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How to Get a Small Business Loan
By Michelle Lambright Black MONEY RESEARCH COLLECTIVE
If you’re a small business owner, there may come a time when you’ll want to borrow money to fund your operations. Whether you’re looking for money to cover startup costs, purchase equipment, or expand your business, a small business loan could provide you with the cash to meet your needs.
This guide will help you determine if a small business loan is right for you. You’ll also find helpful tips on how to improve your chances of qualifying for this versatile type of financing.
Table of Contents
- 7 types of small business loans
- 7 steps to getting a small business Loan
- Should I get a small business loan?
7 types of small business loans
Some business lenders may let you use the money you borrow in a variety of different ways. Others restrict their loans to specific purposes. So it’s important to choose the right type of financing for your business needs. Below are seven common types of business loans. Consider whether one of these funding options might work for your business.
Commercial real estate loans
A commercial real estate loan is similar to a residential mortgage in several ways. But instead of financing the purchase of a home, businesses can use commercial real estate loans to construct or buy commercial properties such as office buildings, retail space, warehouses, and restaurants.
Repayment terms on commercial real estate loans may range from a short 12 months up to 30 years. Loan limits can vary by lender—generally from $50,000 to $5 million or more.
Invoice factoring
Invoice financing may be available to businesses that use an invoicing system to charge customers for products or services. With this type of funding, your business uses its unpaid invoices as collateral to secure a cash advance.
Your business might qualify to borrow up to 80% of the value of its outstanding invoices, even if you have bad credit (personal or business) or other qualification challenges. However, invoice financing can be a costly way to secure funding compared with other small business financing options.
Equipment loans
From computers and desks to vehicles and heavy machinery, an equipment loan could help you finance the purchase of business-related equipment. With equipment financing, the product your business buys typically serves as collateral to secure the loan. So you might be able to get a better interest rate than you would with unsecured financing—especially if you have good credit.
Business lines of credit
A business line of credit can provide your company with flexible access to working capital over and over again. Similar to a business credit card, you can use a line of credit to borrow money on an as-needed basis. As you repay the funds you borrow (plus interest and fees), you should regain access to your original maximum credit line so you can use it when additional needs arise.
Unlike a credit card, you may have a limited draw period on a business line of credit. Once the draw period expires, you’ll no longer be able to use the credit limit on the account.
Term loans
With a term loan, a well-qualified business might be able to borrow as much as $500,000 or more from a traditional financial institution or online lender. Repayment terms vary with this type of loan, but can often span up to 10 years. Many term loans also feature fixed interest rates and fixed monthly payments throughout the life of the loan.
If you want to take out a term loan from a bank, credit union, or Small Business Administration (SBA) lender, both you and your business may need good credit to qualify. Online lenders may have easier-to-satisfy qualification criteria, but the interest and fees tend to be higher.
Merchant cash advances
A merchant cash advance (MCA) is one way to access fast funding for your business, even with a bad personal or business credit score. With this type of financing, your business receives a lump sum upfront and repays the loan through direct withdrawals from its merchant account (aka credit card and debit card sales).
It can be easier to qualify for an MCA than for some other types of business loans. But the interest rates associated with MCAs can be steep—sometimes as high as 350% APR. You also might have to agree to daily payment drafts until you repay the advance.
Franchise loans
A franchise loan can be a good choice for entrepreneurs who want to purchase a franchise attached to an existing brand. Franchise fees can differ widely, from as low as $10,000 up to millions of dollars.
You may be able to secure a franchise loan from a bank or SBA lender. But if your credit or other business profile doesn’t satisfy a traditional lender, you might still be able to get a franchise loan from an online small business lender (albeit at a higher cost).
7 steps to getting a small business Loan
Once you settle on the best type of business loan for your business, certain actions might improve your approval odds. The seven steps below will walk you through how to get a small business loan so you’ll know what to expect.
1. Evaluate your credit score
With many types of small business loans, a credit check is a given. In fact, a lender might want to review your personal credit score and report along with details pertaining to your company’s creditworthiness. Since you know that a review of your credit is likely, it’s wise to know where you and your business stand before you fill out a business loan application.
You can access free copies of your three consumer credit reports online at AnnualCreditReport.com and purchase your FICO Scores at myFICO.com. For business credit reports and scores, you may need to visit the websites of the major business credit reporting agencies—Dun & Bradstreet, Experian, and Equifax.
2. Gather the documents you need for a small business Loan
When you apply for a small business loan, the lender may request various documents including the following:
- Tax returns (business and personal)
- Bank Statements (business and personal)
- Business financial statements (balance sheet, cash flow, annual revenue, etc.)
- Business plan
- Business licenses
- List of business assets and personal assets
- Lease agreements
- Articles of incorporation
3. Know how much you want to borrow
It’s important to calculate the amount of capital your business will need to reach its goals. This information can help you determine if a loan program is suitable for your business needs. And of course, you’ll want to figure out how much your business can afford to repay.
Many lenders set up a monthly payment schedule when you take out a small business loan. Yet some financing companies (such as merchant cash advance providers) require automatic daily payments toward your debt. Be sure to crunch the numbers ahead of time to make sure the repayment amount and schedule won’t put your business in a bad position.
4. Compare lenders and rates
Before you take out a business loan of any kind, it’s essential to shop around for a good deal. Getting a lower annual percentage rate (APR) on your business loan has the potential to save you thousands of dollars in the long run—and sometimes more.
In addition to the interest rate and fees, borrowers may also want to consider the following details before filling out a business loan application.
- Down payment requirement
- Funding speed
- Repayment terms (long-term or short-term loans)
- Ease of application process
- Personal guarantee requirements
- Customer service
- Available loan amounts
- Eligibility requirements
- Additional benefits
Note that some lenders offer an online prequalification option to check your loan eligibility and interest rate. In many cases, you can see if you prequalify without hurting your credit score.
5. Review loan terms and conditions
Once you find a loan you like, it’s time to look over the fine print. Make sure you understand the repayment schedule, interest rates, and fees that the lender will charge you. You may also want to pay attention to details like credit reporting policies, prepayment penalties, and any terms that seem like potential red flags.
6. Apply for the loan
If you’re satisfied with a lender’s terms and conditions, you may be ready to complete an official loan application. Depending on the small business loan type, you should be prepared to answer questions about your business and personal identity, finances, and more.
The lender may also require you to authorize a review of your credit history and score. And you may need to submit supporting documents to verify your company’s eligibility for financing.
7. Sign and wait for funds to be deposited
The final step of getting a small business loan is accepting your loan offer. (Note: It’s important to review the terms and conditions one more time before signing to make sure nothing has changed.)
Finally, you’ll need to wait for the lender to fund your loan. With certain loans, like equipment loans or commercial real estate loans, the funds may go straight to the seller of the equipment or property you’re purchasing. Other loans, like term loans, may result in a deposit to your business bank account—typically within a few days to a few weeks.
Should I get a small business loan?
Whether you’re opening a new business or trying to expand an existing company, a small business loan could be helpful. But it’s important to take an honest look at your situation to make sure that a business loan will be affordable and able to propel your company forward.
Qualifying for the best small business loans requires research and preparation. You might also need to work to improve your credit to become eligible for more financing options. But if you can put your business in a position to qualify for affordable financing, all those efforts could prove to be well worth your time.
Michelle Lambright Black is a nationally recognized credit expert with two decades of experience. Founder of CreditWriter.com, Michelle's work has been published thousands of times by FICO, Experian, Forbes, Bankrate, MarketWatch, Parents, U.S. News & World Report, and many more.