apply for loans.

Your DSCR is the amount of debt you have relative to your income. It’s calculated by dividing your net operating income by the total of your debt and interest payments. Lenders prefer a DSCR of 1.25 or higher.

Collateral

Collateral is important for a traditional loan, and the more you have, the higher your chances are at getting funded. Determine if you have the equipment, real estate, or other assets that can be used as collateral to secure the loan. Alternative lenders typically don’t require collateral, although they may place a Uniform Commercial Code (UCC) lien on your business assets and require a personal guarantee.

Customer Payment Processing

The method through which you receive payment from your customers may be a potential loan source. For example, if you bill your clients via invoices, invoice factoring, or invoice financing might be the right solution for your cash flow problems. If you accept credit card payments, a merchant cash advance might be an alternative option.

What the Loan Qualifications Are By Loan Type

Small business loan qualifications vary by loan type and lender but, in general, the longer you’ve been in business, the higher your credit score is and the more collateral you have, the easier it will be to qualify for a loan. Loan qualifications are primarily based on time in business, credit score, and business revenues.

Short-term Small Business Loan Qualifications

Short-term small business loans have minimal qualification requirements compared to long-term small business loans. The standard qualifications are that your business is operational for at least a year, that you have a positive credit history and adequate business revenue to repay the debt.

Typical qualifications for a short-term loan are:

• Time in business: At least one year
• Personal credit score: At least 550
• Annual gross revenue: At least $100,000

Long-term Small Business Loan Qualifications

Long-term small business loans have more stringent qualifications than their short-term counterparts. Long-term small business loans also require that your business has been operational for at least two years, that you have a higher credit score, that your business is profitable and growing, and that you have nothing negative impacting your credit.

Typical qualifications for a long-term loan are:

• Time in business: At least two years
• Personal credit score: At least 680
• Profitability: Profitable and trending up
• Other requirements: No negative credit marks like bankruptcies, tax liens or repossessions

If you determine that you need funding quickly, you should apply for an online or alternative business loan. Be prepared, however, to pay more in terms of interest rates for the added speed and convenience of an alternative business loan.

3. Find a Lender Experienced in Your Industry

A lender that has experience originating loans to small businesses in your industry will understand the nuances of your business needs. The small business loan you can qualify for and the information you may be required to provide may vary based on the business you have.

Some questions you can ask potential lenders before you apply for a small business loan are:

• How many loans have you funded in my industry?
• What’s your average loan amount that gets funded?
• What is the average APR of your current outstanding small business loans?
• What fees are involved with originating and closing on a small business loan?
• What is your required repayment schedule, such as monthly, weekly, or daily?
• What does your application process entail, and how long does it typically take?
• What documentation do I need to provide you?
• Do you have any current or past customers that I could speak to about your process?
• Do you require a personal guarantee?
• Which credit bureaus do you report to and when?

There are several factors you should consider when getting a small business loan in the following nine specialty industries.

Small Business Loans for Retail Businesses

Retail businesses need financing to purchase inventory, prepare for a busy season, or to procure real estate for expansion. Because of the variety of needs that retail businesses have, retail business loans range from short-term to long-term small business loans depending on the intended use of funds.

Financing for Business Professionals

Business professionals, like certified public accountants (CPAs) or consultants, who usually bill their clients either hourly or by project, often have trouble getting financing. This is because their income depends on the consistent acquisition of new clients. Small business lenders experienced with these types of businesses will often offer business professional loans in the form of short-term financing or lines of credit.

Restaurant Business Loans

Getting a small business loan to finance a restaurant can be challenging because many lenders view restaurants as risky investments. Lenders experienced in the restaurant industry will often rely more heavily on your personal financial condition than the financials of the business. The type of restaurant loan they’ll offer you will depend on why you need the funds and how quickly you can repay.

Small Business Loans for Contractors

Due to the nature of their businesses, contractors frequently need to invest in supplies and materials before their customers paying for the work. With this cyclical need for funding, small business lines of credit are often the most reasonable business loans for contractors. They allow contractors to borrow and repay as the funds are needed.

Funding for Dental Practices

While lenders typically view dental practices as a safe industry, practitioners right out of dental school often find it difficult to get loans to open their own practice. This is because they carry large amounts of student debt. Lenders experienced in this industry understand this nuance. The most common types of dental practice loans available from experienced small business lenders include SBA loans and alternative loans.

Working Capital for Trucking Companies

Loans for trucking companies can be difficult to get from a traditional lender due to uncertainty and seasonality of the business. Trucking companies are often in need of short-term loans for working capital to fund cash flow gaps and/or to fund equipment repairs. The type of trucking company loan an experienced small business lender will offer depends on your needs but could include a line of credit or SBA loan.

Home Healthcare Business Funding

Home healthcare is a rapidly growing industry, and home healthcare businesses are often in need of loans for working capital and expansion. Short-term small business loans are the most common home healthcare loan because they provide a quick influx of funds to finance the business’ growing needs.

Small Business Loans for Medical Practices

Doctors who own their own practice can generally qualify for most medical practice loans due to their stable revenue and high earning potential. An SBA loan will typically provide the most favorable loan terms for this industry. However, if you require faster funding, alternative small business lenders can get you funded faster and with less paperwork.

