Finding a small business loan is often a necessity during the growth of your business, but it can be difficult to find a loan you qualify for. The four basic steps for getting a small business loan involve evaluating your loan options, determining your eligibility, finding the right lender and applying for the right loan.
One of the most important aspects of small business financing is choosing the right loan provider. OnDeck offers term loans, with interest rates starting at 9 percent and flexible lines of credit that are easier to qualify for than loans from traditional lenders. They can fund term loans up to $500,000 and lines of credit up to $100,000 in as quick as 24 hours. Get prequalified online in minutes.
Small Business Loan Options
| Loan Option | |
|---|---|
| SBA Loans | Financing for long-term projects, like working capital, CRE, or equipment. |
| Short-Term Loans | Loans for short-term working capital needs |
| Business Line of Credit | Revolving financing for working capital or cash flow problems |
| Equipment Loans | Funding for large pieces of equipment and machinery |
| Invoice Financing | Cash advance financing, based on your unpaid invoices, for working capital |
| AR Financing | Line of credit financing, based on your unpaid accounts receivables, for working capital |
| Merchant Cash Advance | Financing for businesses with significant daily credit/debit card receipts |
How to Get a Small Business Loan
There is a lot to consider as you prepare to get a small business loan. We have broken the process down into four steps to help you make informed borrowing decisions. By comparing the available loan options, predetermining your potential eligibility and finding the right lender, you should feel confident in your small business loan decision.
1. Evaluate Potential Loan Options
Finding the right loan for your small business is easier if you understand the various types of loans for small businesses that are available. The purpose of your loan often dictates the type of loan needed and the available financing options. The three primary loan types are asset-based loans, short-term loans and long-term loans.
The qualifications for each loan type are different, and the loan you need is unique to your specific situation. This is why it’s important to evaluate all of your options before you start applying for a loan. You don’t want to waste time or money applying to loans that you either don’t qualify for or that won’t help your business succeed.
Long-term Loans
Long-term small business loans are typically offered by traditional banks. These loans offer the longest repayment terms and lowest interest rates, resulting in the most affordable loan payments of any loan type. Long-term financing can be the right option if you need significant financing to buy a business or finance a large purchase like real estate. The long-term loans with the best rates are typically SBA loans.
SBA Loans
SBA loans are long-term loans, from a traditional bank, that are guaranteed by the Small Business Administration. The SBA guarantee allows the bank to offer you better interest rates and terms than they would without the guarantee. The rates for SBA loans typically fall between 6 percent to 10 percent with repayment terms up to 25 years.
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 loans also typically carry a larger annual percentage rate (APR) than a general business loan. If you have a short-term financing need, this could be the best solution for you.
Some of the best short-term financing solutions we’ve found are short-term loans from OnDeck and Kabbage. Both offer financing with a 30 percent to 50 percent APR and both can fund you in as quick as one day. You can learn more by reading our guide comparing the best short-term loan options.
Asset-based Loans
You can use your current assets or assets you are acquiring, as collateral for your loan. These small business loans may be a good option if you don’t qualify for long-term financing or to be used as small business startup loans. Two of the best options in this category are equipment loans and invoice financing.
Information to consider when getting a small business loan for equipment or invoice financing includes:
Equipment Loans
Equipment loans use the equipment that you are purchasing as collateral for the loan. These loans can only be used towards the purchase of equipment and cannot fund business purposes. In the event that you default on your loan, the bank would claim the equipment as repayment of the remaining balance due on your loan.
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.
Invoice 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 a great way to collect the value of your unpaid invoices in advance without having to wait for your customers to pay them.
2. Determine Your Eligibility
Every lender has its own set of parameters for determining whether or not you qualify for their loan products. When comparing small business lending options, it’s important to understand the eight primary factors that lenders evaluate you on. Understanding these eligibility requirements will help you determine which loan products are best for your business’ situation.
How Long You’ve Been 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, 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.
Your 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 yours here), it’s easier to qualify for most loans. Knowing your credit score will help determine which loan options you may be eligible for.
Having less than perfect credit doesn’t make it impossible to find a business loan, but it does make it harder. Instead of a traditional bank, borrowers with lower credit scores will need to seek out costlier alternatives.
Your Repayment Ability
In order 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 is willing to 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 to calculate your DSCR before you start applying 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.
How Your Customer Payments Are Processed
The method through which you receive payment from your customers may be a potential loan source. For example, if you bill your clients via invoice, 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 requirements to qualify as compared to long-term small business loans. The standard qualifications are that your business be 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:
- At least one year in business
- Credit score of 550 or higher+ (check your credit score)
- Annual gross revenue of $100,000 or more
OnDeck is a short-term loan provider who can fund you for up to $500,000 in as quick as one day. They have an online application process where you can get approved within minutes.
Long-term Small Business Loan Qualifications
Long-term small business loans have more stringent qualifications than their short-term counterparts. Generally, they 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 short-term loan are:
- At least two years in business
- Credit score of 680 or higher (check your credit score)
- Profitable and trending up
- No negative credit marks like bankruptcies, tax liens or repossessions
SmartBiz offers working capital SBA loans up to $350K and commercial real estate loans up to $5 million. If you meet the qualifications above, you can fill out an online application that only takes a few minutes and be fully funded within 30 days.
What Collateral You Have to Offer
Collateral is important for a traditional loan, and the more you have, the higher your chances are at getting funded. Determine if you have 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 UCC lien on your business assets.
Information About a Personal Guarantee
Most business loans, whether from a bank or an alternative lender, require a personal guarantee. This is a promise to pay the loan out of your own pocket if the business fails to make payments. In the event of a default, the lender will usually first foreclose on your collateral and then collect the remainder of the loan balance, if any, by enforcing the personal guarantee.
