- 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.
- The amount of time you've been in business is more important than the number of employees you have.
Taking out a 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.
Types of business loans available
You need to determine what you will use the money for before applying for a 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 most common types of financing 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.
- 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: 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 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. Business loans differ from personal loans, so ensure you're ready to take on the responsibility and all that comes with it.
Business loan FAQs
What credit score is needed to get a 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.
Can I get a business loan with no collateral?
Yes, you can sometimes get a business loan with no collateral. However, these loans may have higher interest rates and stricter eligibility criteria.
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.