How To Get a Small Business Loan in 2023
Tricia has nearly two decades of experience in commercial and federal government lending. Her expertise is highlighted throughout small business loan content on Fit Small Business.
Andrew has over a decade of experience in finance and mortgage lending. He shares his expertise in Fit Small Business’s financing content.
This article is part of a larger series on Business Financing.
If you need cash for your business, you can use this guide to get a small business loan in five steps. You’ll need to know how much cash you need, what your best loan options are, what paperwork you’ll need to provide, and whether you’re likely to be approved.
Being prepared before submitting a loan application can allow you more time to gather the necessary documentation. It can also give you the opportunity to improve your business finances or credit. Doing so can help you get approved for a loan quicker and at a lower rate.
Step 1: Determine What You Need the Funds For
There are several questions you should ask yourself before taking out a loan, such as what you need the funds for, how much you’ll need, and how it’ll help your business. The answers to these questions will help save you time and money by helping to ensure that you make the most of your loan proceeds.
- Know what you need the funds for: Lenders can offer different types of loans, some of which prohibit the funds from being used in certain scenarios. Knowing what you’ll use the funds for will also help identify loan terms best suited for your business, such as repayment schedules, rates, and fees.
- Understand how much cash you need: Asking for more than you need can cause your loan application to be denied. Even if it’s approved, you may end up paying more interest due to a higher interest rate or larger loan amount. Meanwhile, not asking for a large enough loan can result in cash flow shortages.
- Recognize how the loan will help your business: It’s also a good idea to understand which aspects of your business it’ll help. Some examples can include process automation, data management, information technology, marketing, human resources, or buildings and machinery.
Step 2: Understand Your Loan Options
Your loan options will primarily be determined by two things: the type of loan, and how the loan is structured. Having an understanding of how you plan on using the funds will help you choose the loan best suited for your business.
Choosing the right loan will give you the most beneficial terms such as rates, fees, and repayment schedule. It will also give you the best chance of approval based on your qualification requirements.
- Equipment financing: Lenders that offer equipment financing can help you obtain vehicles, machinery, furniture, or other equipment used in running your business. You can choose to get an equipment loan if you want to retain ownership after the loan is paid off, or an equipment lease that can allow you to return the equipment at the end of the term.
- Working capital loans: These are short-term loans designed to help cover your day-to-day expenses such as payroll, inventory, rent, and other operational costs.
- Startup business loans: These loans can give you the cash needed to launch your business. While rates can be higher, they can be a good option to consider if you’re unable to obtain financing from other sources.
- Small Business Administration (SBA) loans: SBA loans generally require good credit and strong business finances. If you qualify, these loans can offer competitive rates and fees.
- Business acquisition loans: If you want to acquire another business, a business acquisition loan can give you the necessary funds. Depending on the specific terms of your loan, it can also be used to provide cash flow for a short time frame to ensure a successful launch.
- Commercial real estate: Often, commercial real estate loan rates are reasonable and are used for purchasing, building, or renovating a commercial property. Commercial property can include warehouses, storefronts, office spaces, and production facilities.
- Accounts receivable (A/R) financing: If your company has sent invoices to customers that have not yet been paid, A/R financing can advance you a percentage of the amount you are expected to receive.
- Merchant cash advances (MCAs): Businesses with a large volume of credit card receipts can use MCAs to receive an advance payment. In exchange, you agree to give the financing company a percentage of the sales.
- Purchase order financing: This can be helpful if you receive large orders from customers that require a third-party supplier to help fulfill. If approved, a PO financing company will then pay your supplier to complete the order. You will send an invoice to the customer, who will then make payment to the PO financing company.
Loans of the same type can be structured in several ways with varying terms, and the best one for you will depend on frequently you anticipate needing more cash.
- Term loan: A term loan issues a lump sum of cash all at once. It’s a good option to consider if you know how much cash you need upfront.
- Line of credit: A line of credit gives you the flexibility to continuously draw funds up to a maximum credit limit that is determined by the lender. Rates tend to be higher than term loans, but you’ll have the ability to draw funds on an as-needed basis to cover emergencies or other unexpected expenses.
- Balloon payment: Loans that have a balloon payment require you to repay a lump sum of cash at a specified time frame. Monthly payments can be lower than many other loans, but you’ll need to plan for making the larger balloon payments when due and payable.
- Interest-only payments: Choosing a loan with interest-only payments can reduce the size of your required monthly payment. However, your loan amount will not be reduced unless you make additional payments to the principal portion of the loan.
- Prepayment penalty: Loans that have a prepayment penalty charge you additional fees if you pay off the loan before a certain date. This is something to consider if you think you may want to save on interest charges by paying off your loan more quickly.
Step 3: Determine the Qualification Requirements & Check Your Eligibility
The rate you get on a small business loan as well as whether you’ll be approved, will be determined by things like your credit score and business finances. The exact requirements will vary depending on the lender and type of loan you’re applying for, but if you know the common qualification requirements for a small business loan, you can improve your chances of getting approved at a low rate:
- Credit score: If you have a personal credit score of 680 or higher, you should have an easy time qualifying for most loans. Even with a score as low as 500, you can still get a bad credit business loan, although rates and fees may be a bit higher.
- Time in business: Unless you’re obtaining a startup loan, you should have more than 24 months’ time in business. With less than two years’ time in business, lenders will consider your business high risk because as much as two-thirds of startups fail in delivering a positive return to investors.
