How to Get a Business Loan in 6 Steps

A business loan can provide the capital you need to grow and expand your company. Funds can typically cover daily operational expenses, equipment, expansions, inventory, payroll and more.

This article walks you through how to get a business loan in six steps. We’ll explain how to evaluate your qualifications and needs, plus how to compare lenders before applying.

1. Decide what type of business loan you need

You have several options when it comes to types of business loans. The following questions can help guide you to the best loan for your company’s unique needs.

  How do you plan to use the funds?

Some small business loans have restrictions or limitations on how to spend the funds. Here are the most common loan types and what they can fund.

• Working capital loans: Ideal for covering short-term expenses, like payroll, inventory and rent. You can also use a working capital loan to keep your business afloat during seasonal lulls.
• Commercial real estate loans: These loans can help you buy, build or renovate property for your business. Loan amounts go up to $5 million, with terms as long as 25 years.
• Restaurant loans: Get funding to launch your restaurant or buy a franchise.
• Equipment loans: Equipment financing could cover the entire cost of buying business equipment, such as computers, vehicles or large machinery.

  How often do you need funds?

Consider your current business needs and how often you anticipate needing extra capital.

• One-time funding: Term loans provide an upfront lump sum of cash, helping you tackle more significant purchases, expansions or renovations.
• Ongoing funding: Business lines of credit offer flexible financing, allowing you to withdraw what you need when you need it for day-to-day expenses.

  How much do you need to borrow?

The amount you want to borrow can help narrow your business loan options. Microloans range from $500 to $50,000, while an SBA 504 loan can reach up to $5.5 million.

If you are considering a first-time business loan, aiming for a lower amount is ideal. This way you can keep up with payments and build your business credit, allowing you to borrow more down the line.

  How quickly do you need the funds?

The timeline to process your business loan application and disburse funds varies by lender and loan type. For example, SBA loans have comparatively lower interest rates, but funding may take two months or longer.

An online, alternative lender could be a better option for emergency business expenses since some offer same- or next-day funding. However, these fast-turnaround business loans usually have higher rates than traditional banks or SBA lenders.

2. Determine your eligibility

Each lender has specific business loan requirements, often outlined on their website. In general, you can expect lenders to review the following criteria when applying for small business financing:

• Credit score: To get the best interest rates, you typically need a FICO Score of 670 or higher. Check your personal credit score before applying to know where you stand. You’ll also want to have a business credit score above 80. Build your business credit by responsibly opening accounts with vendors and paying off invoices promptly.
• Time in business: You typically need to be in business for six months to one year to qualify for an online business loan. Traditional banks often require you to be in business for at least two years. Newly established companies can consider small business startup loans.
• Annual revenue: Many lenders require a reliable income stream for small business financing. Annual minimums can be as low as $36,000 and go up to $480,000. If your revenue is lower, consider applying for business credit cards or microloans.
• Collateral and/or personal guarantee: Collateral, such as real estate, equipment or cash, reduces a lender’s risk with secured business loans. If you default, the lender can repossess your collateral as a form of payment. A personal guarantee might also be required, allowing a lender to seize your personal assets if you fail to repay the debt.
• Repayment terms: Most lenders limit your loan to 30% of your annual revenue to ensure you can manage repayments. Note that some lenders require weekly or even daily repayments, so review your business budget in advance to ensure you can manage the payments. Use LendingTree’s business loan calculator to estimate your potential borrowing limit.

3. Compare small business lenders

Banks, credit unions and online lenders offer various types of small business financing. Here are some lenders to consider, including details on how each type of lender works.

Traditional banks

Traditional banks offer a range of small business products, including term loans, commercial real estate loans, lines of credit, business credit cards and SBA loans.

While traditional banks tend to offer the most competitive business loan interest rates, they usually have stricter criteria and a longer application process than alternative lenders. Criteria typically include at least two years in operation, collateral and consistent revenue.

SBA lenders

The U.S. Small Business Administration (SBA) partners with lenders nationwide to offer affordable financing options for small business owners. Interest rates are capped based on loan amount and whether you pick a fixed or variable rate.

The most popular SBA loan is the SBA 7(a) loan, which funds up to $5 million for general expenses. If you want to finance major assets, like real estate or large equipment, the SBA 504 loan can provide up to $5.5 million — the amount guaranteed by the SBA. However, some lenders offer amounts of $20 million or higher.

Low-income, women, veteran and minority entrepreneurs might be eligible for up to $50,000 with an SBA microloan.

Government lenders

The federal government works with lenders to provide low-cost funding solutions for small business owners. In addition to SBA loans (mentioned above), the USDA offers business loans.

The USDA’s Rural Microentrepreneur Assistance Program offers business loans up to $50,000 with a fixed interest rate and a term of up to 20 years. To qualify, your business must have 10 or fewer full-time employees and operate in a rural area.

Online lenders

Online lenders, also called nonbank or alternative lenders, utilize digital underwriting technology to approve or deny business loan applications with record speed. For example, Fundbox claims it makes funding decisions within three minutes. If you can’t gain approval from a traditional bank, you might have better luck with an alternative lender since they usually look beyond credit scores.

However, online lenders rarely offer rates as low as traditional banks. For example, OnDeck’s starting APR is 35.40%.* Your final interest rate will be based on the loan type and size, repayment term, your credit score and if you can provide collateral.

