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How to Get a Small Business Loan (+ What to Know Before Applying)

When is a small business loan right for your business?

Despite the enduring romance of the rags-to-riches success story, many entrepreneurs have at least some help when building their startup. 

Ambition and grit are essential, but unfortunately, these entrepreneurial traits don’t guarantee the immediate cash flow a business may need. What you should consider is some vital initial financing to get new businesses off the ground: business loans.

Business loans are among the most common forms of financing available to founders looking to start a business or support business needs. But the choice of whether to apply for a business loan is a major decision for every business owner, and not one to be taken lightly. 

This post will examine the many factors that go into deciding whether applying for a business loan is right for you and your business, and take you through the steps of acquiring a loan. 

Why should you get a business loan?

Sometimes you need more than grit and elbow grease to achieve your business goals. You also need money. Business loans are a common way for small business owners to fund their operations when lacking cash flow. 

In fact, the US Small Business Administration (SBA) reports that over 61,000 loans were given out to small business owners in the 2021 fiscal year.

Not sure if a loan is for you? Here are a few telltale signs that you should consider one:

  • Poor cash flow: If you don’t have enough working capital to pay for inventory or basic operating expenses, a loan may work for you.
  • Expensive equipment costs: Businesses often use loans to fund expensive equipment to help manufacture products. 
  • Advertising fees: Advertising is necessary for every small business, but it gets expensive fast. You may need a bank loan or business credit card to help pay for fees. 
  • Hiring: Strong team players contribute to your company’s culture, operations, and success—they can also be expensive. A loan can help you hire the right people that help grow your business. 
  • Emergency funds: The unexpected can always occur, such as equipment failures or natural disasters. To keep your business running during these times, a loan may be helpful.

Applying for a business loan takes time. Regardless of what type of loan you’re applying for, there are several steps you can take to prepare yourself before submitting an application.

Depending on the lender, applying for a business loan can take anywhere from a few minutes to several hours. But taking on a potentially significant financial obligation at the outset of a new venture is a major decision, especially for entrepreneurs launching completely untested business ideas.

At this stage, a little planning can save you a lot of effort later on.

How to get a business loan

  1. Calculate how much you need
  2. Write a business plan
  3. Consider repayment terms
  4. Talk to a financial adviser
  5. Decide on a type of loan
  6. Apply for the loan

1. Calculate how much you need

Before you can apply for a business loan, use a loan calculator and have a good idea of how much funding you need. To answer this, you’ll have to identify what you need a business loan for.

The Federal Reserve Bank of New York found three core reasons US businesses take loans:

  • Business expansion (64%)
  • Operating expenses (45%)
  • Loan refinancing (45%)

For example, let’s say you run a small but growing home-based catering business and want to open a single brick-and-mortar location, from which you intend to make and sell various baked goods. 

At an average cost of $95,000 for kitchen equipment alone, our hypothetical catering company is already looking at a considerable business loan just to properly equip a single kitchen—and that’s before commercial real estate and licensing costs.

When estimating how much funding your business will need, it’s also worth considering the costs beyond initial investments. It may cost an average of $95,000 to fully equip a professional-grade kitchen, but what about: 

It’s easy to focus on the sticker price of new hardware, but there’s a lot more to consider. This can be especially important for businesses in industries with notoriously tight margins, such as food service, which can take longer to reach profitability, because this will directly affect how easily a borrower can meet their repayment obligations.

🛠️ Take action: Use our Business Loan Calculator to determine how much you should borrow and approximately how much it’ll cost.

image of business loan calculator

2. Write a business plan

Most traditional business loans offered by private lenders will not process a loan application unless it’s accompanied by a detailed business plan. A solid business plan is your company’s road map for the future. Without one, it’s very hard for a prospective lender to evaluate whether your idea is commercially viable.

In recent years, several online lenders have emerged that do not require formal business plans as a part of their loan application process, or they have eliminated the application process entirely.

Shopify Capital, for instance, has no application process; eligible businesses are preapproved based on a range of criteria associated with their Shopify storefronts, including total sales, in much the same way as Amazon Lending prequalifies certain Amazon merchants.

This kind of financing can be a great choice for established businesses that want to expand their footprint in a financially sustainable way.

shopify capital

I just didn’t want to deal with the whole process of going through traditional lending—I wanted to focus on the business. A traditional loan felt cumbersome and more restrictive. Shopify Capital has a different mentality to it. It’s so easy.

Tracey Hicks, Founder, All Things Real Estate

That said, many lenders that do not require a formal business plan as part of the application process offer short-term loans with higher annual percentage rates (APRs). Higher APRs mean a greater share of a loan’s repayments goes toward interest rather than the principal. 

