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How to get a small business loan: Guide & tips

If your existing or newly founded small business needs working capital, but securing investors, a personal loan, or a small business grant isn’t an option, a business loan might be your best route.

Business financing can be a long and confusing process. But rest assured—with the following road map, you can gain understanding of the process and information you’ll need to gather as you prepare to apply for a business loan.

In this article, you’ll learn about how to get a small business loan, the different types you may qualify for, and how to choose the best fit for you.

Types of small business loans

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There are several types of small business loans available, including small business administration loans, traditional loans, business lines of credit, invoice factoring, and specialty loans. Explore the different options below to see what might be the best loan for your small business. 

Small Business Administration (SBA) loans

SBA loans are funded through small business lenders but guaranteed by the U.S. federal government. The most common loan for this type is the SBA 7(a) loan. Because the federal government backs the loan on behalf of your business, your small business is more likely to get approval than if you went directly to lenders. SBA loans range from $500 to $5.5 million. 

  • Who can apply: For-profit businesses that operate in the U.S. or U.S. territories, with existing equity investment and with no additional lenders providing financing, while meeting certain size standards are eligible to apply for SBA loans.
  • Pros: SBA loans are flexible from an amount and term perspective. Both short-term and long-term options are available, and SBA loans typically have some of the lowest interest rates available.
  • Cons: The business loan application process is long and burdensome. Business owners may be required to disclose personal credit information and approval can take months. SBA loans are some of the most prized loans; therefore, they are often limited to those with strong credit history and financial statements, as well as adequate collateral to back the loan. 

Traditional business loans 

You can apply for traditional business loans directly through banks and financial institutions that loan funds. Bank loan amounts range depending on the traditional lender requirements, lender size, and your business’s industry, size, and history.

  • Who can apply: No one-size-fits-all answer exists for this question. To explore options in the traditional lending space, conduct your search with your company size, financial statements, history, and personal risk in mind. No one-size-fits-all answer exists for this question, as loan approval depends on a variety of factors. 
  • Pros: Flexibility is the key benefit of traditional business loans. You can apply for loans that fund general business purposes or loans specific to capital investment, like equipment, inventory, or additional employees. The sizes of loans available also vary but keep in mind that the larger the loan you request, the more information you will need to provide.
  • Cons: If you don’t have good business credit, a solid business history, or don’t want to personally back your business loans, you may have trouble getting approved.

Business lines of credit

A business line of credit is similar to a loan in that you apply for access to a specific amount of money. Once approved, you have access to the funds. Unlike a loan, however, a business line of credit allows you to withdraw only the amount of cash you need, and you only pay interest on that amount of money.

  • Who can apply: Businesses who meet certain criteria can apply. The approval process is similar to a traditional bank loan; however, the process is more detailed and restricts your business from certain activities. For example, if you provide a certain type of collateral to secure the line of credit, the lender may disallow you from offering that asset as collateral for another line of credit or loan. Oftentimes, credit unions offer best-fit financing options.
  • Pros: Lines of credit are a great way to ensure access to cash in the event that your business needs it. At the same time, you don’t pay interest unless you use the cash available.
  • Cons: In exchange for credit line approval, you will likely restrict your ability to secure debt financing from other sources. As mentioned, the credit line agreement needed to secure the credit line may prevent you from offering your business collateral to other creditors, including suppliers and financial institutions.

Invoice factoring or financing

While not technically considered a business loan, using outstanding receivables owed to your business can be a way to access short-term funding when you need cash. There are a couple of options when it comes to using your receivables to access funding.

Invoice factoring is a business practice where your business sells your accounts receivable to a third-party company (the factoring company). The factoring company immediately pays your business a large percentage of the invoice amount (often 80%–90%).

Your customer then pays the invoice amount to the factoring company according to the payment terms of the invoice (30 days, 45 days, or 60 days, for example). Once your customer pays the factoring company the invoice amount, the factoring company pays your business the remainder of the invoice, minus a fee to the factoring company.

