As a small business owner, you’ll likely find yourself in a situation sometime where you could use extra cash, no matter the age or stage of your company. Whether you need temporary help making ends meet or you’re looking to finance a large purchase, it’s helpful to understand how to apply for a business loan.

How Do Small Business Loans Work?

Business financing, whether through loans or other options, can help established small business owners and entrepreneurs launching new businesses. Small business loans work as a way to pay for day-to-day operations and purchase equipment or real estate. You can also use them to fund marketing costs and inventory.

Once you qualify for a business loan or other financing option, you have instant access to funds. You pay for that access over time, usually via interest payments. Applying for a business loan is a decision you should make with careful consideration of which loan option and lender to pursue.

What Do You Need to Get a Business Loan?

applying for a business loan

Every business must apply for a business loan before lenders can determine whether it’s qualified to borrow money. Most traditional lenders want to see a strong business plan, clear financial records (including annual revenue, cash flow reports and tax returns), your business’s credit history, and information on both the business and its owners before deciding whether to issue a loan. While alternative lenders often have more lenient eligibility requirements, their applications typically request similar information.

Applying for a Business Loan in Five Steps

Once you know that you need funding for your small business, it’s time to research different loan types. Start by focusing on why you need a loan and what the money will help you finance. Some loan types are designed for specific large purchases, like manufacturing equipment and commercial property. Other financing options can be used to cover general needs.

Once you’ve narrowed down which types of loans may work for you, get familiar with the loan qualifications and begin to compare lenders. With a short list of lenders in hand, the next step is to review loan requirements and gather relevant documents before applying for the loan. Read on for more details on each step.

1. Determine Your Need and Choose Your Loan Type

To help you determine which type of loan to pursue, consider your business’s creditworthiness and your goals. Why do you need a business loan at this point in time? Maybe you’re financing a large equipment purchase, or you need a relatively small amount to purchase raw materials. Maybe you’re having temporary cash flow issues. Or perhaps you’re expanding your business and must fund increased operating expenses while your sales grow to match this new scale.

When you keep your needs at the forefront, you’ll have an easier time identifying which type of loan is right for your business.

Your next step should be researching each type of loan available to small businesses. Common business loan options include:

  • Term loans. These business loans come with a repayment term between two to 10 years. They are typically issued by banks and other private lenders that are known to have lower approval ratings for small business loans. Because these lenders tend to service higher loan amounts, they are more wary of risk. To qualify for a term loan, you often need a credit score above 680 and to have been in business for at least two years with demonstrated profitability. This means term loans are often best for large businesses with longer track records.
  • Small Business Administration (SBA) loans. The SBA partners with various lenders—including banks, credit unions, microlenders and community development organizations—to design and issue loans that meet various needs unique to small businesses. The loans that SBA offers through its network of lenders can range from $10,000 microloans to $5 million 7(a) loans. Because the SBA guarantees a portion of each loan, it assumes some of each lender’s risk. This enables small businesses to take advantage of lower interest rates, longer repayment periods and lower credit score requirements. In the 2022 fiscal year, the SBA issued more than 62,000 loans, including 7(a) loans, 504 loans and microloans.
  • Equipment loan. Also known as equipment financing, these loans are designed specifically for purchasing machinery, hardware or even furniture. If you secure this type of loan, your equipment functions as the loan’s collateral; if you fail to make payments, your lender can seize it.
  • Online business loans. These loans are offered by alternative lenders that have higher risk tolerance and fewer eligibility requirements. Small business owners with poor credit and newer businesses can often qualify for online business loans. While business owners may be able to secure online business loans quickly and easily, this type of loan comes with much higher interest rates than others, especially for borrowers with poor credit scores.
  • Personal loans. Your ability to secure a personal loan depends on your own credit score and income. Typically, only new entrepreneurs starting up their business use personal loans to fund business needs—and only if their lender hasn’t restricted use for business.

Other options for financing business expenses include business lines of credit and business credit cards, each of which can be obtained more quickly than most business loans. Plus, they can help you build and improve your business’s credit history.

Now that you understand various loan options, you can determine which type of loan may work best for your needs.

Tip: Use a business loan calculator to determine your potential monthly payment.

2. Review Business Loan Qualifications

Once you’ve narrowed down your loan options, it’s time to determine whether you meet the criteria to qualify for a business loan. Do a self-audit to see what types of loans you’re likely to qualify for, using the following checklist:

  • Check your personal credit score.
  • Find your business credit score.
  • Write down the date you established your business and calculate your years in business.
  • Decide whether you’re willing to personally guarantee your loan.
  • Catalog potential collateral.
  • Look at your financial records and find your average annual revenue.

