How to get a business loan and fund your startup’s next move
Every business owner needs to understand how to get a business loan. Borrowing capital is vital for new ventures. It frees up funds for operational improvements, equipment and inventory purchases, and everyday working capital.
Today, small business loans come in many shapes and sizes, and the pool of lenders has also expanded. In addition to traditional banks, there are online lenders, peer funding sites, and small business programs offering competitive credit options to founders.
For new businesses, the struggle to secure business financing is well-documented. Without an understanding of the loan application process—and how to boost your chances of approval—your business could hurt for liquid cash when it needs it most.
Learn how to find the right loan type, assess your qualifications, and put together a strong loan application, plus explore an alternative to the traditional small business loan.
How to get a business loan: 5 steps to take
These steps can prepare you to apply for a small business loan in a timely and organized manner. Keep in mind that this process will vary depending on factors like your business industry, structure, location, and more.
1. Determine the purpose of the loan and the amount you need.
Small business founders lean on short-term and long-term loans for both support and growth. You may be starting up your business or looking to bridge a cash flow shortfall. Perhaps you’re expanding your operations, or seeking a financial safety net for your fledgling business.
To begin, you must explain the purpose—and desired results—of taking out a loan. Whether you're prioritizing an investment in fixed assets, like machinery or real estate, or working capital, you have two numbers you need to calculate.
The first is the minimum amount you need to attain your goals. The second is the absolute maximum you can realistically and reliably repay under reasonable conditions.
This checks off multiple boxes. With hard limits in mind, you're less likely to borrow more than your business can manage or repay. Many new companies can't afford the costs—or reputation damage—of defaulting on an oversized loan early in their launch.
More importantly, financial institutions closely scrutinize the loan amount you request. If you significantly over- or underestimate an adequate amount for your business needs, a lender will reject your application.
For instance, a financial institution likely wouldn't lend $30,000 to a business that has only demonstrated a need to buy basic office furniture for four employees.
Small business loans can range anywhere from $5,000 to $5 million. Once you've determined an appropriate loan amount, you can evaluate the different small business lenders.
2. Compare the different types of business loans and terms.
As mentioned earlier, you can borrow capital from banks, online lenders, microlenders, nonprofits, small community banks, government-backed lenders, and other non-bank institutions.
Generally, it’s easier to get approved by a small bank than a large national bank. In 2019, midsize banks approved 81% of loan applications, while large banks approved just 54% of applications.
But you shouldn't base your decision on lender and loan type solely on the likelihood of approval. To select the best type of loan for your needs, compare the wide variety of loan terms.
Here are the main factors to consider:
- Loan amount
- When funds are disbursed
- Type of interest rate
- Average monthly payment
- Annual percentage rate (APR)
- Total cost of the loan
- Loan fees
- Loan penalties
For example, you may qualify for a higher loan amount with online lenders—even with poor credit—but the lifetime cost will be higher. On the other hand, a government-backed loan typically offers a low APR and longer repayment terms.
Term length matters, too. Long-term bank loans, for instance, often require that you use your business assets as collateral. They may also require monthly payments from your profits or cash flow, but with the benefit of lower interest rates.
5 common small business loan types
- Small business term loans: Versatility is what attracts founders to term loans. It's the most common method of business financing for startups. Typically, term loans are repaid in a year or less and can have fixed or variable interest rates. They can be unsecured or secured, and used for a wide variety of expenses.
- U.S. Small Business Administration (SBA) loans: Banks and other loan programs offer SBA loans as high as $5 million. A significant benefit is that the SBA guarantees a portion of the loan, leading to more favorable interest rates and repayment terms. That said, the loan eligibility requirements are relatively strict, and the approval process can take up to 90 days.
- Microloans: A microloan is typically a loan for $50,000 or less. Most large commercial banks aren't willing to loan such small amounts, especially to companies less than two years old. Microloans are typically provided through nonprofits and tailored small business loan programs.
- Equipment financing: An equipment loan is one of the most accessible loan types. It's secured by the equipment itself—including software, machinery, vehicles, and more—and provided directly by equipment sellers, banks, and other financial institutions.
- Small business lines of credit: With a business line of credit, funds are capped at a predetermined amount, and you can tap into them as needed. The full limit restores once you repay the borrowed amount, and interest only accrues on the amount you use. Available capital can range from $10,000 to $1 million, and repayment terms range from six months to five years. It's important to note that credit score is a critical factor for approval.
The goal of a startup business loan is to give your business a leg up, not create an unnecessary burden. You’ll have to strike a balance between the immediacy of receiving funds and securing repayment terms that work out in the long run.
3. Improve your chances of qualifying.
The most common reasons for denying a loan are a borrower’s financials, collateral quality, and credit history. That's why learning how to get a business loan includes knowing how lenders assess your creditworthiness.
Let’s use the “5 C's of credit” to understand the baseline qualifications that loan officers use to approve your application:
- Character: Your personal and business credibility, derived from professional reputation, work experience, credit history, and financial relationships.
