How To Get a Small Business Loan: Requirements, Types & Application Guide

Getting a small business loan starts with two things. You need to know the lender’s business loan requirements, and you need to pick the right loan for your business. This guide covers common loan types and what each one requires. It also lists the documents you’ll need and walks you through how to apply for a business loan, step by step.

Types of Small Business Loans

The first step is figuring out which type of loan matches your company’s needs. In general, you can choose between loans backed by the Small Business Administration (SBA), term loans, business lines of credit, equipment financing, invoice financing, and merchant cash advances.

SBA Loans (7(a), 504, and Microloans)

SBA loans are partially guaranteed by the government. Because this guarantee reduces the risk involved in offering them, lenders will often provide these loans with lower rates and longer terms than comparable loans that aren’t backed by the SBA. The most common options offered by the SBA are 7(a) loans, 504 loans, and microloans.

• 7(a) Loans: SBA 7(a) loans are the most common loan type offered by the SBA. They can be used for working capital, funding real estate purchases, refinancing business debt, buying furniture or supplies, installing equipment, or improving real estate. The maximum businesses can borrow through 7(a) loans is $5 million.
• 504 Loans: For 504 loans, the maximum is $5.5 million. While 504 loans cannot be used for working capital, you can use them for buying or renovating properties, consolidating qualified debt, or purchasing long-term machinery or equipment. These loans are specifically available through Certified Development Companies (CDCs).
• Microloans: An SBA microloan can provide up to $50,000. These loans are available for small businesses, startups, and certain nonprofit childcare centers that meet the SBA’s eligibility requirements. They can be used for working capital, machinery, equipment, furniture, fixtures, inventory, and supplies.

Term Loans

With a term loan, you receive a lump sum that is then repaid over a fixed term. Typically, they are used to fund business expansions, renovations, inventory purchases, or large, one-time investments. You can access these loans through banks, credit unions, and online lenders. The interest rates, terms, and eligibility requirements will vary between lenders.

Business Lines of Credit

With a business line of credit, you can pull money from your line of credit into your business’s checking account. It provides flexible, revolving access to funds when you need it, such as for buying inventory, covering seasonal expenses, or bridging a short-term cash gap. It’s best suited for ongoing cash flow needs rather than a single large purchase. 

Equipment Financing

With equipment financing, the actual equipment serves as the collateral. This often makes meeting the business loan requirements easier than for unsecured loans or lines of credit. You can use this type of loan to purchase vehicles, computers, equipment, and machinery.

Invoice Financing and Merchant Cash Advances

Invoice financing and merchant cash advances involve accessing funds in exchange for future cash flow, but there are a few key differences between the two funding types. With a merchant cash advance, the business receives money upfront and repays it using a percentage of future card sales or revenue. This option can work for companies with steady revenue that can’t access traditional financing because of a thin credit history. Because it’s an advance on future revenue, it is technically not a loan. Meanwhile, invoice financing is where the business borrows against outstanding customer invoices. For businesses that receive delayed payment, this type of financing is useful for easing cash flow crunches. 

Although these options are useful for businesses that have cash flow issues or minimal credit histories, their relatively high fees and factor rates can quickly add up. Because of this, businesses should carefully consider the total borrowing costs and available alternatives before making a decision.

General Requirements Lenders Look For

What do you need to qualify for a business loan? Lenders will generally want to see your business credit score, time in business, and annual revenue. If your business lacks a credit score or has a short credit history, they will likely want to see the owner’s personal credit score as well. Because your financial history reflects your risk level, lenders will also evaluate your company’s existing debt, cash flow, and debt-service coverage ratio.

These requirements will vary significantly between lender types. While traditional banks are the strictest, SBA-backed lenders and credit unions tend to be more flexible. Meanwhile, online lenders are the fastest to work with, but they also tend to be the costliest.

Documents You'll Need To Apply

If you’re wondering, “What do I need for a business loan?”, there are a few common documents that are typically expected. However, the requirements for a business loan can vary based on the lender, borrower, or loan type, so it’s important to always check in advance. The following are some of the most frequently requested documents.