💡 High APY loans often require higher repayments or longer repayment periods, or both. The APRs of these kinds of loans typically start at around 24% but can be much higher for borrowers with poor credit scores.

Ultimately, only you can decide if you need a business plan to support a small-business loan application. If you do, you can download the handy template below to start putting together your business plan.

Free: Business Plan Template

Business planning is often used to secure funding, but plenty of business owners find writing a plan valuable, even if they never work with an investor. That’s why we put together a free business plan template to help you get started.

3. Consider repayment terms

Your next step is deciding how you’ll repay your loan. Be realistic about the amount you can afford to pay each month. Consider external factors such as seasonal lulls, supply chain interruptions, and even social changes.

A lender will determine your monthly payments based on various factors, such as:

  • Loan type
  • Business profitability 
  • Business type and how long it’s been operating
  • Business owners income
  • Credit history

Your credit history shows how responsible you are at paying your debts. It directly affects your interest rates. 

  • If you have good credit, you’ll most likely be eligible for a lower interest rate on your loan.
  • If you have bad credit, your monthly payments will be significantly higher and may even be excluded from qualifying for a loan. 

Small business lenders understand that each business is unique, which is why they offer so many loan options. Each loan option has a different repayment period. If you're planning on taking out a loan, know how long it’ll take to repay it.

Here are some common loan types and their average repayment periods:

  • Term loans: Up to 10 years
  • Microloans: Up to 6 years
  • SBA loans: Up to 10 years for working capital and fixed assets
  • Business lines of credit: Up to five years
  • Invoice financing: A few months
  • Equipment financing: Up to 10 years

💡Pro tip: Check if a lender has prepayment penalties in case you want to pay your loan back early. You don’t want to spend extra money to get yourself out of debt. 

4. Talk to a financial adviser

Talk to a financial adviser before you choose a loan. They will have insight into the various financial institutions and their loan programs. As a result, they can provide you with more personalized advice on which financing options are best for your business, plus help you create a plan to repay any debt that you take on and stay profitable in the long run. 

5. Decide on a type of loan

If you’ve decided to apply for a business loan, the next decision you’ll have to make is what kind of financing is right for your business and growth goals. There are many different kinds of business loans, each of which has advantages.

Term loans

Best for: Established businesses with large financing needs 

The most common type of business loan is the term loan. Typically repaid over a period of between two and 10 years, term loans are a reliable and common way of financing a business.

However, the eligibility requirements for traditional term loans are often stringent. 

  • Businesses often need to operate for two years or more, because a demonstrated history of profitability is often a requirement. 
  • Many private lenders also prefer to service larger loans—up to $500,000—making term loans an impossibility for smaller ventures that don’t need that much money or for entrepreneurs without a proven track record of success.
  • Most lenders insist on minimum credit scores, usually around 680. 
  • It can take anywhere from two weeks to two months for a traditional term loan to be processed.

SBA loans

Best for: Small businesses with special funding requirements 

Small Business Administration (SBA) loans are very similar to standard term loans offered by private lenders. The biggest difference is that SBA loans are serviced by lenders that have agreed to offer more favorable terms to groups that might struggle to secure traditional small business financing, such as women founders and minority business owners.

Loans administered via an SBA-approved lender often require: 

  • A formal business plan
  • Collateral, such as real estate 

The term of SBA loans can be much longer than a traditional term loan; some have terms of up to 25 years. SBA loans are also typically smaller, starting at around $10,000 at the lower end, up to the average SBA loan amount of around $350,000.

SBA loans are usually a little more forgiving in terms of credit score, requiring a minimum threshold of 650. While these loans are definitely friendlier to smaller businesses, it can still take up to 90 days for an SBA loan to be processed.

Short- and long-term online loans

Best for: New businesses with bad credit 

Online loans have become increasingly popular in recent years as entrepreneurs have sought alternatives to traditional business financing. These are the kinds of loans offered by lenders such as Funding Circle and OnDeck. They are often unsecured, which means you don’t need any collateral or assets to get the loan. 

There are many advantages to short- and long-term online loans:

  • Borrowers with lower credit scores can still benefit from this type of financing. Minimum scores of between 500 and 600 are considered acceptable by many lenders.
  • Businesses that have been in operation for one year are often eligible for this type of loan.
  • Annual revenue requirements are also typically lower—around the $100,000 mark in many cases.

These loans can range from as little as $5,000 to around $250,000 for short-term loans, and up to $500,000 for long-term loans. This makes them a solid choice for business owners with more modest funding needs. 

