How To Get A Business Loan In 6 Steps

Halfpoint Images/Getty Images

Applying for a small business loan is a multi-step process that involves running numbers for your business, researching lenders and organizing your business financials. If you’re able to go through this process and get approved, a small business loan can help keep your business afloat during hard times and help stimulate growth as well.

1. Calculate how much your business can afford

Getting an idea of how much capital you need and how much you can afford is the first step in getting a small business loan. These numbers can help direct you to the appropriate lender and loan. It can also help you figure out what requirements you’ll need to me in order to qualify.

The total amount of money you need to borrow will be determined by the purpose of your loan. To determine the total amount that you’ll repay, you’ll need to account for any interest or fees associated with the loan. 

You can use Bankrate’s small business loan calculator to get an idea of what payments will look like and how they fit into your cash flow. The total cost, repayment terms and repayment schedule will influence how affordable a loan is.

• Interest rates and fees. When comparing lenders, make sure you use annual percentage rate (APR), not just interest rate. APR is a measure of the overall cost of a loan, including interest rate and all fees. If your lender offers a factor rate, you can convert it to APR to make it easier to compare with other offers. 
• Loan repayment terms. Depending on the type of business loan, terms can range from three months to 25 years. The term of your loan impacts how much total interest you pay, and more immediately, the amount of your monthly payments. A longer term means lower monthly payments, but you’ll likely pay more over time in interest than you would with a short-term loan.
• Repayment schedule. As a part of your repayment terms, your lender will also determine your required repayment schedule. Most business loans use monthly or weekly payments. Daily or weekly payments can eat into your cash flow and make it harder to afford the loan. 

If you can’t afford the monthly payments, you may need to consider waiting or requesting a lower loan amount. 

2. Choose your loan type

The type of business loan you choose will depend largely on your loan purpose and what you can afford.

3. Determine your eligibility

Each lender determines its own qualification requirements, but there are some common factors that you can expect almost any lender to look into.

• Length of time in business. Traditional lenders typically want to see at least two years of tax returns and business financials, but some online lenders and other alternative lenders may fund businesses with just six months in business.
• Personal credit score. Many lenders assess your personal credit score to understand your likelihood of repayment. Traditional lenders typically want to see a FICO score of 680 or higher, while some online lenders may lend to business owners with scores in the 500s.
• Business credit score. If you have one, lenders may also use your business credit score to assess your loan application. Your business credit score will range from 0 to 100 (or 0 to 300 with the FICO Small Business Scoring Service). The score factors in your company’s size, payment history, industry and other debts. A strong business credit score may allow you to forgo a personal guarantee.
• Annual revenue. Minimum annual revenue requirements tend to be $100,000 or above. There are some exceptions, though, and you may have some success with lenders that work with small businesses or startups.
• Debt service coverage ratio (DSCR). Debt service coverage ratio (DSCR) is a measure of monthly cash flow against current debt obligations. It is used by many lenders as a metric to determine whether or not your business is able to afford monthly loan payments. Most lenders require a DSCR above one, which means you can afford more than your current debt obligations. 

In addition to these requirements, other factors like collateral and your relationship with a lender can impact your chances of approval. If you are able to offer assets to secure your loan, it can help mitigate other risk that you may pose to your lender, improving your chances of approval and potentially lowering interest rates.

4. Research and compare lenders

To get an idea of what your options might be, take a look at the following types of lenders that offer small business loans.

5. Gather required documents

Lenders not only need to know your business’s financial standing and legal status, but they also want documentation supporting how you plan to use the loan and its projected impact on your business. When you apply for a business loan, your lender should have a full list of required documents. Some of the required documents you should have ready to go include general business information, financials and personal details about the owners.

General business information

• Business plan.
• Business tax ID number.
• Business legal documents and registration, and any relevant licenses.
• Any lease agreements the business has.

Business finances

• Business bank statements.
• Income tax returns from the last three years.
• Accounts receivable and accounts payable statements.
• Financial statements (profit and loss, balance sheet and financial projections).
• Information on any available collateral you plan to pledge.
• Use of funds statement.
• Business debt schedule. 

Personal information

• Resumes of all business owners.
• Personal IDs of all business owners.
• Personal tax returns.
• Information on any personal assets that might be pledged as collateral. 

6. Submit your application

Once you’ve gathered and reviewed your business documents, you can submit your application. Many lenders offer online applications that require minimal initial paperwork. If your bank or lender has a brick and mortar office or branch, you may also go in person to apply for the loan, especially if you’d like some assistance from a loan officer. 

After you submit your application, if your lender doesn’t contact you within a day or two, feel free to reach out. A loan officer should let you know the status and timeline of your application and any additional documents required. 

Bottom line

Small business loans allow businesses to get the funds needed for expansion, working capital, equipment purchases, inventory management and more. The process to apply and qualification requirements can vary slightly depending on the type of lender and type of loan product you choose. 

Frequently asked questions

• What happens if your business is denied?
  

  If your business loan is denied, try talking to the lender to find out more about the reason why. There may be steps you can take or ways to alter your request that can help you get an approval in the near future. If you can’t afford to wait, consider other lenders or look for alternative options to finance your business.

  • Business credit cards: Business credit cards can be used in a pinch to purchase things like inventory or small equipment. But they can have much higher interest rates than traditional methods of financing, and their limits typically won’t reach high enough for some larger purchases.
  • Business grants: Business grants are another way to get funding, and you don’t have to repay them. If you’re able to get free funding from a grant, you could save thousands on interest while building your business and keeping all cash flow free.
  • Friends and family loans: Friends and family loans are a method of finance that involves repayment, sometimes with interest, but they can be more flexible and easier to get than traditional loans.
  • Equity financing: Equity financing is a method of funding your business that involves trading ownership in your company for a lump sum of cash. It can include equity crowdfunding, venture capital and angel investors.

• How hard is it to get a business loan?
  

  Getting a business loan depends on your business’s eligibility and the lender’s requirements. When evaluating your application, lenders will look at your credit history, annual revenue, time in business and available collateral. In most cases, a startup will likely have a harder time getting a business loan than an established business, but there are alternative financing options available.

• What disqualifies you from a small business loan?
  

  You may not qualify for a small business loan due to poor credit, insufficient cash flow, lack of collateral, significant debt or a bad or lacking business plan. Some lenders may not extend credit to businesses in specific industries that are considered risky.

• How long does it take to get a business loan?
  

  This depends on your lender and what type of business loan you get. Online lenders can fund in as little as 24 hours; however, most lenders take a few weeks to process your application. SBA loans can take up to 90 days from the time of application to funding.

• How easy is it to get a business loan from a bank?
  

  Getting a business loan from a bank can be challenging. You’ll be required to meet specific criteria, including a strong credit history and stable revenue. Once you can meet these requirements, however, it can be relatively easy to get a bank business loan, depending on the size of the bank.