Loans for Women-owned Businesses

While there is nothing inherently different about small business loans for women, there are some opportunities and resources that women-owned businesses can benefit from. For example, the SBA has a national network of Women’s Business Centers aimed at assisting women to start and grow their small businesses.

4. Submit Your Loan Application

Knowing the amount of financing you need and if you meet the minimum qualifications will help you choose the type of small business loan to apply for. The loan you’re applying for will determine how much documentation you will need to gather before submitting your application. While short-term loans from online lenders usually require the least amount of documentation, long-term loans typically have an extensive application process.

According to Stuart Blake, vice president of sales and customer success at BlueVine:

“The major difference between a working capital loan from a bank or online lender is the approval process and experience. While you may be able to get financing with lower interest rates from banks, the application and approval process can be tedious, require you to submit a large amount of paperwork, and take weeks and, in some cases, months to receive an answer. With online lending, you can apply in minutes without paperwork and get funds the same day. That’s because most online lenders use advanced AI [artificial intelligence] and machine learning technology that makes the application and approval process faster and more accurate.”

How to Apply for a Small Business Loan

The application process for most business loans can be started online through the lender’s website. For short-term loans, the entire application process can be done online in a matter of minutes. For long-term loans, the application process is more daunting due to the amount of documentation required but can still be started from your lender’s website.

Application Process for Short-term Small Business Loans

Small businesses using short-term financing have a simple application process compared to the process for long-term financing. It requires significantly less documentation than loans through a traditional lender. Most online lenders for short-term loans only require you to provide basic personal and business information and applications can be completed online within minutes.

The information typically required to apply for a short-term small business loan includes:

• Name
• Address
• Business revenue
• Amount of financing you need

Once you fill out the online application, which takes about 10 minutes with our recommended short-term financing lenders, you’ll connect the lender to your bank account. This is how it will verify your revenue and decide how much it can lend to you. The entire funding process typically takes up to three business days.

BlueVine is a great example of a short-term loan provider that’s easy to apply with. It offers loans up to $250,000 with rates starting at 4.8% for a 26-week term. You can apply online with a short 10-minute application and receive funding in as little as 24 hours.

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Application Process for Long-term Small Business Loans

Long-term small business loans have a lengthy application process. These loans are typically made through banks and require that you submit substantial documentation with the application. SBA loans are among the most common long-term small business loans. To learn more about the process, you can read our article on how to apply for an SBA loan.

You typically must gather the following documents before you apply for an SBA loan:

• Detailed description of how you’ll use all funds
• Proof of business ownership
• Loan application history
• Business overview and history
• Current business financials
• Year-to-date profit and loss (P&L) statement
• Current year-to-date balance sheet
• Business tax returns (two years)
• Projected financials (up to three years)
• Business licenses
• Business leases
• Personal financial statement
• Personal tax returns (two years)
• Owner resume

You’ll likely be asked for additional documentation if you’re using this loan to buy a business or if you’re buying commercial real estate. You may also be required to provide additional documentation during the underwriting process, depending on your personal or business situation.

SmartBiz is an SBA loan provider who gets these long-term loans closed quicker than anywhere else we’ve seen. While these loans typically take 30 to 90 days to close, SmartBiz can get your business funded in less than 30 days. You can fill out an online application to prequalify, which only takes a few minutes.

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Small Business Loan Frequently Asked Questions (FAQs)

How do small business loans work?

A small business loan is a method of borrowing money to provide additional capital to your business for growth. With a typical business loan, you have a set amount of time in which you have to repay the debt to the lender, and the debt is repaid based on a regular payment schedule.

How do you qualify for a business loan?

Exact qualification requirements for a business loan vary depending on the loan and lender you choose. General qualifications include having a credit score of 550 or higher, your business being operational for at least one year, a DSCR―revenue divided by debt payments―of 1.25 or greater and adequate repayment ability.

How hard is it to get a business loan?

How difficult it is to get a business loan depends on the type of loan that you are applying for and how well you qualify for that loan. Short-term loans are easier to qualify for and fund quicker than long-term loans. Long-term loans require significant documentation and take 30 to 90 days to be funded.

Is it hard to get a loan to start a business?

Trying to find a loan to start a business can be intimidating, but there are some startup business loan options available if you know where to look. Startup funding often consists of a combination of various financing tools, such as home equity loans, rollover for business startups, SBA loans, and business credit cards.

What credit score is needed for a small business loan?

Every lender sets its own minimum credit score requirement, creating some variability. For traditional and SBA loans, you’ll typically need a credit score of at least 680 to qualify. Alternative lenders often have a lower minimum requirement of 550. There are even some funding options that have no stated minimum.

Can you qualify for a small business loan with bad credit?

Your personal credit score is typically a major deciding factor for loan approval and the amount of funding your business can receive. Some lenders offer bad credit business loans suitable for borrowers with credit scores of 650 and lower, but these loans often carry higher overall costs and shorter repayment terms.

Bottom Line

There are plenty of small business loan options available, whether you need the money for working capital, to start a new business or to purchase equipment. Understanding the various loan types, how to qualify for them, and what is involved in the application process is an important first step to getting the financing you need.

To satisfy your working capital needs, make sure you find the right small business loan provider. BlueVine is a reputable lender that offers term loans up to $250,000. The online application takes a few minutes to fill out, and you can get funded within a day.

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