How to Get a Small Business Loan

Small business owners tend to come from pretty resilient stock.

Running your own company isn’t for the easily spooked, after all. Even under perfect circumstances — the business is growing; its reputation is glowing — you face a million little decisions you'll have to confidently stand behind.

Taking out a small business loan creates about a million more. How much money do you need? How much money can you get? Do you need collateral? What IS collateral?

Whether you're a solo entrepreneur or leading a staff of 100, here’s everything you need to know about getting the best small business loan.

Table of contents

• How to apply for a small business loan
• Reasons to get a small business loan
• Should I get a small business loan?
• SBA loans: What every business owner should know
• How does collateral work for a business loan?
• What to do if your small business loan application is denied
• How to get a small business loan FAQs
• Summary of Money’s guide on how to get a small business loan

How to apply for a small business loan

If you want to apply for a small business loan, follow these steps to ensure a straightforward process.

Step 1: Research your small business loan options

The U.S. Small Business Administration (SBA) website, your community bank or credit union, and online search engines are great resources for information on the different funding options. Use a spreadsheet to track what you find — keep a close eye on interest rates, fees, repayment terms, prepayment penalties and qualifications for every lender you come across.

Small business owners have a few different types of small business loans to choose from:

Business line of credit

A “line of credit” is a popular one, though it technically isn’t a loan at all. This borrowing option functions much like a credit card, with lower interest rates and higher utility (some small business owners tap lines on credit specifically to pay their vendors who don’t take credit cards). Lines of credit can be used to pay for just about any business expense, up to a certain dollar limit, and interest is paid on funds drawn.

“A business line of credit is especially suitable for businesses with fluctuating cash flow needs. This can be ideal for companies that experience seasonal variations or those that deal with irregular payment cycles from clients. The flexibility of drawing and repaying as needed, without reapplying, makes it a versatile tool for managing working capital,” says Adrienne Fischer, founder and attorney for startups and growing businesses at Basecamp Legal.

Installment loans

Installment loans — or term loans — follow a more traditional borrowing structure. The full amount is doled out in a lump sum when the contract is signed. You must make payments within the agreed-upon repayment period. Short-term loans can be paid out in a few months; long-term loans are often paid over several years — typically three to 30-year terms.

Other loan and funding options

Other types of small business loans include the following:

• Microloans: Small loan amounts, usually up to $50,000
• Equipment loans: Can be used to finance business equipment
• Working capital loans: Short-term loans to fund everyday operations
• Startup loans: Helps new businesses get started
• Commercial mortgage loans: Can be used to finance commercial real estate

You may also want to look into alternative funding options, like the following:

• Invoice factoring: You sell unpaid invoices to a factoring company, which pays you a percentage of the invoice's value in cash. Once the customer pays the invoice, the factoring company pays you the remaining balance minus its factoring fee.

• Small business grants: Government agencies and private companies offer small business grants that don’t need to be repaid. A Small Business Development Center (SBDC) may be able to help you find grants and other business funding options.

• Merchant cash advance: This is a way to receive cash quickly in a lump sum, but it may be expensive. You may be required to make payments to your merchant cash advance provider daily or weekly.

• Crowdfunding: Crowdfunding is when you raise money from a lot of people, typically on the internet on platforms like Kickstarter.

• Investors: Investors are a great way to get funding for your business, but the process can take some time. Some entrepreneurs ask friends and family to invest, but you can also seek venture capitalists or other investors.

• Self-funding: You can fund your business yourself. Self-funding — also called bootstrapping — gives you complete control over your business but comes with risk.

Step 2: Determine your eligibility

Next, determine if you qualify for a small business loan. Consider the following factors:

• Credit score: Many lenders prefer credit scores above 700, but you may still be eligible if your credit score is lower. A higher credit score earns you more financing options, more favorable terms and better interest rates.

• Business age: Many traditional lenders require a business to be two years old. However, online lenders may offer financing to businesses as young as six months old.

• Revenue: Lenders consider your revenue to determine your loan repayment ability, but minimum revenue requirements can vary by lender.

If you’re a new business owner, an accountant — and also a financial advisor, preferably — can help you determine what loans you qualify for, how much debt you can afford to shoulder and whether or not it’s a good idea to take it out in the first place.

Step 3: Choose the best lender for you

Some small business loans are easier to secure than others (search for “bad credit loans” online and you’ll find plenty of examples). Online business lenders like OnDeck and Lendio can disperse money quickly, but beware of sky-high interest rates and steep (sometimes hidden) fees sprinkled throughout the fine print.

Credit unions and traditional banks are usually safer bets, though you may encounter more difficult hurdles. Bank loans typically require a good to excellent credit score and a minimum annual revenue, and the businesses must be at least two years old. Once the loan is approved, you’ll also have to wait a few business days to access the funds.

“When it comes to choosing a good lender, small business owners should prioritize lenders who offer flexible terms and have a reputation for supporting businesses through their growth phases. Through my practice, I've observed many cases where businesses thrived due to the strategic choice of a lender who was a partner rather than merely a creditor. A good lender should be transparent about terms, offer competitive rates and be willing to work with you to find solutions tailored to your business's specific needs,” says M. Denzell Moton, Esq, founding partner of Moton Legal Group.

