How to get a small business loan in 5 easy steps

Getting a business loan is one of the best ways to cover everyday business expenses and grow your business without disrupting your cash flow. However, securing a business loan can be intimidating. With hundreds of lenders and endless financing options, it might seem hard to choose which small business loan is right for you.

But while the process can be confusing, it doesn’t have to be. Here are five steps on how you can get the best business loan for your business:

1. Understand Why You Need a Business Loan
2. Determine if Your Business is Qualified for Funding
3. Compare Available Loan Options for Your Business
4. Evaluate Different Loan Companies and Lenders
5. Get Your Loan Documents Ready and Apply

1. Understand why you need a small business loan

Is getting a business loan is a good idea in the first place? Before starting the process of how to obtain a business loan, you should be able to succinctly answer why you need the loan. 

Knowing why you need a loan is essential when creating a business plan (which many lenders look at) and will also help narrow down the type of loan you need. You might even find you’re better suited for an alternative financing option instead.

Common uses for a small business loan

• For starting a business: If you’re looking to get startup capital to open a business, you won’t qualify for most traditional business loans from commercial lenders. Check out loans from online lenders or get a microloan to jumpstart business.
• For managing expenses: If you want to stay ahead of your expenses, the best financing you can get is a business line of credit. This is because it allows you to borrow exactly what you need with few restrictions, which is perfect for businesses with diverse needs.
• For growing your business: If you need capital to heavily invest in your business for expansion or take on larger projects, your best loan options are invoice factoring or a term loan.
• For emergency expenses: Businesses that are looking for an extra cash cushion in case of any financial emergencies should look to a business line of credit for its accessibility and low cost to keep open.  
• For purchasing equipment: If all you need is to purchase a piece of equipment, equipment financing is specifically designed to help you cover the costs.

2. Determine if your small business is qualified for funding

Once you’ve got a good grasp on your business plan, the next step is understanding how much financing you can afford and if you’re qualified for a business loan. Before you can get approved for a loan, your business will be evaluated on whether you can take on extra capital. To figure this out, consider at three important factors:

Credit history

When you apply for a business loan, one of the biggest factors lenders look at is your personal or business credit history. Most online lenders only look at personal credit, but some banks and certain types of loans expect to see business credit history. Lenders typically want to see scores above 600; if your score is weaker, you may want to take the time to improve your credit before applying for a loan.

Bluevine Tip

You can typically improve your business score in three major ways:

1. Doing business with vendors that will report your payment history to credit agencies
2. Making early payments to credit bureaus
3. Getting credit cards that report payment history to commercial credit agencies

Cash flow

Another factor lenders look at is cash flow. Lenders like to see positive cash flow because it indicates whether your business is more likely to pay off debt. Lenders will look to see if your business generates enough money to cover your debt obligations and operating expenses, as well as whether the amount of cash you have going into your business is steadily increasing over time.

Collateral

With most business loans, you usually need to provide some form of collateral in case you’re unable to make your repayments. The best types of collateral are cash itself or negotiable securities, such as stocks or treasury debt. Most traditional lenders are hesitant to give out loans without collateral. However, another option to consider is online lending, which accepts businesses that have little to no collateral.

3. Compare available loan options for your small business

This section will help you understand the different types of business loans and financing available to you. We’ve also included what each funding option is best used for and what costs you can generally expect.

• Term Loan
• SBA Loan
• Business Line of Credit
• Equipment Financing
• Invoice Factoring
• Microloan

Term Loan

A term loan is an upfront lump sum of money that is repaid in fixed installments over a set period of time. Since term loans often have longer repayment terms (1-10 years), they are ideal for growth or expansion—if you need to make renovations, stock up on inventory for the season, or upgrade systems, a term loan is your best choice.

It should be worth mentioning that term loans are not as flexible as business lines of credit. You take a fixed amount upfront, and payments start immediately after you accept funds.

Best for:

• Businesses that have an immediate investment or growth opportunity, such as expansion or new equipment
• Businesses that need lower payments, spread out over a longer term  

Expected rates and fees:

• 6% to 99% APR, but varies by lender and type of term loan
• May have prepayment fees

SBA Loan

The Small Business Administration (SBA) is a government agency that works with select lenders to issue out loans. The SBA guarantees a partial amount of the loan so that lenders are more willing to approve a borrower. The most popular SBA program is the 7(a) loan, which is ideal for businesses that need extra help on their loan applications. For example, if a business is struggling with cash flow, the 7(a) program increases guarantee to the lender to decrease the risk of default.

If you’re interested in the SBA 7(a) program, note that the maximum amount is $5 million. The term lengths are 7 years for working capital. To meet the minimum requirements of a 7(a) loan, your business must meet the following:

• Have fewer than 500 employees
• Generate less than $7.5 million in sales
• Be in an eligible industry
• Be a for-profit business that does business in the United States
• Creates jobs or upholds policies set by the SBA
• Demonstrates a need for the loan
• Using some form of alternative financing

Best for:

• Businesses that struggle with cash flow issues, as the loan can be restructured for those wanting lower monthly payments and longer loan maturities
• Newer businesses that do not have established credit

Cost:

• The typical interest rate range for an SBA 7(a) loan is 7.75% to 10.25%

Business Line of Credit

A business line of credit works similarly to a credit card. You are given a credit line that you can access and draw funds from at any time so long as you make your payments. It’s great because it often costs nothing to keep open, and the best part is that you have the ability to draw as much as you want up to your credit limit.

