Small business couple with laptop and papers

How To Get a Small-Business Loan

Cathie Ericson8-minute read
April 02, 2022

Whether you’re planning to start a new business or expand one you have, you might need capital to get it off the ground. While some entrepreneurs fund their ventures themselves, there is another way. Getting a small-business loan can let you grow your business without putting your personal or business cash flow at risk. Here’s what you need to know about how to get a small-business loan.

How Do Small-Business Loans Work?

As mentioned, business startups can be funded in many ways. Many business owners use their own funds or they might find an investor. Still others take out a loan, and the good news is that if that sounds like a compelling option, there are lots of different types of loans that can be used, depending on your current financial situation and how you plan to use the funds. Here are some types of loans that might work for you.

Small Business Administration (SBA) Loans

One popular type of funding is through a U.S. Small Business Administration (SBA) loan. Although that’s the name of the loan, most people don’t realize these loans aren’t from the agency themselves. Rather, you would apply at your local bank or preferred lender, which provides the funding, and then the SBA backs the loan to reduce the bank’s risk. If you have a business banking relationship already established, ask them if they provide small-business loans and if you are a good candidate. You also can search your local area to see which lenders provide a lot of SBA loans; they might be a good place to start as they understand the intricacies of the program and how to get a small-business loan.

Secured And Unsecured Loans

There are two key types of conventional loans: secured loans and unsecured loans. A secured loan means that it is backed by collateral of some type (secured by it, so to speak). Most often these loans are for mortgages or cars, where that item – the house or the vehicle – serves as the collateral.  But a security also could be the cash in your bank account or what you have accumulated in investment accounts or life insurance policies. With an unsecured loan, you receive the loan without putting up collateral. These are usually unavailable to those without a solid credit score and may demand a higher interest rate.

Merchant Cash Advances

A merchant cash advance is usually used if you have a short-term need for quick access to cash. Rather than having a lender approve you based on your business model, credit score, and other factors, a merchant cash advance is based on the credit card sales of your business. The MCA provider would take into account the amount of business you typically do, and then front the money, while you pay it back via an agreed-upon percentage of your daily credit card receipts.

Equipment Financing

These loans are specifically used to finance large pieces of equipment you use in your business, whether it’s office or manufacturing machinery that will update or expand your operation. For this type of loan, the lender will check factors such as your credit score and business revenues to arrive at terms including the loan amount and your repayment terms. While in some cases you might need to provide a down payment, typically the equipment itself acts as the collateral.  Another option is equipment leasing, where you’re essentially paying "rent" to use the equipment. This can be a good choice if you aren’t sure whether you’ll be using the equipment for the long term or if it’s something that quickly becomes obsolete, necessitating frequent updates.

Small-Business Line Of Credit

While this isn’t a loan per se, it’s another financing option you might consider. A business line of credit operates like a credit card, where you have a certain amount of funding that’s available for use, but you’re only paying interest on the amount you’re tapping at any given time. This can be a good choice if your needs for cash fluctuate, meaning that you don’t need the full amount of a loan at any given time.

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Steps To Getting A Small-Business Loan

Ready to get a small-business loan? You’ll need to prepare a number of documents in order to give your company the best chance of earning approval.

1. Understand Why You Need The Loan

A lender often wants to know what you’ll be using the loan for before they approve. That’s where a solid business plan comes into play that illustrates the fact that your business will be able to pay back the loan and also shows how the funds will be used. For example, you might need a small-business loan to expand to a new location or to offer a new product or service. Showing your market research will assure the lender that your plan is viable and that their money will be repaid.

2. Choose The Best Loan For Your Business

As cited above, there are different types of loans that might be appropriate for your needs. To find the one that works best for your goals and finances, make sure you understand all the intricacies of each one; for example, the length of the loan, the repayment terms, whether you need a down payment, etc. Remember that you still need to be approved by the lender, who will examine your cash flow and assess your credit history before providing the funds. That’s where your business plan and meticulous record keeping will help boost your viability.

3. Decide On The Best Lender

There are many types of lenders, all of which have pros and cons. Here are three popular options you should explore to determine what’s best for you:

  • Local bank: If you already have an established relationship with a bank, that can be a good place to start as they understand your business and your market. However, they are not the only game in town.
  • Microlender: While microlenders often tap the SBA program mentioned above, often these are nonprofit or mission-focused groups that focus specifically on loaning to potentially underserved groups like women or minorities. Along with the funds, they might offer advice and mentorship. They can be a great option if you’ve been turned down by a traditional bank based on your size or lack of longevity.
  • Online lenders: With less infrastructure, these lenders have lower operating costs which means you might be able to secure better rates, and they also might offer a faster approval. You won’t have the same interaction as you would with a local bank, but that may suit your needs perfectly.