*For at least 5% of customers in the half-year ending in Q1 2023.

Microlenders

A microloan can help startups, low-income businesses or those with a damaged credit history launch or expand their business. Nonprofit organizations and government agencies typically fund microloans, providing up to $50,000 with flexible terms, low interest rates and minimal fees.

Some popular microloan lenders include Accion Opportunity Fund, Grameen America, Kiva and LiftFund.

4. Gather required documents

Potential lenders will likely request some or all of the following documents for your business loan application.

• Business plan. A strong business plan outlines your company’s mission and goals, including financing and marketing strategies. This reassures lenders that you’ll put their money to good use.
• Business licenses. Each state has different requirements for business licensure. Make sure all required documents are up-to-date before applying for business financing.
• Financial documents for the business. Your lender may use your bank and income statements and balance sheets to confirm your company’s annual revenue.
• Personal financial statements. Your and your business partners’ personal financial information can help lenders determine your overall creditworthiness for a business loan.
• Personal and business tax returns. Personal and business tax returns are needed to show your overall net profit. Eligible business partners will likely need to provide this information as well.
• Articles of Incorporation, bylaws or operating agreement. You may need to provide these legal documents depending on your business entity.
• Building lease. If applicable, have any building leases on hand, including your monthly payment.

How an executive summary can help you get a business loan

An executive summary is a three- to five-page document outlining your business’s needs and the project’s relevance to your company’s success, anticipated costs and timeline. You should also include recent revenue and profit numbers, current market dynamics and your overall growth plan for the next one to three years.

The more details you can include in your executive summary, the better. You want lenders to see your business as well organized and stable, with the potential to grow.

While having an executive summary won’t guarantee loan approval, it will likely strengthen your application and reduce lender risk.

5. Apply for a business loan

Applying for online business loans is often quick and automated — you may even receive immediate approval if you meet the requirements. However, traditional banks may require you to visit a physical branch to apply for a small business loan.

Consider asking a business colleague or your local Small Business Development Center (SBDC) to review your business loan application before submitting it. Having a polished loan application can help avoid delays in the financing process.

Your lender may also need additional information, such as:

• Personal details for all business owners, such as name, date of birth, Social Security number
• Business name or DBA name
• Business street address
• Phone number
• Type of business
• Date the business was established
• Business tax ID number
• Annual net profit
• Number of employees (if applicable)

6. Pick the best business loan

Here’s what to consider when choosing the best small business loan:

• Interest rates. Is the rate variable or fixed? How much interest will you pay over the life of the loan?
• Fees. Does the loan have origination fees, late charges and prepayment penalties? Add these to the loan amount to ensure the total cost is worth it.
• Terms. How long do you have to repay the loan? Do repayments start immediately?
• Funding speed. How quickly will the funds hit your business bank account? Can you wait if the funding time is exceptionally long?

Beware of scams

Some lenders offer no-credit-check business loans or guarantee approval before submitting anything. Such loans often come with high fees and unfavorable terms. Look for signs of predatory lending and read small business lender reviews before proceeding.

Tips to help you get approved for a business loan

Try following these steps to improve your chances of loan approval.

  Clean up your credit

It’s crucial to dispute any errors on your credit report before submitting a loan application. While the disputing process varies by credit agency, most investigations finish within 30 days. Consider working with a credit repair company if you need additional assistance repairing your credit.

  Establish a relationship with a lender

Building a relationship with a financial institution can improve your chances of getting a business loan. Consider applying for small business financing at your current bank or open a business checking account with a desired lender. Some lenders even offer rate discounts or rewards when banking members get a business loan.

  Offer collateral

Collateral reduces lender risk since your lender can seize your collateral to recoup its losses if you default on your loan. If your company is new and you don’t have business assets yet, you could pledge personal assets, such as home equity or a retirement account.

  Shop around for the best deal

Many lenders allow you to enter basic details to see estimated rates and terms, typically resulting in a soft versus hard credit check. You can even submit multiple applications within a 14-day window without drastically impacting your credit score — often called “rate shopping.”

Be sure to view all offers to find the best deal for your needs, paying attention to any additional fees listed in the fine print.

Alternatives to small business loans

While small business loans can help take your business to the next level, not everyone can meet the eligibility criteria. Here are some alternative ways to get business funding.

• Small business grants: You can apply for small business grants through the federal, state or local government or a private entity like a foundation or corporation. Grants provide free money for specific business types or industries but are often very competitive.
• Business credit cards: Business credit cards are convenient for financing everyday expenses, like low-cost inventory and supplies. However, compare interest rates when considering business credit cards versus business lines of credit since credit cards typically have higher rates. Plus, carrying a significant monthly balance on your credit cards could negatively impact your credit score.
• Crowdfunding: Raise funds from your customer base using crowdfunding platforms like GoFundMe for business. While crowdfunding platforms generally don’t have business requirements, you typically have to pay a fee for their services.
• Friends and family: Obtaining money from a generous friend or family member can save you from hard credit inquiries and high interest rates. However, you may compromise your relationship if you don’t repay the loan. Be sure to outline all expectations in a written agreement if you take this route.
• Personal loans for business: Yes, you can use personal loans for business purposes. Personal loans are typically easier to get than business loans, though loan amounts may cap at $50,000 with higher APRs. Additionally, you can’t claim interest on personal loans as a business tax deduction.