How to Get a Small Business Loan: The Ultimate Guide

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Last updated on March 11th, 2019 at 05:54 am

If owning a small business isn’t demanding enough, getting a loan to help start or grow your business can add to the stress.

Obtaining outside finances can sometimes mean the life or death of your business, so you need to secure the right type of funding.

When looking into a small business loan, you need to consider and compare your options and what you need to qualify.

This guide will take you step-by-step and show you how to obtain the best loan for your business along with sources to help you apply.

How to Get a Small Business Loan: The Ultimate GuideDon’t want to wait too long? If you’ve been in business for at least 1 year, make $2,500 every month, and your credit score is 550 or higher.

You meet the minimum requirements to qualify for a loan up to $100,000 from Kabbage.

Their online application only takes a few minutes to fill out.

Visit Kabbage

Below is a quick look at the six types of loan financing options. We reviewed each category like usage of funds, amount you may borrow, minimum FICO score, time to get the funds.The required time in business, if collateral is necessary, the time to repay the loan, and where you can apply for each type.

How to Get a Small Business Loan: Top 5 Factors

There are five primary determinants that will help you pick the best loan for your small business:

  1. Time in business

Are you looking for startup capital or growth funding? Your time in business can affect your likelihood of getting a bank loan, but there are other options to consider.

Generally, it is harder to obtain financing as a startup because you have yet to prove profitability. Thus, startup founders often use personal assets or alternative funding methods.

Established, profitable businesses are better candidates for SBA or bank loans, which are the cheapest forms of business funding.

  1. Personal credit score

Nearly all loan types require a good credit score. It is much easier to qualify for bank loans with a personal credit score above 680.

Borrowers with lower credit must seek alternative options, which can be costly. While personal credit of the borrower is important, business credit also helps to qualify for low-rate financing.

You should check your credit score before attempting to get a loan to avoid any unwarranted surprises; try Nav for a personal and business credit report and 24/7 monitoring.

  1. Business cash flow

Have your business revenues available from the last two to three years and provide your Debt Service Coverage Ratio (DSCR). The DSCR is your debt relative to your income, and banks like to see a DSCR of 1.25 or higher.

All businesses, new and established, should come with projections for the upcoming years based on previous and expected performance. This demonstrates to banks and lenders that you will be good on paying back your loan.

  1. Collateral

When you take out a loan, lenders often ask for collateral in case of a default. The more collateral you have—such as equipment, real estate, and other assets—the more likely you will be accepted for a loan.

Alternative lenders often don’t take collateral but may place a lien on business assets, which enables them to take said asset if you do not pay back the loan.

Most loans also require a personal guarantee, which is a promise to pay out of your own pocket if the business cannot pay.

Before you look into getting a small business loan, understand your financials: what are your annual gross revenues?

what are your annual net profits? what goods and materials does the business have as collateral for the loan?

  1. Speed

When do you need the loan? If you can afford to wait and don’t mind the paperwork, bank loans are the cheapest solution.

An SBA loan can take up to several months, though. If you need the funding quickly, you may want to seek an alternative lender.

As always in business, speed and convenience comes at a higher price.

Generally, you want the cheapest and most secure option. The best way to get this is to prove you are a dependable business and borrower.

The older your business, the higher your credit score, and the more revenues, profits, and collateral you have equate to an easier qualification and a lower interest rate.

Below we will discuss the loan options in depth. You will learn what each type is, what it is good for, the qualification criteria, and links to help you apply.

Bank and SBA Loans

SBA 7(a) Loans

A 7(a) loan is the cheapest way to get business capital, and you can borrow between $5k and $5 million.

These loans are backed by the U.S. Small Business Administration (SBA) but are made through a partner bank or lender.

They are often the first choice when looking for small business funding.We recommend SmartBiz for SBA loans. They may be able to get you an SBA loan in just 1 month.

To qualify for an SBA (a) for an existing business:

  • In business at least 2 years
  • Minimum personal credit score 680 (check your score here)
  • Potential down payment, especially for real estate purposes
  • Must personally guarantee the loan, sometimes with collateral
  • Must provide business plan and financial data
  • Must be a profitable business
Pros Cons
Inexpensive with 6 to 9% APR High minimum credit score
High $ amount available Slow process with significant paperwork
Long terms (10 years)

= lower monthly payments

All loans subject to packaging and closing costs; loan of $150k+ must also pay a guaranty fee

Visit SmartBiz

Standard Bank Loans

If your bank doesn’t offer SBA loans or you need a quicker turnaround of funds, you could consider a standard bank loan.