Although rare, there are some instances in which you can get financing without a personal guarantee. Some business credit cards and invoice factoring providers will issue you credit without requiring a personal guarantee.
How Quickly You Need the Funds
How quickly you need financing can limit your choices. If your financial needs are not immediate, you are prepared for the extensive application process and meet the qualification criteria, a traditional loan is likely your best option. While these loans can take between 45 to 120 or more days for funding, they offer better rates and terms than other loan options.
On the other hand, if you need a fast loan or an easier business loan, you would do better to seek out an online or alternative lender. Be prepared, however, to pay more in terms of interest rates in exchange for speed and convenience.
3. Find a Lender Experienced in Your Industry
Having a lender experienced with loans for small business in your industry is indicative that the lender understands the nuances of your business needs. The type of small business loan that you can qualify for and the information that you may be required to provide may vary based on the type of business that 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? (monthly, weekly, 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?
Factors you should consider when getting a small business loan in nine specialty industries are:
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 purpose.
Small Business Loans for Business Professionals
Business professionals, like 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.
Small Business Loans for Restaurants
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 heavily on your personal financial condition, rather than on that 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 prior to 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, as they allow you to borrow and repay as the funds are needed.
Small Business Loans 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.
Small Business Loans 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.
Small Business Loans for Home Health Care Businesses
Home health care is a rapidly growing industry and home health care businesses are often in need of loans for working capital and expansion. Short-term small business loans are the most common home health care loan, as 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.
Small Business Loans for Women-owned Businesses
While there is nothing inherently different about small business loans for women in general, 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 type of loan you’re applying for will determine how much documentation you will need to gather prior to 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.
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.
The application processes for short-term and long-term small business loans are:
Application Process for Short-term Small Business Loans
Small business loans using short-term financing have a rather simple application process compared to the process for long-term financing and requires significantly less documentation than loans through traditional lenders do. Most online lenders for short-term loans only require you to provide very 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 is:
- 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 they’ll verify your revenue and decide how much they can lend to you. The entire funding process typically takes up to three business days.
OnDeck is a great example of a short-term loan provider that’s easy to apply with. They offer loans up to $500K with interest rates starting at 9.9 percent. You can apply online with a short 10-minute application, and they can have you funded in as little as 24 hours.
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’ll typically need to gather the following documents before you apply for an SBA loan:
- Detailed allocation of how you’ll use all funds
- Proof of business ownership
- Loan Application history
- Business overview and history
- Current business financials
- YTD P&L (profit and loss) statement
- YTD balance sheet
- Business tax returns (two years’ worth)
- Projected financials (for up to three years)
- Business licenses
- Business leases
- Personal financial statement
- Personal tax returns (two years’ worth)
- 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 45-120+ days to close, SmartBiz can get you through the application process within 30 days. You can fill out an online application to prequalify, which only takes a few minutes.
Small Business Loan Frequently Asked Questions (FAQs)
A lot of information has been covered in this article about small business loans, the eligibility criteria, the various types of loans, finding the right lender and how to apply for a small business loan. If you have any questions about any of the information presented here, you can post them in the FitSmallBusiness forum.
Some common questions regarding small business loans are:
How Do Small Business Loans Work?
A small business loan is a method of borrowing money to provide additional capital to your business to help your business grow. 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 type of loan you are applying for and the lender that you choose. General qualifications include having a credit score of 650+, your business being operational for at least one year, a debt service coverage ratio 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 are more quickly funded than long-term loans. Long-term loans require significant documentation and often take 30-120 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 a number of startup business loan options available if you know where to look. Startup funding is often comprised of a combination of various financing tools; such as home equity loans, rollover for business startups, SBA loans and business credit cards.
The 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.
For working capital needs, a small business loan is a good option, but a line of credit can be even better. OnDeck offers a line of credit up to $100,000, the online application takes just a few minutes to fill out, and you can be approved in just 20 minutes.
Genevieve
I need a loan to finance my small scale business. How can i get it.
Laura Handrick
Hi Genevieve,
You can search “start up” on our website to find helpful articles for funding your start up, such as using an existing 401k (ROBS) or crowdsourcing, in addition to financing.
Otherwise, the best way to get a loan is to write a business plan and make an appointment at your local bank to talk to a loan officer. They can advise you on options.
Best!
Laura
David Filliari
A good start is always the U.S Small Business Administration (link: http://b7y.us/SBALoanOptions). They’re whole job is to help up and coming businesses secure the funding they need. It can be tough wrapping your head around everything but this article has a great explanation.
Laura Handrick
Thanks David for sharing the link.
Max Smith
Hey Jeff, Thanks for the helpful and informative article. As I am a small business owner, How can I get a small business loan without any mortgage? Can you suggest me an option for that?
Jeff White
Hi Max!
I assume you’re asking how to get a small business loan without putting up your home as personal collateral, or without owning one? If that’s the case then you should check out our guide to unsecured business loans. There are plenty of options for you to take a look at, especially if you have some experience with your business. If your business is brand new then most lenders like to see collateral, like a personal home or other real estate. There are some other options available though. Most of those options can be found in our startup business loans article. Please let us know if you have questions about either of those resources!
Best,
Jeff
Amir Najam Sethit
Nice post… I want to start my new business and I get a business loan. Thank you for sharing this deep information about the loan process.
Jeff White
Hi Amir!
I’m glad you found the information helpful! Good luck in your efforts to get the business loan you need!
Best,
Jeff
Jack
Very informative post.
Ian Atkins
Thanks, Jack! Glad you liked he article.