- Income and business revenue: While the specific requirements can vary based on your loan amount and minimum monthly payments, having annual revenue of $50,000 should give you a wider range of loan options. In many cases, your income will also be compared to the amount of debt you’re carrying.
- Collateral or personal guarantee: With a collateralized loan, the lender can take possession of your assets to recoup losses in the event you default. A personal guarantee makes you personally liable if your business doesn’t make the loan payments in a timely manner.
- Cash for down payment: Down payment requirements typically range from 0% to 20% but can vary depending on the type of loan and the strength of your credit and income.
- Debt service coverage ratio (DSCR): The DSCR is calculated by taking your annual net operating income and dividing it by your current year’s obligations. A DSCR ratio of 1.25x or greater generally will make it easier to get approved for a loan.
Even if you get approved for a loan, you need to be comfortable with the monthly payments and other terms of the loan. You should consider what could affect your ability to make timely payments and what you might do if that occurs.
Step 4: Choose a Lender
You can get a small business loan at many banks, credit unions, and online brokers. Each has its own set of pros and cons. You should also prioritize what aspects of a loan are most important to you, and what you can do without. Before making any final decisions, you should have shopped multiple lenders and obtained several quotes as this will improve your chances of finding the lender and loan type best suited for your needs.
If you’re not sure where to start, you can use our list of the best easy business loans as a starting point. Many of the providers on that list, such as Fundbox, have easy qualification requirements and can get you a loan within 24 hours of submitting a loan application.
Types of Lenders
How To Choose a Lender
You can use the following list of items to help you find the best lender. Prioritize what’s most important to you and which items you can do without:
- Eligibility criteria
- Loans offered
- Rates and fees charged
- Monthly payment and loan terms
- Speed of funding
- Lender’s expertise with your industry and loan type
- Hours of operation and customer service availability
- Customer ratings
- Branch locations
Step 5: Submit Your Application & Provide Documents to the Lender
Once you’ve picked a lender, you’ll need to complete a loan application. You’ll provide information about your business and type of loan you’re looking for. Some lenders may also require you to sign certain disclosures and give permission to check your credit report.
You’ll also have to provide documents to the lender to confirm the information on the application is correct and that you’re eligible for the loan. Specific documentation varies by lender but commonly include the following:
- Tax returns: Many lenders will require your personal tax returns from the past two years. If you have filed an extension, a third year may be required. You can also be asked to provide business tax returns for every company that you have a 20% or more ownership interest in.
- Financial statements: Depending on the type of loan you’re applying for, you can be asked to provide additional documents like profit and loss (P&L) statements, cash flow statements, or balance sheets. Lenders may request current year-to-date figures as well. To avoid any delays, you can prepare these ahead of time.
- Bank statements: As proof of current business activity and revenue earned, you may need to provide your most recent 2 to 3 months of bank statements. In some cases, the lender may request explanations for things like unusual deposits.
- Loan statements: If your credit report doesn’t contain sufficient information on your financial obligations, your lender may ask you for more information. Be prepared to provide loan statements, lease agreements, promissory notes, or other items that show the terms of any loan you’re responsible for.
What To Expect After Applying
After providing all information requested by the lender, your application will be reviewed to determine if you’re eligible for financing.
1. Loan underwriting
Loan underwriting is the process in which a lender reviews your application to determine if it meets its eligibility criteria. Your file will be reviewed in detail, and you may be asked to clarify items by providing explanations or additional documents. It typically takes several days to one week to receive a decision on your loan, although some of the best fast business loans can issue a decision in under 24 hours.
2. Terms of approval review
If approved for the loan, your lender will provide you with disclosures detailing your loan terms. It’ll also indicate any additional requirements that must be met. Loan terms will include your rate, fees, and loan amount.
If you would like the lender to reconsider your loan for better terms, you can discuss the details that led to its decision. If there are any discrepancies, you can provide the lender with additional documentation to review.
3. Loan documents signing
If you’re agreeable to the loan terms, you’ll schedule a time and place to sign your final loan documents. Once signed, the documents will be reviewed by the lender to ensure the paperwork was completed and signed properly, at which point your loan will be funded.
Frequently Asked Questions (FAQs)
How long does it take to get a small business loan?
It can take anywhere from several days to two weeks to get a small business loan, and the length of time needed can vary depending on the type of loan you’re applying for and the lender you have chosen. If you need a loan quickly, you can consider some of the best same-day business loans and the best fast business loans.
How often can I apply for a small business loan?
There’s no limit to how often you can apply for a loan. However, if you agree to allow a lender to conduct a hard check on your credit report, it can negatively impact your credit score. Some lenders may also request an explanation if you have an excessive amount of applications in a short period.
Is it hard to get a small business loan?
In general, it isn’t difficult to get a small business loan. Loans are available for businesses in a variety of circumstances. For example, although rates and fees may be higher, you can get a loan if you’re a startup, have bad credit, or have low monthly revenue.
Bottom Line
There are many different types of small business loans, so there’s a good chance you can find one that’s a good fit for your needs. There are also many providers that cater to business owners in a variety of situations, such as startup businesses and borrowers with bad credit. By understanding your loan options and what the loan process involves, you can better prepare yourself and improve your chances of getting approved.
