- There are many types of financing available, from traditional bank loans to microloans.
- Your credit score is important in getting a business loan, but so is your total revenue.
- If you don't qualify for a business loan, it's important to take steps to improve your eligibility before reapplying.
Taking out a business loan for your company may provide a needed cash injection to push ahead on a stalled project or fund other business goals. Whether you're a startup or already well-established, you have many financing options available.
However, with so many loan options available, it's essential to understand the different types, their requirements, and how they align with your business goals. Choosing the right loan can help you manage cash flow effectively, seize new opportunities, and set your business up for long-term success.
Types of business loans available
You need to determine what you will use the money for before applying for a small business loan, as there are various loan types.
"There are many types of loans, from SBA loans to traditional term loans, lines of credit, and more," says Gina Taylor Cotter, EVP and GM, Small Business Products at American Express. "All of these may come with various terms, rates, repayment options, and even financial institutions."
Some of the best ways to get a business loan include:
- Small Business Administration (SBA) loan. Loan amounts range from $50,000 up to $5 million, and often come with good rates and repayment terms. The government partially guarantees SBA loans and they are issued by participating lenders, often banks. The approval process may take weeks or months.
- Traditional bank loan. Loan amounts differ depending on the bank, and repayment term lengths generally range from one to 20 years. You may get some of the lowest rates of all the options available, but eligibility criteria is often strict. The approval process could take several weeks.
- Business credit card. This is one of the better ways for new businesses to get money. Credit limits range from about $1,000 to $25,000, and you may pay 20% or more in interest. Personal credit is a major factor in your approval. You'll find out if you're approved within hours of applying. Additionally, consider a 0% APR business credit card to save on startup costs or initial expenses.
- Line of credit. You can borrow against lines of credit repeatedly after you pay down the balance. The amount you can borrow ranges from roughly $1,000 to $100,000, depending on your credit profile and business revenues. It can take anywhere from a couple of days to several weeks to get approved.
Microloans. These are usually available through nonprofit organizations trying to make funds more accessible to underserved communities. That means they may have looser eligibility requirements than traditional banks. Loan amounts range between $500 to $50,000 and may be a great option for new businesses. It's likely take at least a few weeks to complete the approval process.
Business loans vs. personal loans
Business loans are specifically designed for business purposes, offering larger loan amounts, longer repayment terms, and often lower interest rates compared to the best personal loans. They also typically require documentation of your business's financial health, such as revenue and tax returns.
On the other hand, personal loans may have more lenient eligibility requirements but can come with higher interest rates and are usually smaller in size. Using a personal loan for a small business is possible, but it comes with risks.
If you take out a personal loan and use it for your business, you are personally liable for repayment. This means that if your business fails to repay the loan, your personal assets, such as your home or car, could be at risk.
Deciding which type of loan to choose
The right loan for your business depends on several factors, including how much funding you need, how quickly you need it, and your ability to meet the lender's requirements. Here are some key considerations to help guide your decision:
- Loan purpose. If you're wondering how to get a big business loan, an SBA or traditional bank loan may be ideal. If you need short-term cash flow, a line of credit or business credit card could be a better fit.
- Approval time. If you need funds quickly, applying for a business credit card or utilizing a line of credit may offer faster approvals than SBA or bank loans, which can take weeks.
- Eligibility requirements. Traditional bank loans and SBA loans often require strong credit and financial history, while microloans may be more accessible for newer businesses.
- Interest rates and fees. Compare interest rates, fees, and repayment terms. Business credit cards typically have higher interest rates, while SBA and bank loans often offer lower rates with longer repayment terms.
- Repayment flexibility. Some loans, like lines of credit, offer revolving access to funds, while term loans require fixed monthly payments.
Business loans: Determining what your business needs
Business loan amount
Noah Grayson, president at South End Capital and a former strategic financing advisor at Real Estate Bees, says business owners should research and weigh the pros and cons of all the financing options available. You may also consider contacting a business loan specialist or a direct business lender that offers many options.
"Business loan options are abundant, and it can be very easy to obtain business financing," says Grayson. "However, obtaining the right financing for your business is essential, and taking expensive financing just because it can be procured quickly and easily is not usually the best option for a business owner."
When applying for your loan, you must have a good idea of how much money you'll need, what you'll use it for, and how you'll be paying it back.
Business loan purpose
Before you take out a loan, make sure you have a detailed plan for how you'll use the money and a budget for how you'll repay it. Be careful before taking on financing to solve an immediate, short-term problem.
"We work with many business owners that are seeking a loan to help to solve urgent cash flow issues and sometimes they don't think long-term about how they're going to repay their debts," says Matt Brewster, vice president of capital access at Hello Alice, an online platform that helps businesses launch and grow. "If you do take on short-term financing of any kind, shop around to find the best rates and fees, pay it down ASAP, and don't become too dependent on it."
Business loan pre-application
Understanding eligibility requirements
Many lenders have a minimum time in business to be eligible for a loan product, typically ranging between six months to five years. Loans for established businesses usually depend on historical information, including you and your business's credit history, tax returns, historical financial statements.
