Getting a business loan in 2020 is no mean feat. Between the global pandemic and the ensuing economic slowdown, lenders of all stripes are worried about protecting their cash and keeping loans out of default. At the same time, millions of American businesses are struggling for the same reasons that are giving lenders pause, so millions are seeking funds at the same time lenders are clamping down.
With so much being asked of lenders, creditors are understandably worried about vetting potential borrowers in light of today's economic climate, so it can be tough to get credit. If you want to secure financing, it's critical to understand the requirements to get a small business loan before you ever apply.
Requirements by loan type
| Loan type | Biggest hurdle to qualifying |
| Term loan | Time in business |
| SBA loan | Application process |
| Business line of credit | Generating sufficient free cash flow |
| Commercial property loan | Building reliable business income |
If you need financing for your small business, there are several different types of loans to choose from, and each has its own terms and requirements. Commercial mortgages, for example, usually have lower interest rates than lines of credit, but they also usually require a higher credit score. SBA loans are easier to qualify for than bank loans but have more substantial documentation requirements than most other forms of financing.
Besides, SBA loans are not supposed to be any borrower's first option. Applicants for SBA financing are supposed to have tried to get financing elsewhere first and been denied – so keep that in mind when deciding which loan is right for you.
Although requirements vary by loan type, you probably won't qualify for any type of business financing unless you meet certain minimum criteria. These include having a credit score of 600 or higher (640 for SBA loans) and a minimum debt-service coverage ratio of at least 1.15 to 1.3 – meaning that you should have at least 15% to 30% more free cash flow than what your loan payments will cost you every month. Online lenders like Rapid Finance might offer more flexible terms than conventional lenders, like banks or credit unions. [Read our full review of Rapid Finance for business lending.]
5 steps to qualify for a small business loan
In order to get a loan, small business owners have to follow a set process. When they apply for financing, borrowers have to supply a lot of information about themselves and their businesses so that lenders can assess their risk and creditworthiness.
Failure to take the right steps can damage business owners' credit and lower their chances of securing financing. So, if you want to get a loan, be sure to follow these steps.
1. Do your research.
Before you apply for a small business loan, it's important to research and understand the various types of loans available. You need to know the requirements for the types of loan that may work for you, as well as repayment options and what types of documentation will be required for approval.
2. Pick a loan.
Once you have considered various loans that may be suitable for your small business, decide which ones may work for you based on your business needs and desired repayment terms, as well as which ones you may be eligible for.
When deciding on a type of financing, be sure to consider loans with realistic rates and terms relative to your credit score and income – not with the best possible terms lenders advertise, which you may not qualify for.
3. Pick a lender.
After you know what kind of loan you want, you need to find someone to give you the loan. If you have an existing relationship with a bank or other lender, it's usually a good idea to look there first. If you don't already have a relationship with a lender, try to find one that specializes in the type of financing you want and offers repayment terms that will work for you.
4. Assess yourself.
When you've decided what type of loan you want and which lender you want to use, there's one last step before you apply – and that is to evaluate yourself as a borrower. Check your credit using Credit Karma or another tool, and examine your own financials to ensure that you have the credit score to qualify and can afford your payments.
When you check your finances, ensure that your income and expenses can be documented. If you can't document certain parts of your income, your lender may not be able to consider that income as part of your loan application.
Once you assess your credit and your finances, ask yourself whether you would approve your loan if you were a lender. If the answer is no, take steps to improve your credit for your finances before moving forward with a loan.
5. Apply for a loan.
Now that you've decided on a lender and evaluated your chances of being approved for financing, you need to file an application. This process varies from lender to lender but is usually pretty straightforward, involving several pages of paperwork.
You should be aware that your application for financing will require the lender to file for a credit check, which will affect your credit score. That's why it's important not to apply until you're ready, and to know what your lender will find when they review your application.
Also, when you apply for financing is when you can start incurring costs. As lenders have to run credit checks or assess the value of assets that you're borrowing against, you may start being charged fees. If you have to pause your application and start it again later, you may have to pay those fees twice.
6. Follow up.
Even after you apply for financing, your work may not be done. More often than not, you'll need to follow up with your lender to provide additional documentation or explain specific items related to your income, expenses, or credit score.
If all goes well, you'll get approved and close on your loan. If you want to get approved for another loan in the future, you'll need to comply with the terms of the loan, making payments in full and on time. You'll either need to pay off your loan on schedule or, if your loan isn't fully amortized, start looking for a new loan to refinance the balloon payment at least four to six months before your balloon payment is due.
Other financing options
If you need a loan for your small business, four of the most common options are bank term loans, SBA loans, business lines of credit and commercial mortgages. However, those options don't work for everyone. If you have poor credit or haven't been in business long, you may need to find another way to finance your business.
If you need more options, there are three main alternative types of small business financing.
- Factoring: If your business regularly invoices clients and you want to get your money faster to grow your business, factoring may be a great option for you. With factoring, you can essentially sell your outstanding invoices (for qualifying clients) to get your money faster, and the factoring company takes responsibility for collecting payment from your client.
- Business credit cards: Small business credit cards work just like personal credit cards – in fact, they're usually based on a business owner's personal credit. These cards can offer long 0% introductory periods and helpful rewards for businesses that need to finance routine purchases.
- Personal loan for business: If your business doesn't have established credit or several years of revenue history, you may be able to get a loan based solely on the strength of your personal finances. With a personal loan, you can get financing without a lender having to consider your business finances. You'll need to sign a personal guarantee, but you would probably need to provide one with a business loan anyway.
Small business loan approval tips
With the economy still struggling in the aftermath of COVID-19 closures, millions of small businesses need financing to survive the slowdown. If you've found yourself in this situation, it's important to maximize your chances of getting the money you need.
Follow these tips to give yourself the best odds of approval.
1. Leverage your relationships.
When you start looking at loan options, don't be afraid to contact people you know personally at banks or other lending institutions. Working with someone you know won't guarantee that you get approved, but it can make the application process easier – and it helps to have someone who can vouch for your character when the lender is considering your application.
2. Optimize your personal credit.
When you check your credit before you apply for a loan, you'll probably find some negative items on your credit report. Whether it's outstanding credit card balances, a high credit utilization rate, or old credit accounts that have been closed but are still listed on your report, do what you can to improve those items. Your lender is eventually going to pull your credit, so it's best to address these issues yourself beforehand.
3. Come prepared.
When you're getting ready to apply for a loan, it's a good idea to gather all of your documents first. Your lender is going to ask for them anyway, and getting everything together before you apply will help your lender make faster progress on your application. It will also reduce the number of gaps or items that you need to clarify later.
These are some items to have ready before you apply:
- Two years of tax returns
- Your business balance sheet and profit-and-loss statement
- Business operating agreements
- Identifying and tax documentation for anyone who owns 20% or more of your business
4. Don't procrastinate.
Applying for a loan takes some time. Even after you get approved, you won't necessarily get your money right away, so don't wait until you need the money to apply.
If your lender asks for something to help complete your application, be sure to get it to them quickly. Lenders are usually trying to process many applications at the same time, and each time they have to wait for things from you, your application moves down in their pile.
5. Know your options.
The last piece of advice we have for borrowers is surprisingly simple, but it's one that business owners often fail to consider: Know what type of loan will work for you before you ask. Applying for the wrong type of loan can mean you get denied for financing and have to start the process over with a different loan type. This can hurt your credit or even lead to your business closing for want of money.