How to Get a Small Business Loan: Complete Guide [2024 Edition]

A business line of credit works like a credit card: you get a recurring pool of credit which you can tap into whenever you need it.

And, provided you pay back your balance, you can continue to use that line of credit for future needs. This makes a business line of credit the ideal form of funding for a seasonal business.

Learn more about business lines of credit.

Term loans are single lumps of cash set on either a short-term or long-term repayment plan.

Term loans are great when you need a quick bulk of cash to pay for a one-time expense, such as a seasonal material purchase or new hires.

Learn more about term loans.

In addition to the above small business loan options, there are also several useful alternatives whether you’re a startup or established business, each with their own unique benefits.

They are:

Merchant cash advance (or split funding)

A merchant cash advance, or split funding, is a purchase of receivable (by a lender) that’s defined by its repayment terms.

With a MCA, you pay back the loan with a portion of your daily credit card sales. That means if you don’t accept credit cards, you’re not eligible for a MCA.

But the great part about an MCA is that regular payment is a percentage, meaning when business is down your payment goes down with it, making it one of the most flexible types of small business loans.

Learn more about Merchant Cash Advance

Invoice factoring

If you’re in manufacturing or are a restaurateur who need to source ingredients for their restaurant, invoice factoring is a useful option to consider.

Invoice factoring is a loan alternative that allows you to obtain working capital based on vendor invoices. It’s a great way to take care of inventory expenses, especially in anticipation of a busy season, while being able to pay the advance back over time.

In addition to this, the invoice itself is used as collateral, so nothing else is required to put down against the capital borrowed.

Learn more about invoice factoring.

In this section, we’ll review the various criteria which lenders look for when reviewing your application, including:

• Credit and the role it plays in small business loans
• Business performance criteria
• Time in business

Now that you’ve assessed your needs and wants, it’s time to learn what lenders look for in an applicant so you can increase your own chances of being approved for a small business loan.

If all you know is how traditional bank lending works, you’ll be pleasantly surprised to hear that many modern lenders have a fairer and more comprehensive qualification process.

What does that mean? Well, for one, credit isn’t a make-or-break criteria that dashes your hopes of business success. Instead, a collection of criteria factors are taken into consideration when qualifying you for a loan.

First, let’s talk about the role credit plays in the approval process.

Did you know?

Lenders use personal credit to qualify you for funding, not business credit. You can go to annualcreditreport.com to get a free copy of your credit report annually.

First, the bad news: Traditional lenders still hold credit as their primary criteria for approval.

If you have great credit, you’re good to go. But if you don’t have a 660+ credit score (preferably 720+ for favorable options), you’ll have little chance of approval. That’s why you must know what the 4 C’s of Credit are.

However, the good news is that many new alternative lenders– such as Excel Capital– use a more comprehensive approval method that factors in your entire business’ health in addition to credit.

In fact, you can be approved for some small business loan products with bad credit (and many others with fair credit or better).

With that in mind, there are still some things you’re going to want to watch out for that may hurt your chance of approval with lenders:

• Foreclosures
• Tax liens 
• Judgements
• Negative Cash Flow
• And bankruptcy

These factors won’t reject your application, however, they will hurt your chance of approval.

To get a better idea of where you stand, get a copy of your credit report and review it for the items below:

• Closed accounts that still show on your report
• Erroneous accounts or details on accounts
• Accounts or judgments which you weren’t aware of

By reviewing your full report, you’ll likely find several items you can either have fixed, removed, paid off so that when you apply, your credit is in tip-top shape.

As mentioned earlier, newer alternative lenders take several factors into consideration when qualifying you for a small business loan.

In addition to credit, those factors include your:

• Debt-to-income ratio
• Profitability
• Revenue
• Sales
• Cash-on-hand
• Repayment and debt history

Each of these factors is considered differently depending on the lender. However, each is taken into consideration as a “complete picture” to gain a more accurate understanding of your business’ health.

Before applying, it’s important to run your own reports to see how your business looks. You might not be able to wait several months to fix any problems before applying for a loan but you will have a better idea of where you stand.

Time in business is a final factor which is simple but vital.

Most lenders that give out small business loans require a business to be active for two or more years (but some as little as 6 months). If you can’t show that, you won’t even get past the application.

Why is this an important factor for lenders? They want to see that you have a proven source of revenue and they’re not investing in a business which may or may not be around in a year.

If you’ve been around for a minimum of two years, you’ve gotten past the “hump” so to speak and are a considered a business which has proven itself.

Every small business loan program is a bit different. However, most of the documents necessary to apply and be approved are the same no matter what type of loan it is.

Keep in mind that there are two categories of documents when it comes to small business applications:

1. What you need to apply
2. What you need for approval

Most lenders only require a few pieces of critical paperwork to receive an approval. However, they may require additional documents to help qualify your approval amount and finalize the process.

Here are the documents most often required to apply for a small business loan:

• Completed application
• Last 4 months of business bank statements
• Last 4 months of processing statements (if applicable to your business
• Copy of photo identification
• Voided business check

In addition to the above, these documents may be requested to help qualify your business and finalize your approval:

• Proof of ownership
• Business licenses
• Profit & loss statement
• Balance sheet
• Debt schedule
• Property lease agreement and landlord contact information
• Personal and/or business tax returns

It’s important to gather these documents in advance so you’re prepared if and when your lender requests them. By having these documents on-hand you can streamline the approval process and get the funds you need as quickly as possible.

By now, you’re ready to apply for your first (or next) small business loan.

However, once you apply and start receiving offers, you’ll want to know what to look for when you’re reviewing those offers so you know what you’re getting yourself into.

Here are a few things you’ll want to look for when reviewing your small business loan offers:

• Types of small business loans: Note the types of small business loan, or loans, you were approved for and compare it with what we talked about earlier about the different loan types.
• Small business loan fees: Processing small business loans has a cost to each lender and lenders must make sure they’re recouping their cost. The most common fees typically have to do with some aspect of this. Those include:
  • Application fee: This covers the credit check and underwriting charges that lenders incur when processing an application.
  • Origination fee: Similar to an administrative fee, this is what a lender charges to process a loan.
  • Prepayment and late payment fees: Common to any type of credit, prepayment fees may exist on your loan, so be sure before making any early payments. In addition, late fees are to be expected but worth mentioning.
• APR: APR, or annual percentage rate, is the combination of both your loan’s interest rates as well as all fees attached to that loan. This makes APR the single most important piece of information you should be looking for on your offers. Use an APR calculator such as calculatestuff.com/financial/apr-calculator to be sure of what you’re paying.