It's harder to get a loan as a new business, Brewster says, as startup loans often require a more robust business plan and financial projections because they have no previous history to on which to base a decision.
"Many financial institutions have loan eligibility guidelines that include a minimum annual or monthly revenue," Brewster says. "Nonprofit micro lenders, usually community development financial institutions and others, specialize in making microloans of $50,000 or less typically to smaller businesses. They can be a great resource for smaller businesses."
Gathering necessary documentation
To get a business loan, you may need some of the following documents:
- Bank statements for the business and potentially the owners
- Tax returns and bank statements for the business and possibly the owners
- Financial statements, including an income statement, balance sheet, and cash flow statement
- Legal documents such as articles of incorporation and business licenses
- Forms of ID to underwrite and validate the business
"You may need additional documentation for specific financing types," Brewster says. "For example, if you're applying for invoice factoring (borrowing against money that customers owe you), you will need to supply your working capital accounts, accounts payable and accounts receivable, and potentially specific invoices."
Business loan application process
What to expect when applying for a small business loan
Depending on the type of loan you're applying for and your unique financial situation, the approval process can be lengthy and may require a lot of effort on your part. Come into it knowing why you need the money and hold steady throughout any challenges you may face.
"Be prepared and be persistent," Brewster says. "Having strong convocation in your business strategy and all of your documents in place is a good first step. Then you need to keep at it. It can take many 'nos' before you get to a 'yes' for a financing product that is best for your business."
Grayson emphasizes that research is the most important tool to be successful with a small business loan.
"There are programs that sound appealing but may be more financially beneficial to the person trying to sell them to you than they will be to your business," Grayson says. "Work with a reputable and experienced lender or financing professional but come armed with as much knowledge and research as possible so you will have the tools to select the financing that is best for you."
Tips for a successful application
Lenders prioritize three key factors before making lending decisions: the ability to repay the loan, the need for the money and how it will assist with a critical business need or growth, and the business and business owner's overall creditworthiness.
Business loans: Application review
What to expect after applying
Lenders generally look at your time in business, credit scores (both your business credit score and personal credit score), cash flow, collateral, and the industry the business is in. You may also have a better chance of approval if you have a previous relationship with the lender.
"The number of employees the business has, or the amount of gross revenue (revenue received before expenses) doesn't matter as much as the net income of the business (revenue after expenses) and the amount of time a business has been in operation," Grayson says. "The higher the net income of the business and the longer the business has been in operation, the more financing options the business will have, and the more favorable terms will be available."
Understanding loan terms and conditions
It's crucial to have a strong understanding of your loan, its length, interest rates, fees, and how not paying can impact your business.
What to do if you can't qualify for a business loan
If you don't qualify for a business loan, it's important to take steps to improve your eligibility before reapplying. One key strategy is to build your business credit by paying bills on time, keeping credit utilization low, and working with vendors that report to credit bureaus. You can also consider alternative financing options such as peer-to-peer lending or crowdfunding, which may have less stringent requirements.
Additionally, a strong business plan and financial projections can help strengthen your case if you decide to reapply for a loan. Keep in mind that some lenders may approve loans for businesses with limited credit history if they can demonstrate clear cash flow and a strong potential for growth.
Consider consulting a financial advisor to explore all potential financing avenues and strengthen your future loan applications. They can help you better understand your options, guide you in improving your credit profile, and ensure you're on the right track to securing the funding you need.
How to avoid business loan scams
Business loan scams can be particularly harmful, especially for new business owners looking for quick funding. Some scammers may promise low-interest loans with little documentation or upfront fees, only to disappear once they've received your personal or financial information. To avoid falling victim to these types of scams, it's essential to research the lender's background and reputation before proceeding with any loan application.
To protect yourself, be wary of unsolicited loan offers and always verify the legitimacy of the lender. Look for reviews, confirm that the lender is registered with the appropriate regulatory authorities, and ensure the terms are transparent and reasonable. Scams often involve high-pressure tactics or promises of easy money, so take your time when considering any loan offer.
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FAQs
What credit score is needed to get a small business loan?
To get a business loan, you should generally have a credit score of 680 or higher. However, some lenders may approve loans for lower scores depending on other factors like business history and revenue.
How long does it take to get a business loan approved?
It can take a few days to several weeks to get a business loan approved, depending on the lender and the type of loan. Online lenders typically have faster approval times compared to traditional banks.
What are the fees associated with business loans?
Fees associated with business loans can include origination fees, application fees, processing fees, and prepayment penalties. Reviewing the loan terms carefully is essential to understand all associated costs.
How can I improve my chances of getting a business loan?
To improve your chances of getting a business loan, ensure you have a strong business plan, maintain good personal and business credit, prepare thorough financial statements, and research the lender's requirements before applying.
How can I get a small business loan with bad credit?
You can still get a small business loan with bad credit by exploring alternative lenders, SBA microloans, or business credit cards, which often have more flexible requirements. Offering collateral and securing a co-signer can also improve your approval chances.
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