Step 4: Gather the documents needed for your application

When you’re ready to apply for a loan, consider using a professional business counselor to help you through this process. The application varies by lender, but they’ll likely ask you to provide the following documents and details:

• Business information (name, address, employer identification number (EIN) and more)

• Business owner information (names, social security numbers, addresses and more)

• Personal bank statements

• Business bank statements

• Balance sheets

• Income and cash flow statements

• Credit score

• Income tax returns

• Any required business licenses and permits

You will also need to fill out an official application form, which you can find on the lender’s website.

If you’re applying for a small business loan with a bank or credit union, you may also have to submit a business plan outlining how you will use the loan funds.

Step 5: Apply for a small business loan

Once you’ve chosen a lender and your application documents are in order, you can officially apply for your small business loan. Double-check all your application materials to ensure everything is correct.

Online lenders allow you to apply for your loan on their websites. However, if you use a credit union or traditional bank, you may need to call or visit a local branch in person to apply.

Reasons to get a small business loan

Running a small business requires sufficient funds to unlock growth opportunities. The main purpose behind getting a small business loan is to secure immediate funding that can be used to increase profits and then repay the debt.

There are various reasons why you might consider taking out a small business loan, such as:

• Enhancing cash flow
• Purchasing inventory
• Acquiring equipment
• Expanding business operations
• Refinancing existing debt
• Reducing tax obligations

Should I get a small business loan?

First things first: Taking on debt brings uncertainty and risk, and small business loans aren’t any different.

Discuss your options with an accountant or financial advisor to determine if a small business loan is right for you.

You'll also want to consider your specific business needs before you submit a loan application. Is your company still getting off the ground? Are you in growth mode? Do you need extra cash flow to keep payroll and other expenses out of the red? Figure out your "why" and be prepared to put it in writing.

“Small business owners should consider a loan when it's clear that the infusion of capital will lead to growth that wouldn’t be achievable otherwise. This could mean expanding operations, purchasing inventory in bulk for a discount or capitalizing on market opportunities that require quick action. It’s crucial to weigh the potential ROI against the debt obligations,” Fischer advises.

SBA loans: What every business owner should know

Many loans (of all types) are backed by the SBA, which works directly with banks and other financial institutions.

SBA loans make the relationship between borrowers and lenders less risky by guaranteeing a portion (generally about 50% to 85%) if it goes into default. Taking out an SBA-backed loan helps borrowers avoid predatory lending and exploitative interest rates.

Small business owners can apply for an SBA 7(a) loan (the agency’s most common loan option), 504 loans and microloans. Those seeking disaster relief can also turn to the SBA for financial support. The Paycheck Protection Program outlined in the CARES Act was created specifically for businesses impacted by COVID-19, but emergency SBA funding isn't new to 2020 — hurricanes, wildfires, and other natural disasters have sent small business owners to the SBA for years.

The quickest way to find traditional SBA loans is through the agency's online Lender Match portal. For emergency loan programs, visit the SBA's disaster assistance website.

How does collateral work for a business loan?

To get a lower interest rate, some business owners provide lenders with personal or business assets as collateral. These are called secured loans and come with an extra layer of risk — if you can’t repay your loan at the end of the agreed-upon term, those assets will be seized and sold.

For small business owners, collateral typically includes inventory, equipment and commercial real estate. In some cases, businesses also use treasury and corporate bonds, certificates of deposit, outstanding invoices and stocks as collateral.

A loan without any business or personal guarantee is called an unsecured loan, and even the best unsecured business loans can have higher annual percentage rates (APR) than secured loans.

What to do if your small business loan application is denied

People get rejected for small business loans all the time. This can be discouraging, but it doesn’t have to be the end of the road.

If your application was denied due to a low or nonexistent business credit score, read up on how to strengthen that number.

Business credit cards are a great way to build business credit, but you can also build credit through your relationship with vendors, suppliers and service providers such as your internet, phone or cable provider. Finding a cosigner with good credit who agrees to take over your loan payments if you fail to make them can also improve your chances.

Consider hiring a small business coach or consultant to help prepare your next application. Score, a nonprofit organization, offers free business counseling throughout the country. And if you’re a woman, a person of color, or another small business owner facing systemic barriers to funding, organizations like the Foundation for Business Equity and the Local Initiatives Support Corporation (LISC) are chock-full of additional resources.

Summary of Money’s guide on how to get a small business loan

Running a profitable small business is challenging, and a small business loan can expand your business and increase your chances of success.

There are several types of business loans and lenders to choose from, including bank-backed financing and fast business loans typically serviced by online lenders.

Bank-backed financing is generally a safer bet, but startups might have a hard time meeting the eligibility requirements. Online lenders are more lenient with the applications they approve, but they offset this risk by charging higher interest rates and fees.

Make sure you fully understand all of the benefits and risks involved with taking on a small business loan, and then decide if it is the right option for you. Check out our best small business loans of the year for recommendations.