Invoice financing is a similar, but slightly different form of financing where your business maintains ownership of your invoices, but use them as collateral to access funding. In an invoice financing agreement, you may be offered financing in the amount of the invoice you’re financing against, minus any fees the lender takes. QuickBooks offers the option to access invoice financing with Get Paid Upfront invoices through QuickBooks Payments, so you can see your money sooner and get the cash you need to keep business going strong.

  • Who can apply: Invoice factoring and financing is generally available to any company that issues consistent invoices to customers on payment terms. If you have a sizable customer base that pays your business consistently through invoices, your business may be a candidate.
  • Pros: Your business gains immediate access to cash due on each invoice. Instead of waiting the 30, 45, or 60 days for cash due on an invoice, your business gets the majority of that receivable immediately. This immediate payment from the factoring company increases your cash flow
  • Cons: You never receive 100% of your accounts receivable. With invoice financing, you’ll pay fees to access the cash from your outstanding receivables. With invoice factoring, even if the lender is able to collect 100% on the invoiced amount, you will still pay a fee to the factoring company.

Specialty loans 

Specific small business loan programs support certain groups or causes. For example, the SBA’s Office of Women’s Business Ownership and Women’s Business Centers help female business owners find loans. The USDA helps small business owners in rural areas secure loans. The Accion Opportunity Fund provides loans to entrepreneurs who are people of color, women, and immigrants.

  • Who can apply: Specialty loans are available to business owners with certain characteristics or businesses that participate in a specific category of work. To see if you qualify for specialty loans, search for loans based on your unique criteria (like age, gender, ethnicity, or disability) or industry ( nonprofit, agriculture, medical, or research).
  • Pros: The average small business will not be eligible for a specialty loan. Specialty loans exist to bolster underserved demographics or causes. If you qualify for a specialty loan, you will face less competition in the approval process. 
  • Cons: Specialty loans can require extra paperwork to prove your business meets the criteria, and the loan may restrict your ability to utilize funds. For example, if you receive a USDA-backed loan, you may be able to buy farm equipment with equipment financing, but not new computer equipment.

Small business loan requirements

Before applying for a small business loan, there are some considerations to keep in mind to ensure you’re prepared. Here are some eligibility requirements that most small business loans require:

  • Credit history
  • Business history
  • Business plan
  • Collateral

Credit history

Credit history is a record of a borrower’s repayment of debt. Just like a personal credit score, your business has a credit score as well. Normally, lenders review your business credit history, but if you’re a startup, lenders may require your personal credit history. 

In this case, make sure you understand what your personal responsibility is if a lender asks to check your personal credit history. If you cosign a business loan, you are personally responsible for the debt incurred by your business.

Typically, business loan providers prefer a credit score of around 680 and above. If you happen to fall at the lower end of the spectrum, you may need other strong business credentials as proof, such as high annual revenue and established years in business.

Business history 

Your business history is a brief description of your business and its financial track record. Prepare at least five years of financials and bank statements if you have been in business that long. Lenders look at your history to predict the future. They want answers to questions like:

  • Is your business growing?
  • Is your business profitable?
  • If your business isn’t profitable, is it on a trajectory of profitability?

The more information you can provide, the better your chances of getting approved by a loan officer.

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Business plan 

Your pitch to lenders should specifically address how you will apply the funds and how your business will pay off the loan.

For example, they want to hear that you will hire software developers with the loan money, and the applications the developers build will start generating revenue within six months of hire. They don’t care about the software itself—only that the software will allow your company to pay interest when due for the life of the loan.

Collateral 

Finally, lenders need a clear understanding of your business collateral. If you don’t pay off your loan, the lender needs to know how they will recoup the money they loaned you.

  • Collateral in cash or a form that is easily converted to cash is most attractive to lenders. 
  • Accounts receivable is cash due from customers, so it is ideal collateral for lenders. Equipment and inventory are easily valued and can be sold to third parties in the open market, so they are also typically good sources of collateral.

Because business assets like equipment, inventory, and accounts receivable all change in value as you operate your business, most lenders will require multiple types of collateral to finalize a loan.

If you don’t have collateral:

If you have no collateral, the lender might require another borrower with adequate collateral to cosign or guarantee the loan. Lenders will need to see that your business has assets to secure a loan, so make sure you understand collateral requirements.