- Capacity: Your ability to handle loan repayments based on your business financials, projections, and goals.
- Capital: The amount of money invested by the business owner(s) into the business, from startup costs to fixed assets.
- Conditions: The risks of lending to you when considering the stability of your business, economic trends, the state of your industry, and more.
- Collateral: The assets that can be used as collateral in case you default on the loan, from accounts receivable and working capital to your business inventory.
A lender wants to minimize risk. Your mission is to prove that a loan will be a stepping stone rather than a crutch. If you demonstrate effective financial management in the following ways, you have a much better chance of being approved.
Your personal and business credit scores
Financial institutions will weigh both your personal credit score and your business credit score when considering your application.
It's a good idea to pull both credit reports from the respective credit bureaus to review your scores and payment history. This is a pivotal opportunity to rectify any mistakes you hadn't noticed before.
If you have bad credit—or it could simply be stronger—consider these methods for improving your business credit score before applying for a loan. There are many accessible ways to build business credit, like opening a business credit card.
A good credit score isn't the only criterion. A history of making on-time payments on credit cards, personal loans, and even supplier invoices plays a role.
Many lenders require you to agree to a personal guarantee on the loan. If your business can’t make repayments, the lender has the right to seize your personal assets. Founders who choose Brex don’t have to worry. There’s no personal liability requirement, so you can secure capital without risking your personal credit score or property.
Your business plan
To receive a loan from just about any lender, you will need to supply a solid and strategic business plan. The SBA offers a convenient guide to creating a traditional business plan.
At a minimum, include the following:
- Executive summary
- Company description
- Market analysis
- Industry outlook
- Marketing and sales strategy
- Employees’ experience and skills
- Statement of collateral
- Research and development
- Financial projections
- Funding requirements
Don’t leave potential lenders searching for facts or compelling evidence that your business is creditworthy.
Your available collateral
Most new businesses have to secure a loan using collateral, such as equipment, real estate, or inventory. It's considered one of the primary determining factors in a loan approval. If your business fails, lenders want to know they have assets they can lien or liquidate to recoup their losses.
If you have no collateral, you may need to use personal assets instead, or look for an unsecured loan, which tends to have higher interest rates and origination fees.
Many traditional lenders won't accept personal assets for business loans. In this case, consider the alternative lenders and other credit options mentioned in this article.
4. Gather your personal and business documents.
This is one of the most tedious aspects of the loan application process, but it's easier if you're already practicing proper business accounting.
The documentation you need depends on the lender, as well as your time in business and annual revenue. Be prepared to provide the following:
- Business plan
- Organizational documents
- Business financial statements (profit and loss statement, balance sheet, cash flow statement, etc.)
- Business income tax returns (past three years)
- Business credit report
- Business bank statements
- Business licenses and permits
- Copies of insurance policies
- Building lease(s)
- Product photos
- Personal credit report
- Personal bank statements
- Personal income tax returns (past three years)
- Job history
- Letters of reference
- Business or personal loan application history
Any missing or incomplete information can considerably delay time to approval, so get a second pair of eyes. Consider contracting an accountant or another financial professional to review your supporting materials for accuracy.
5. Apply for your small business loan.
You've searched for the best business terms, built out your formal business plan, reviewed your credit scores, and collected your preliminary documentation. Now, it's time to fill out a loan application.
You can do so in person or online, depending on which lender and loan type you’ve determined is best for your business needs.
Be prepared to answer specific questions about your business plan and vision, and what makes you qualified to run a successful operation. You should also be ready to break down your finances to date.
Having an accountant look over your application package will help you anticipate any problems a potential lender might raise.
It can take several weeks to a few months to receive your approval. In the meantime, monitor your credit score and other business vitals.
Finally, keep in mind that you don't have to put all your capital eggs in one basket. If you're concerned about approval, you can send out multiple applications within a couple of weeks without negatively affecting your personal credit score.
How a business credit card could be the better alternative
Now that you know more about how to get a business loan, let’s talk about a financing option for businesses that are off the ground and growing: the Brex corporate card for startups.
If you’re approved, here a few ways Brex could benefit your business:
- Builds credit history automatically with on-time payment reports to Dun & Bradstreet and Experian, the two major business credit bureaus
- Spending limit is typically 10–20x higher than competing cards and it’s reviewed regularly
- Fast approval for qualifying businesses, so cardholders can start making purchases instantly
The pursuit of small business capital
Over the lifetime of your business, you're going to need periodic influxes of cash. Perhaps you’ll need to cover payroll for a couple months or free up money to conduct product research. A small business loan remains one of the most direct ways to secure necessary funding if you can qualify.
When you’re applying for a loan, preparation is vital. Calculate what you need, and stand by it—what matters most is your ability to make payments on time, every time. Compare loan types and repayment terms. Consider working with small local banks when possible for the best chances of approval.
If you handle the application process correctly, you'll do more than secure a loan. You'll launch a high-yielding financial relationship.