Most lenders have eligibility requirements. These can vary greatly by lender type (e.g., banks vs. online lenders) and by funding option (e.g., term loans vs. equipment financing). Once you’ve gathered your data from the above checklist, compare your information against the qualification criteria for each loan type you’re considering. Determine whether your business meets the eligibility requirements to narrow down your financing options. Then you can compare lenders.

Tip: If you find that you don’t qualify for traditional term loans or SBA loans, identify what you need to do to improve your chances of qualifying in the future (e.g., improving your credit score). In the meantime, consider other options. It is possible to qualify for a business loan with bad credit, but you’ll likely have to settle for higher interest rates and shorter repayment terms. There are also other financing options such as business credit cards, invoice factoring and merchant cash advances.

3. Compare Loan Lenders

Would you buy a car after testing driving it at the first dealership you visit? Most likely not. You’d probably visit several dealers to make sure you’re getting a good deal. This strategy applies to shopping for a loan, too. Once you know which type of financing option will best serve your business, it’s time to find out which lender is the right fit. Shop around with various lenders that offer what you need.

If you’re pursuing a term loan, talk with several traditional banks and credit unions. For a short-term loan, check with multiple online lenders. Whatever financing option you choose, compare interest rates, repayment terms and your monthly payments. Make sure your business can afford the cost of borrowing money. Beyond the numbers, consider each lender’s reputation for fairness and service.

4. Review Business Loan Requirements and Gather Documents

Each lender has their own application process and loan requirements. Some, for instance, require a personal guarantee from the small business owner. The necessary documentation you’ll need to gather will depend on this criteria, so get a list of what your top lenders need to see. In general, most require:

  • General business information such as your years in business, the product lines you offer and your business plan. This will help lenders determine the viability of your business.
  • Financial documents such as your profit and loss statement, cash flow report and tax returns. These demonstrate your business’s financial track record and help lenders calculate whether you’ll be able to afford monthly repayments.
  • Information about business owners, such as your business experience, educational background, personal income and personal credit score. This can give lenders confidence in your ability to run a successful business—and to make good on your personal guarantee, if necessary. There are sometimes special financing options for minority and underserved business owners, so you may choose to disclose that information if relevant.
  • Collateral information, such as vehicle titles and property deeds, will be required if your loan requires collateral as backing.

5. Apply for a Loan

Each lender has their own application process. Some lenders’ applications take as little as five minutes, and they issue a decision within 24 hours. Others might take weeks to decide whether a candidate qualifies Many online lenders aim to streamline the application process as much as possible, even offering a funding specialist to help guide small businesses through the loan process, from application and loan selection, to qualification and funding.

If you opt to apply for a business loan from traditional lenders, such as banks and credit unions, you may not have a lending specialist to guide you. In those cases, consider working with a business-focused financial advisor who can both help you determine whether you’ve chosen the best option for your business and double-check your loan application before you submit it.

5 Reputable Lenders for Business Loans

business loan requirements

These lenders help small business owners get the right funding for their business needs.

1. Lendio

You can apply for financing in just 15 minutes with Lendio. If you qualify, you could receive your funds in as little as 24 hours. Lendio’s lender marketplace offers various types of business loans, from SBA loans and startup loans to commercial mortgages and business acquisition loans. You’ll also find other financing options such as accounts receivable financing (or invoice factoring) and business lines of credit.

2. Biz2Credit

When you use Biz2Credit, you can apply for a business loan from $25,000 up to $6 million. This business financing partner says its application process takes just four minutes, and qualified businesses can get funded within 72 hours. The process is designed to start with your business needs before serving up potential funding solutions that include short-term working capital loans, term loans and commercial real estate (CRE) loans.

3. Tillful

Tillful funding is powered by Biz2Credit. It offers free business credit score checks to small businesses and immediately matches them with lending advisors to guide them through the funding process. Loan and financing options from Tillful include term loans, equipment financing, lines of credit, cash flow loans, credit cards and merchant cash advances.

4. Fundera

After businesses fill out just one application, Fundera finds the best financing options from its lending marketplace and pairs applicants with a funding advisor. From there, businesses can compare options from various funding categories with guidance from their advisor. Their options may include SBA loans, term loans, equipment financing, invoice financing, business lines of credit, short-term loans, merchant cash advances, startup loans, business credit cards and personal loans.

5. National Funding

National Funding has helped small business owners with their financing needs since 1999 and operates in all 50 states. Known for its quick funding, National Funding also offers an early payoff discount to borrowers who pay off their loans quickly. This lender offers both short-term small business loans from $10,000 to $400,000 and equipment financing up to $150,000. It also has low-threshold eligibility requirements. To secure a small business loan, for example, business owners need just six months in business and a credit score of 600, even without collateral to back their loan.

Share in the comments: What matters most to you when shopping for business loans and choosing between lenders?

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