To qualify for a standard bank loan:

  • In business at least 2 years
  • Minimum personal credit score 600
  • Must personally guarantee loan
  • Must provide business plan and financials
Pros Cons
Inexpensive with 9 to 15% APR High minimum credit score
High $ amount available (no upper limit) Slow process—but quicker than SBA
Long terms (5-10 years)
= lower monthly payments
Need down payment and collateral
Must pay closing costs and other fees
Visit SmartBiz

Commercial Real Estate Loans

commercial real estate loansBuying commercial real estate or structures is a large capital expenditure.

Thus, not all loan types will work to get you the financing options that you need.

The best loans specific to buying business real estate are the SBA504 or a commercial real estate loan.

To qualify for a commercial real estate loan:

  • Minimum personal credit score 680 (do you meet the minimum?)
  • 10-30% down payment
  • Must personally guarantee loan
  • Must provide business plan and financials

For property that will be producing income, such as a rental space, the tenants must also be creditworthy.

If it is an owner-occupied property, such as a business complex, SBA 504 loans require that the owner occupy 51% of the property for productive business purposes.

Pros Cons
Inexpensive with 5 to 15% APR High minimum credit score
High $ amount available Paperwork and investigation into the property and applicable parties
Long terms [10-20 years)
= lower monthly payments
Down payment required
Must pay appraisal, closing, and other fees

Consult SmartBiz for a commercial real estate or long-term SBA 7(a) loan to get your business the funds it needs.

Financing Alternatives

Since bank options typically require a minimum number of years in business and a higher credit score, there are lending alternatives for newer businesses and borrowers with lower credit.

These can help you get the money you need without hurting your business or personal assets. Options include: credit cards, Peer2Business loans, short-term loans, invoice factoring, and merchant cash advances.

Credit Cards

credit cardsCredit cards can be a convenient and inexpensive solution for capital, especially at the start of the business.

Some services even help you combine several cards into a single business line of credit. The best part?

No collateral or down payment, and it can help you boost your credit for future loans.

To qualify for a credit card (although cards vary):

  • Minimum personal credit 600 (check your score here)
  • Provide EIN (Employer ID Numbers) or documentation to verify business
  • Must personally guarantee repayment
Pros Cons
Moderately inexpensive with 8 to 24% APR
(many cards offer 0% APR during promotional periods on purchases and balance transfers)
Interest and costs build if you do not pay off your balance each month
Fast and convenient to obtain a credit card Available funds controlled by credit limit
Rewards or cash back for purchases Some have annual fee
Building business credit Too many cards can hurt personal business credit
Credit Cards for Small Business

Peer2Business Loans

unsecured-businessPeer2Business connects individual borrowers and investors with small business owners on an online platform. Loans can be up to $500k.

To qualify for Peer2Business:

  • Minimum personal credit 650
  • In business at least 2 years
  • Annual business revenue above $75k
Pros Cons
Moderately inexpensive with 5 to 30% APR High minimum credit score
Fast funding (1 to 2 weeks) Revenue minimum

Apply for a Peer2Business loan with Funding Circle.

Short-Term Loans

short term loansA short-term loan is from a non-bank lender, and it is a good option for borrowers with lower credit scores or those that need fast financing.

These loans are usually paid back within 3-24 months and can be up to $250k.

To qualify for a short-term loan:

  • Minimum credit above 500 (check your score with Nav)
  • In business at least 1 year
  • Monthly business revenues above $2,500
Pros Cons
Fast funding (1 to 3 days) More expensive than other funding sources with 40 to 80% APR
Online applications Can be hard to get a second business loan if necessary
No collateral required
Some lenders offer lines of credit, so you can continue to borrow as you pay off

If your business makes more than $100k revenue annually, apply for a short-term loan with OnDeck.

If your business makes at least $50k in revenue annually, apply with Kabbage.

Invoice Factoring

invoice factoringIf your business runs on invoices, you can convert unpaid invoices into working capital through invoice factoring.

The best invoice factors do not contact your clients and they offer fair pricing with no minimums or long-term contracts.

To qualify for invoice factors:

  • 3-6 months of invoice history
  • Invoices due in less than 3 months
  • Creditworthy clients
  • Sometimes minimum credit score of 530
  • Some lenders require use of bookkeeping software, like QuickBooks or Wave
Pros Cons
Fast funding (1 to 3 days) More expensive than other funding sources with 30 to 60% APR
Stabilizes cash flow by having available capital while waiting for client payment Amount of funding is limited by value of invoices, with a max of $100k
Funding works like line of credit, so you can continue to borrow as you pay off
Discretion so payment remains in business’ name

If you need more than $25k in invoice capital, work with BlueVine.