How to get a small business loan in 6 steps

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Obtaining a loan for your small business may seem daunting at first, but it will be much easier if you’re prepared going into the application process. Here’s how to get a small business loan in six simple steps. 

1. Determine how much money you need

It may seem obvious that you should determine how much money your business needs before you start looking for a loan, but don’t skip this step for three reasons:

  • 1. The bigger your loan, the more you will pay toward interest. Your loan is an interest-bearing debt that will weigh on your balance sheet. You want to pay off your loan as efficiently as possible. The more you pay toward the principal, the quicker that loan will disappear from your business liabilities.
  • 2. Lenders make money on your interest payments. Accordingly, lenders want you to pay interest for as long as possible. If you know how much money you need before you talk to the lender, the less likely you are to fall victim to a lender convincing you to take out more money than you need.
  • 3. Loans affect your credit score. Too much debt negatively impacts that score. The less debt you take on, the less likely the loan will bring down your credit score.

2. Decide if a loan is the right method 

Before jumping into debt, consider your other options. Would it be better for your business to add an additional owner in exchange for equity capital?

Instead of taking on a loan to higher additional employees, is it possible to outsource the work to a freelancer and avoid the need for the loan? In other words, make sure a loan is the right fit for your business before committing to a debt financing strategy.

3. Select the type of loan that fits best 

As mentioned, there are plenty of loan options for your business, but how do you determine which one is the right fit? Review each loan and consider these factors below to determine suitability for your business:

  • Qualifications: Take a look at the loan qualifications to see if your business qualifies.
  • Restrictions: If you qualify, review any restrictions that might apply to the loan. If restrictions disallow you from applying the funds as your business needs, the loan is not a fit.
  • Interest rate: As a borrower, it’s important to look at the interest rate and the term to see if you can afford the loan. 
  • Loan terms: Review the loan terms for any early pay penalties that may apply in the event that you can pay off the loan before the end of the term. Remember, lenders make their money on interest!
  • Impact on credit: Finally, consider the impact of the loan on your business credit score. Some debt can improve your credit rating, but too much debt will pull that number down. 

4. Review the lenders available

Once you land on a loan type for your business, find applicable lenders. Think of your business as a customer during this process. Shop around. Play one lender against another, and search for the best deal possible.

Because lenders make their money on interest when it comes to small business financing, they may not offer you their best rate at introduction. Don’t be offended by this. Push back. Let the lender know that you are shopping their rates and terms against competitors.

A word of caution as you shop lenders: If you give a lender permission to check your credit score, the check will show up on your credit report. You don’t want your credit score checked too often in a short amount of time. Get as many details as possible from a potential lender before you give them permission to check your credit score.

5. Review each lender’s requirements

Once you have narrowed down the list of lenders, make sure you understand their requirements before applying. For example, most lenders require collateral to secure the loan.

In the legal documents you fill out to finalize the loan, you will offer your business collateral as the backup. If you don’t pay the loan, the lender has the right to seize your collateral, and then sell the collateral to repay the loan.

In the event that a lender is not satisfied with your business collateral, they may require you to find a cosigner with better collateral. In this case, you want to find a cosigner before the loan documents are ready for signing.

Understand collateral minimums and any other loan requirements early in the process. Give yourself time to determine what risks you are willing to take to secure your loan.

6. Collect information

The documents required to secure a loan vary from lender to lender and are based on your business history. Some of these documents include: 

  • Balance sheets with recent financial and tax return statements 
  • A written business plan 
  • Business credit history 
  • Personal financial information 
  • Contact information

If your business carries enough cash to cover the entire loan, you likely won’t need much more than a balance sheet and some recent financials. However, the fact that you are considering a loan probably means you don’t have that much in your bank account.

In this case, you will need a few years of business financials, a written business plan, your business credit history, personal financial information, contact information, references, and possibly more. Lenders to specific industries also want proof of your specialty.

The more business information you have available, the more prepared you will be. If specific licenses, qualifications, or permits tailored to your business exist, have associated documentation ready for review when you apply for a loan. Using accounting software like QuickBooks can help you automate business recordkeeping and generate reports like the balance sheet.

