How to Get a Small Business Loan

To have a chance at qualifying for a small business loan, you must clearly explain your business’s goals to potential lenders. Are you seeking funding, for instance, to start a business? Is your existing business hoping to expand to new states or regions? Or are you simply needing to manage cash flow, a fluctuating income, or unexpected business expenses? The clearer your explanation is, the better your chances will be when you discuss your loan options with the available small business loan providers.

Your best small business loan options differ depending on how much money your business needs and the money’s purpose. The section below overviews some of the most common types of small business loans.

Equipment loans for small businesses

An equipment loan is exactly what it sounds like—a way to get cash for buying equipment for your small business: vehicles, software, tools, machinery—you name it. Equipment loans can come with fixed or variable interest rates, depending on the loan and the lender, and they can range from several thousand to several hundred thousand dollars. Down payments are common, and you can expect to make monthly interest payments with a principal repayable over several years. The equipment itself usually serves to secure the loan.

Term loans for small businesses

If your small business needs a larger sum of money, perhaps to expand or pay off major expenses, a term loan might be a better option. Unlike a line of credit, term loans can provide your small business with an immediate lump sum of money. Depending on the loan and the loan provider, the loan could have a fixed or variable interest rate, and you can expect to make interest payments monthly. A term loan’s principal is usually repayable over several years.

SBA loans for small businesses

A more secure, if more time-consuming, small business loan option is to seek an SBA-backed loan for your small business. These are bank loans backed by the U.S. Small Business Administration (SBA), and they come with several undeniable perks: low interest rates, low down payments, occasionally even financial counseling, and longer repayment plans when compared to many conventional loans from banks. The SBA offers various types of loans, including equipment loans and general small business loans.

Lines of credit for small businesses

Technically, a line of credit isn’t a loan (a loan is a lump sum of money), but lines of credit remain one of the simplest ways for small businesses to manage their cash flow or pay unexpected expenses. With a line of credit, you will typically pay a fee to start your account and an annual renewal fee to keep it going. You can then borrow money from the account as your business needs it, which will give you at least some control over how much you owe and how much interest accrues over time. Interest is usually paid monthly, and you can pay down the principal over a period of years.

Credit cards for small businesses

Like business lines of credit, business credit cards are not technically loans, but they can be a useful substitute when the business either doesn’t need a lump sum of money or can’t otherwise secure a small business loan. As with personal credit cards, business credit cards should be handled with care, but their accessibility and convenience for paying off small, short-term expenses can’t be matched.

Which type of lender is right for you? The section below discusses three of the most common types of lenders that provide small business loans.

Banks

Banks remain the tried-and-true, if cumbersome, method of securing a small business loan. Lines of credit, equipment loans, term loans, and SBA-backed loans are all available, depending on the bank in question, its reputation, and lending power. If your business operates in a single town or region, local community banks may also have a special interest in helping your business meet its goals.

SBA Lenders

As mentioned above, loans guaranteed by the U.S. Small Business Administration have some of the most favorable terms. The catch is that it’s often difficult to secure an SBA-backed loan because of strict eligibility requirements. New businesses, borrowers with low credit scores, borrowers without enough collateral, and borrowers unwilling to personally guarantee the loan are often rejected when applying for SBA-backed small business loans.

Online lenders

Online lenders tend to have less stringent requirements than banks and are much faster at accepting or rejecting a small business loan application. The application process for online business loans also tends to be easier to manage. There is, of course, a flip side. Loans from online lenders often have higher interest rates than those from more traditional lenders, and the relative unfamiliarity of online lenders—unlike famous banks like Wells Fargo and Bank of America—can make it difficult to distinguish the more credible from the less credible lenders.

If your business is already well-established, most lenders will be mainly interested (though not solely interested) in your business’s credit history and credit score, which you can get from one of the three credit reporting agencies: Experian, Dun & Bradstreet, and Equifax. Business credit scores are based mostly on whether or not your business makes timely payments to its creditors, and your business’s score can make or break its ability to secure a small business loan. Be aware, though, that the personal credit histories of an established business’s main owners can still make a big difference in the loan application process.

For new or newer businesses, however, the personal credit scores of the business’s owners are the main way lenders evaluate the risks posed by a potential borrower, so it pays to research your own credit history and credit score in advance of seeking a small business loan. Credit scores of 690-719, for instance, are usually considered “good,” but applicants with credit scores in this range will likely pay higher interest rates than applicants with “excellent” (720-850) credit ratings. In the opposite direction, of course, loan opportunities and interest rates may vary for applicants with a “fair” (630-689) credit rating, and applicants with “poor” or “bad” credit scores of 629 or below may find themselves rejected altogether.

You can get a free copy of your personal credit report once every 12 months at Annual Credit Report.com.

Although the exact requirements may vary from lender to lender, and though traditional lenders (such as banks and credit unions) will usually expect more information and documentation than online lenders, your best bet is to prepare for any eventuality and gather as many of your business documents as you can in advance of seeking a small business loan. In general, you can expect most lenders to closely examine your business’s financial statements, credit score, tax returns, and organizational documents, as well as the financial and legal histories of your business’s principal owners.

What follows is a general list of information and documents many small business loan providers will expect you to produce to complete the application process:

Basic business information

At the least, most potential lenders will want to know your business’s name and any doing-business-as names (DBAs), if applicable, as well as your business’s Federal EIN. The lender will also likely want to know about your business’s legal structure (if it is a corporation, for instance, or an LLC), ownership information, number of employees, and bank account numbers. Be prepared to discuss your business’s background, as well as your personal background and business experience, to paint an overall favorable picture of you and your business as a potential borrower.

Information about the loan & collateral

Every lender will want to know the amount of the loan you want, the type of loan, the requested term of the loan, and if any business or personal assets are available to secure the loan.

Financials, bank statements, tax returns & credit reports

Expect to produce financial statements for the current year and the past several years, as well as projections for the years to come and your business bank statements. Most lenders will also expect to see tax returns for the previous several years and a business credit report from a legitimate reporting agency. Individual owners can also expect to present personal tax returns and personal financial statements.

State business filings 

Many lenders will also want to see your state organizational documents, including formation documents, foreign registrations, and the like. The lender will want to verify your business’s ownership information, executive information, legal structure, and current standing with the state.

The Bottom Line

Ultimately, legitimate lenders approve small business loan applications when giving the loan might actually benefit their bottom line—that is, when you and your business pose a reasonable risk (or at least the kind of risk they like!)—and they reject loan candidates who can’t make a coherent case for the amount of money they need, the type of loan that best fits them, or how they will manage to pay back the loan.

This is why researching your options in advance and doing the necessary due diligence is so important. The more you know about the types of loans available, the types of lenders out there, the documents required, and the standards expected of you and your business, the better chance you’ll have of securing the small business loan you need.