If you need less than $25k, Fundbox helps put your cash flow in control.

Merchant Cash Advances

cash advanceAlthough the more expensive option, merchant cash advances are useful for businesses with a large volume of credit card sales (and have not been able to obtain other funding).

If you use PayPal or Square to accept credit card payments, these companies offer lower cost merchant cash advances than others.

To qualify for merchant cash advances:

  • Large volume of credit card payments
  • Sometimes minimum credit of 500
  • Often must use specific credit card processor
Pros Cons
Fast funding (1 to 5 days) Very expensive with 80-100% APR
Convenient payment (it comes directly out of your daily credit card sales)
Less costly options for Square and PayPal
Often no personal guarantee required

CanCapital offers up to $150k in working capital.

Personal Means of Capital

If you are unable to qualify for a business loan from the above options, you can look into your personal assets to find other financing sources.

home equityHome Equity

You can get a line of credit as secured through your home, which is an inexpensive option for homeowners.

However, if you default on the loan, you could lose your house.

To qualify for a loan through your home equity:

  • 20-30% of mortgage must be paid off
  • Minimum credit score above 650 (check here)
  • History of on-time mortgage payments and no foreclosures
  • Debt-to-income ratio no higher than 40-45%
Pros Cons
Inexpensive Home can be foreclosed if defaulted
No business collateral necessary Fees and prepayment penalties

Retirement Funds

retirement fundsYou can use your retirement funds as an investment in your business using Rollover for Business Startups (ROBS).

ROBS allows you to use your retirement account as financing for your business without income taxes or early withdrawal penalties.

This is an inexpensive option since you are using your saved money and not repaying a loan; however, it is risky because you would lose your retirement funds if the business fails.

We recommend Guidant Financial to learn more about using your retirement assets for your small business.

To qualify for ROBS:

  • Eligible retirement account, like a 401(k) or traditional IRA
  • $50k in retirement account that you are willing to invest
Pros Cons
No debt or interest ROBS fees must be paid at inception and annually
Retirement savings will grow if business does well Could lose retirement savings if business fails
ROBS fees not high
Visit Guidant Finacial

Family and Friends

You can borrow money from those close to you as a convenient and inexpensive solution. To avoid unpleasantries, get the arrangement in writing and treat their loan as you would treat one from a bank.

The only qualification is to find the right friend or family member to partner with you. Ensure that you are borrowing from someone you trust and who has secure finances themselves.

Pros Cons
Inexpensive If business fails, could create tension with family and friends
Built-in support system Investors have right to some control in business, so you may receive unsolicited advice

Peer2Peer Consumer Loan

peer to peer loanPeer2Peer loans are similar to a Peer2Business loan as mentioned earlier, with the added bonus of the flexibility.

These are personal loans from an investor to an individual that do not necessarily have to be used for the business.

Check out the Lending Club to find personal loans with great rates.

To qualify for a Peer2Peer loan:

    • Good credit score (check yours here)
    • US resident over 18 years with U.S. bank account
Pros Cons
Low interest rates at 5 to 30% Need good credit
No restrictions on usage of loan Small amounts of financing (less than $35k)
Go to Lending Club


How to Get a Small Business Loan: The Ultimate GuideIf you need financing for a startup, you could consider a crowdfunding platform like Kickstarter.

This gives you funding from individual backers in exchange for a small gift or reward to your donor, such as a product or service from your business.

You may even offer equity as a method of gaining larger donations.

To qualify for a crowdfunding campaign:

  • 18 years of age or older
  • Citizen of the country in which you are crowdfunding
  • An address, bank account, and government-issued ID from that country
  • Major credit or debit card
Pros Cons
No debt or interest because it is not a loan Many platforms are all-or-nothing, so you need to reach your funding goal or you receive no money
Support of backers gives you marketing and motivation

Our Final Take on How to Get a Small Business Loan

If you are looking for inventory funds, Kickfurther is a great crowdfunding platform for micro-retail.

Ultimately, there is a wide range of financing options for small businesses. Before looking into any, determine where your business stands and what it needs.

How do you fit into the “five factors”? Which options correlate best to your business’ situation? Compare the qualifications, pros, and cons of each loan type listed above.

Remember that there are many financing options, so you will undoubtedly find the right one for your small business to get you going and growing.




























The WiseSmallBusiness Team is full of industry experts and successful business owners  willing to contribute important business articles.

1 Comment

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