• Personal and business tax returns
• Profit and loss (P&L) statements
• Balance sheets
• Cash flow statements
• Bank statements
• Business plan
• Articles of incorporation or articles of organization
• Employer identification number (EIN)
• Ownership information
• Business license
• Certificate of good standing (if required by the lender)

When you apply for a business loan, you will generally be expected to provide two to three years’ worth of financial statements.. By organizing these records in advance, you can make your application process as simple and efficient as possible.

Why Lenders Ask for a Certificate of Good Standing

A certificate of good standing is a commonly requested document for business loans.. Lenders require this document because it confirms that your business is properly registered with the state and current on its state filings. You’ll often be expected to provide this document to SBA-backed and traditional lenders.

Over the years, it’s easy to forget about paying a fee or filing a business document. If there is a lapsed annual report or unpaid state fee, you may lose your good standing and be unable to get a certificate of good standing. In turn, this can slow down or stop the approval of a loan you’ve already applied for.

How To Check Your Entity Status Before Applying

To avoid any complications, it’s a good idea to confirm your entity’s status before you request an official certificate of good standing. It takes time to receive a certificate of good standing and generally requires a fee, so you can save time and money by verifying your status first. 

One way to see if your entity’s status is current is by using EntityCheck’s Secretary of State (SOS) Business Search. This tool is a fast way to check your business’s state registration and standing before you apply for a loan. If there is a lapsed filing or other status issue, you can fix it and prevent mid-application delays. 

Step-by-Step: How To Apply for a Small Business Loan

While each business and lender is different, there are a few steps you can normally expect to go through when you apply for a small business loan. 

• Determine how much funding you will need and why. 
• Check your personal and business credit scores in advance. 
• Gather your documentation using the list above, including two to three years of financial statements.
• Compare different lenders and loan types. Consider whether you are eligible for an SBA-backed loan.
• Fill out and submit your loan application.
• Respond quickly to any follow-up requests you receive during the underwriting process.

Frequently Asked Questions

What credit score do I need to qualify for a small business loan?

It depends on the loan type and the lender. Banks and credit unions generally expect a 670 credit score or higher. Lenders may accept lower credit scores with an SBA-backed loan. The presence of collateral, your company’s revenue, the industry you work in, and your business’s financial history are also considerations that can determine whether you get a loan.

How long does it take to get approved for an SBA loan?

The timeline for getting approved for an SBA loan depends on the type. It can take between 30 and 90 days for the entire SBA loan approval and funding. 

To complete just the 7(a) loan’s initial application process, it generally takes between one and five days. In comparison, SBA 7(a) Express loan applications can often be processed in 36 hours or less. However, both of these estimates are only the time it takes the SBA to process it and not the time spent by the lender on processing the application, underwriting the loan application, completing closing documents, and funding the loan.

What's the difference between a term loan and a line of credit?

A term loan is for a fixed amount with regular interest and principal payments over the course of the loan term.

A line of credit is not for a fixed amount. Your line of credit will have a maximum limit that you can transfer to your bank account when you need it. Lines of credit are often used to fund unexpected expenses, such as sudden equipment failure or a cash flow issue. There is no set payment until money is borrowed. Because lines of credit often have variable rates and extra fees, term loans are usually the better fit for planned purchases.

Do startups qualify for small business loans?

Yes, they do. The type of loan, the interest rate, and the term length available will vary based on the lender. Some loan programs, like SBA microloans, are expressly designed for startups. With traditional lenders, a lack of credit and operating history can frequently be an issue. In these cases, the lender may create additional business loan requirements, such as asking for a personal guarantee, requiring collateral, or reviewing other factors that affect the company’s creditworthiness.

What is a certificate of good standing, and do I need one to apply?

A certificate of good standing is proof that your business is registered and meets the state’s requirements to maintain its active status. Whether you need a certificate of good standing to apply will depend on the lender and loan program, but many lenders, including SBA lenders, ask for one. Because not having this document can hold up your loan application, it’s important to check your business’s status and standing before you apply.

How can I check my business's registration status before applying for a loan?

You can generally verify your status by going to the SOS or the comparable entity in your state. To find your business, you must search your business’s name, keyword, or other identifier in your state’s database.

EntityCheck’s SOS Business Search can also help you check your company’s standing before you apply for financing. Through a quick search, you can check your registration status, and standing.