7. Apply for your small business loan

Once you have narrowed down the loan type for your business and determined you are qualified, it’s time to apply. If you’ve followed the steps in this article and prepared the information above, it should be as simple as bringing everything together.

Small business loan alternatives

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If you can’t qualify for a business loan or line of credit, you may consider loan alternatives and other financing options: microloans, business loan marketplaces, or business credit cards. Of course, there are a few pros and cons to consider:

  • Pros: All three offer your business buying power when your business is unable to secure a traditional business loan.
  • Cons: Microloans, loan marketplaces, and credit cards all tend to carry higher interest rates than small business loans.

Here’s a quick breakdown of the different alternatives available:

Microloans 

Microloans are loans granted by online lenders with significantly lower principals than standard loans. Depending on the lender or lender marketplace, microloans can range from $50 to as much as $5,000. 

Why it works: Microloans are often funded through crowdsourcing platforms and don’t always require the rigorous approval process associated with traditional loans.

Marketplaces

Loan marketplaces are online lending platforms that connect consumers and businesses with investors willing to buy or invest in the loan—kind of like dating sites for debtors and creditors. 

Individuals may not be able to fund an entire business loan, but if their money is pooled with other individuals, they may be able to collectively fund a loan. These individuals together become a creditor in a loan marketplace.

Why it works: A pool of individual lenders is more likely to approve a risky debtor because the risk is spread across the multiple creditor lenders that come together to fund a single loan. Business loan marketplaces are growing in popularity for both individual creditors and debtors.

Credit cards

Credit cards are an option too if you can’t get approved for a loan. Even though your new business might not get approved for a $10,000 small business loan, it may get approved for a $10,000 credit card limit. 

Why it works: Many credit card issuers have specific programs tailored to small businesses.

These three loan alternatives might be good options—or the only option—for businesses that cannot obtain a business loan. If you have trouble landing a business loan, consider your other options.

Tips for getting a small business loan approved 

Preparation is the single best thing you can do to increase your chances of getting approved for a business loan. Start the entire process earlier than you think is necessary. Research loan types, loan terms, and loan requirements before you actually need the money. 

Here are some additional tips to help you secure that small business loan. 

Reduce your debt-to-income ratio

Your credit utilization ratio is the amount of credit used compared to the credit available to you. Some suggest a 15% credit utilization ratio to improve your credit score while others suggest 30%. Consider this an acceptable range, but do what you can to lower the number. You can lower the number by:

  • Paying off balances
  • Increasing credit limits
  • Decreasing debt and credit card spending
  • Paying bills more frequently than required

Improve your business credit score 

Your business credit score serves similar purposes as your personal credit score. However, because your business probably conducts more transactions than you do personally, there is more data available to base the score on.

A good business credit score is key to getting the loans you need. Consider these steps to improve your score if you have poor credit:

  • Start by obtaining your current scope: Do this through an agency like Dun & Bradstreet, Equifax, or Experian. Free options include CreditSignal, Nav, and CreditSafe.com. Once you know your credit score, you can start improving it.
  • Pay your bills on time: Your creditors can and will report bad payment history. Pay on time.
  • Open credit accounts with suppliers when possible: The more suppliers you pay on a timely basis, the better your business credit score will become.
  • If your business ends up in collections: Make sure you pay off the amount as soon as possible and ensure that the collection agency deletes the negative mark from your credit report.

Boost your small business before applying

You’re much more likely to get approved for a small business loan if you are already generating revenue. If your small business is already off the ground, make sure you’re boosting your sales as much as possible. You can do this by:

  • Running PPC ads on a regular basis
  • Launching new campaigns with a professional marketing team 
  • Starting email campaigns to get more leads 

By using these tips, you can show lenders that you are able to repay your small business loan.


Small business loan resources 

If you’d like to learn more in depth about small business loans, browse these resources from small business development centers and other organizations for more information.


Take your small business to the next level

Applying for a small business loan can be intimidating. But with some intentional preparation, you can increase your chances of approval and get the money you need to take your business to the next level. Using the right tools to manage your day-to-day business finances can help you prepare for funding applications when the time is right.


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