Best for:

• Covering unexpected cash flow gaps
• Providing a cash cushion in case of emergencies

Expected rates and fees:

• Interest rate ranges from 5% to 80% APR but varies by lender
• May have origination fees and prepayment fees
• Often little to nothing to keep open

Equipment Financing

Equipment financing is specifically designed for business owners looking for help to partially or fully finance an equipment purchase. Equipment financing is typically easier to qualify for because the equipment itself will serve as collateral. This means that if you’re unable to make payments, the lender can seize the equipment as payment.

Best for:

• Businesses that have equipment to finance
• Lower interest rates  

Expected rates and fees:

• 12% to 30% fixed interest  
• Payment terms will last the lifetime of the equipment

Invoice Factoring  

Invoice factoring, or accounts receivable factoring, is ideal for businesses that need to tap into the funds stuck in their unpaid invoices. To factor an invoice you first “sell” or submit an invoice to a factoring company. The factor will then give you a percentage of the invoice amount (around 70% to 90%). Once your client pays the invoice to the factor, the factor will issue the remainder of the invoice minus a fee.

Businesses often use factoring as a debt-free solution to getting working capital. Nowadays, there are online invoice factoring companies that let you apply entirely online and pick and choose which invoice you want to submit.

Best for:

• B2B Businesses with accounts receivables
• Businesses that don’t want to incur debt

Expected rates and fees:

• A percentage of the invoice (usually 1% to 5% of the invoice amount)
• Some traditional factors charge hidden fees

Microloan

If you’re looking to start a business or have very low working capital needs, a microloan can be a solid financing solution. However, because microloans are mostly distributed by non-profit community lenders in specific regions or states, they can be hard to qualify for. It’s also best to keep in mind that because these non-profits rely on grants and donations, the number of loans and amounts are restricted. The largest microloan most lenders will issue is around $50,000; the lowest is usually $500. According to the SBA, the average microloan recipient receives roughly $14,000 in working capital.

Best for:

• Businesses with low working capital needs
• Businesses who don’t meet the qualifications for commercial lending products

Expected rates and fees:

• Interest rate ranges from 8% to 13%

4. Evaluate different loan companies and lenders

Traditional Banks

Out of all the lenders, traditional banks are the most difficult to qualify for. The application process usually takes weeks or months to complete, and banks will require a large number of documents. Getting a loan from a traditional bank is not easy, but if you manage to secure an offer, it’s worth taking as rates are typically lower.

As a start, they often require at least two years of business history and hundreds of thousands in annual revenue.

Bank loan average minimum requirements:

• 2+ years in business
• $250,000+ in annual revenue
• 700+ personal credit score  
• Sometimes collateral required

Online Lenders

After the 2008 recession when traditional banks were less likely to lend to small businesses, online lenders were gradually filling the gap as an alternative lending source. Online lenders have much faster and easier application processes and usually require less documentation. Additionally, online lenders are much easier to qualify for than banks; some only require a couple of months of business history. The biggest disadvantage to online lenders is higher rates.

Online lender average minimum requirements:

• 6+ months in business
• $50,000+ in annual revenue
• 500+ personal credit score

SBA

The SBA is a government agency that works with lenders to issue out loans to small businesses. The SBA does not originate loans; they guarantee a partial amount so that lenders are more willing to approve a borrower. They offer many types of working capital such as lines of credit, term loans, equipment financing, and more. However, getting an SBA loan is as difficult as getting a bank loan due to their strict requirements.

Average minimum requirements for an SBA 7(a) loan:

• 4+ years in business
• $180,000 in annual revenue
• 640+ credit score

Nonprofit Lenders

Nonprofit lenders are more mission-driven and mostly work with businesses in their local community. They typically do not lend out more than $50,000, so they’re ideal for businesses with very small working capital needs. Non-profit lenders generally require very little in terms of prerequisites and don’t expect high revenues or perfect credit scores.

Average minimum requirements for nonprofit lenders:

• 1+ year in business
• No bankruptcies over the past 12 months
• 575+ personal credit score

Bluevine Tip

Most lenders will check your personal credit report when evaluating your loan application. Checking your credit also gives you the opportunity to identify issues that you may be able to resolve easily, such as settling old debts or correcting false information.

5. Get your loan documents ready and apply

The last and final step when applying for a business loan is that you must get your documents in order.

To speed up the application process and prevent delay, here is a list of all the documents you should keep handy when you finalize your application.

• Recent bank statements (last 3 to 12 months)
• Recent tax filings (1 to 3 years)
• Incorporation papers
• Updated balance sheet
• Profit and loss report

In addition to getting the necessary documents in order, another important step is to check for any tax or existing business liens. That’s because having a clear idea of your legal standing as a business tells lenders that your business affairs are in order.

Here’s what you need to do: Check with the Secretary of State’s office in your area whether there are business liens or tax liens on you or your business. In most cases, you can do this online.

If there are liens that are not valid, take the necessary steps to have them removed.

If your business is incorporated, take the opportunity to check if you are properly registered and in good standing with the Secretary of State. If your business isn’t incorporated, you should consider doing so before applying for financing. Lenders often view incorporated businesses as more stable and creditworthy.

TIP: Lenders may also check your LinkedIn and other social media profiles to get more information about you and your business. They even read what customers say about your business on review sites. Negative customer reviews reflect poorly on your business, so take steps to mitigate the impact of these reviews by responding to the comments.

Ready to get a small business loan?

A business loan is often necessary for managing and growing your business. When you start applying, it’s important to consider why you need a business loan and determine how much your business can appropriately take on. From there, you can decide which loan is right for your business and check to see which lender you’ll have the best chance of securing it from. Lastly, you’ll need to gather all of your business documents and statements for submission.

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