4. Determine Your Eligibility

As mentioned, each lender and loan type has various requirements. Getting a small-business loan with bad credit or for a startup will differ from a small business that’s more established and can show a high credit score, ample cash flow, and an impressive track record. While you won’t know for sure if you’ll be approved until you apply, realizing how your business fits into the general world of lending can help you pinpoint the type of loan and institution where you’re likely to have the most success, ideally saving you time and frustration from pursuing fruitless opportunities. 

5. Apply

Each type of loan and lender will have different requirements for the loan application. It's worth taking the time to assemble a complete package that assures the potential lender that you are professional and committed. While their needs may vary, here are the typical documents you should be prepared to show:

  • Tax documents, both personal and business records, ideally for 3 – 5 years
  • Bank statements that show your income and cash flow
  • Requisite insurance, such as a business license and other qualifications necessary for your industry or your project; for example, proof of a construction permit if applicable
  • Business plan detailing your market and financial projections
  • Proof of collateral, if needed
  • Other documents as your lender requires

6. Celebrate

Hopefully you did adequate research to know what it would take to secure the loan you need. Once you’re approved, you can congratulate yourself – and then get down to business.

Small-Business Loan FAQs

Here are a few more questions you might have about getting a business loan

How Hard Is It to Get a Small-Business Loan?

Just because you need the money doesn’t mean that lenders will be lining up to give it to you. Your success rate will vary based on factors such as your:

  • Credit score and credit history
  • Documented cash flow
  • Solid business plan, including sufficient market research and financial projections that show your business is viable
  • Longevity, as in whether you are a new business that has yet to prove itself

If you’re lacking in any of these areas, it could affect your potential. Often you’ll need to go back to the drawing board and reapply, perhaps considering a different type of lender if you’re unable to work around these issues.

Can I Get a Small-Business Loan With Bad Credit?

If you have a poor credit score, you may be wondering if that will affect getting a business loan. The answer is that you probably still can, but you’ll likely pay more. Just like your interest rate for a mortgage, car loan, or credit card can increase if you don’t have good credit, the same principle will apply to your business loan. Make sure you completely understand the terms before committing.

A better strategy might be to work to improve your credit score and then reapply in hopes that the payments will be more manageable. And of course, as with any purchase, shop around. You might find a microlender or online lender is able to offer more appealing terms than a bank, for example.

What Are Some Alternatives to Small-Business Loans?

Sometimes a conventional loan isn’t possible, in which case you might pursue other options. Here are a few to consider:

  • Personal loans: This might be easier to obtain than a business loan because a lender won’t ask its intended use. This is an especially good option if you have stellar personal credit, which is what they will access to give you your approval and subsequent terms.
  • Business credit cards: Many small business get started using a credit card. To make accounting easier, make sure to keep this separate from your personal credit card. Seek the best terms you can and pay it off in full to avoid incurring exorbitant interest charges.
  • Crowdfunding: Sites such as KickstarterGoFundMe, and Indiegogo promote your business to individuals who can choose to make an investment. Often in return they get an early version of the product or a discount.
  • Business competitions: Many universities and municipalities hold “pitch challenges” where you have the opportunity to present your idea in a “Shark Tank”-like format.
  • Investments from friends and family: This is another common way to seek investment for your business. Only you can decide if the “strings” attached, in terms of their opinions, advice, and judgment, are worth it.

What Can I Do With A Small-Business Loan?

Wondering what types of investments small-business loans typically cover? While you can use it for anything that you deem necessary (assuming that your lender agrees and loans you the funds based on your projected use), here are a few ways that small-business loans are often used:

  • Purchasing inventory
  • Purchasing or updating equipment
  • Investing in marketing
  • Hiring more personnel
  • Expanding your location or product line
  • Refinancing or paying off debts

General expenses needed to operate the business

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Bottom Line

Whether you’re starting or expanding your small business, often you need an infusion of cash to help make your dreams come true. Getting a small-business loan can help you keep your business running smoothly, allowing you to stay afloat in tough times and expand in flush times. Even if you don’t anticipate needing a loan, it’s wise to always run your business as though you might, since you never know what needs might arise. That entails keeping your credit strong and tracking expenses and income to maintain a healthy cash flow that will make your business appealing for a loan.

Want to know more about starting a business? Read more resources on the Rocket HQSM Learning Center that will help you be the best and most successful entrepreneur you can be.

Cathie Ericson

Cathie Ericson writes about personal finance, real estate, small business, education, retail/ecommerce and other topics for a host of brands and websites. Her work has been featured on major media websites, including U.S. News & World Report, Forbes, Business Insider, The Oregonian, Industry Dive, Boston Globe, CNBC, MSN.com, Realtor.com and Yahoo Finance, among many others. Find her @CathieEricson.com.