This type of loan almost never requires collateral, making them ideal for entrepreneurs who lack certain assets. And, in many instances, decisions can be made in a matter of days, if not sooner; some lenders offer same-day decisions.

However, short- and long-term online loans aren’t without their drawbacks. The APRs of these loans can be prohibitively high—as much as 99% in extreme cases—depending on your creditworthiness.

Invoice factoring

Best for: Businesses that rely on long periods to get invoices paid 

Another popular yet somewhat less conventional type of business loan is invoice factoring.

Businesses that rely on invoices for payment often have to wait for prolonged periods of time before those invoices are paid—up to 90 days in some cases. In turn, this can have an adverse impact on a business’s operations, particularly smaller businesses that cannot afford to wait three months for outstanding invoices to be paid.

Companies that provide invoice factoring services buy outstanding invoices owed to companies—also known as purchasing accounts receivable. Rather than waiting for overdue invoices to be paid by their clients, businesses can sell those outstanding invoices to an invoice-factoring company to get money faster, sometimes in as little as 24 hours.

Ultimately, invoice factoring is a trade off. Invoice factoring allows companies to avoid waiting months to be paid, but it also means losing some of the money owed. 

Invoice-factoring companies will typically pay around 70% of an outstanding invoice for less creditworthy clients and up to 90% to 95% for billed customers with better credit. Something else to consider is that factoring may not be suitable for businesses that rely on high volumes of smaller invoices, because the service fees may not be economically feasible.

6. Apply for the loan

Once you've done your research and decided which loan you want, it's time to apply. 

Choose a lender

You can probably use a traditional lender if you have a good credit score and small business finances. You might have to look online for less conventional loan options, like a merchant cash advance, if you don't meet those requirements.

Different lenders have different approval ratings. Biz2Credit’s Small Business Lending Index lists the loan approval rates for each type of lender:

  • Alternative lenders: 24.3% (up from 20.5% in 2020)
  • Institutional lenders: 23.6% (up from 21.4% in 2020)
  • Credit unions: 20.4% (up from 20.3% in 2020)
  • Small banks: 18.7% (up from 16.9% in 2020)
  • Big banks: 13.5% (up from 11.5% in 2020)

small business loan approval ratings

Choose a financial institution that has the loan you're looking for and will pay out the loan within the timeframe that works for you.

We weren’t old enough as a business to be approved for a bank loan. That’s when we found out about Shopify Capital. They already had access to all of our business data and they made an educated decision quickly about how much money we qualified for. We received the funds in our business bank account a few days later.

Helena Price Hambrecht, Co-founder, Haus

Get your documents ready

A lender will send you a list of the specific materials needed to process your application. Each lender will have slightly different requirements, but it’s often a version of this list below:

  • Details about your business, such as business plan, name, address, and tax ID.
  • Personal and business-related financial statements, such as tax returns, bank statements, credit card bills, pay stubs, balance sheet, lease agreements, list of business assets, and other related files. 
  • Information about business owners, like personal details for anyone who owns more than 20% to 25% of a company. 

🛠️ Take action: Use the SBA loan application checklist to prepare all the necessary documents for your loan application.

Submit your application

Every lender will have their own application process and instructions for turning in an application. Interviews are typically part of that process. It could mean going to a bank branch or setting up a phone interview.

Follow the instructions provided by your lender. Find out during the interview how long it usually takes them to process your application so you know when to expect their response. Follow up with your lender as needed.

Consider your options before making a decision

Taking out a business loan is a major financial decision and not one that should be taken lightly. As 2020 handily demonstrated, significant economic disruptions can have a profound effect on everything from revenue forecasting to the financial feasibility of a business itself.

Only you can decide whether taking out a business loan is right for your business. Before making any decisions, be sure to double-check that you’ve covered as many of your bases as possible:

  • Have as close to a precise dollar amount in mind as possible before applying for a business loan, and know exactly how you’ll invest that funding into your business.
  • Even if not required as part of a business loan application, consider making a formal business plan (if applicable) to identify any important points you may have overlooked, such as realistic revenue projections.
  • Be realistic about how much your business can afford in terms of repayments, and identify any external factors that could jeopardize this when considering repayment terms.
  • Consider discussing your plans with a financial adviser in your community to learn more about types of business financing

In uncertain times, some financial support can go a long way. Shopify Capital is here for you with quick and easy access to funds. Shopify Capital helps you get funding based on your history with Shopify and skip lengthy application processes.

Small business loan FAQ

How can a beginner get a business loan?

  1. Calculate how much you need.
  2. Write a business plan.
  3. Consider repayment terms.
  4. Talk to a financial adviser.
  5. Decide on a loan type.
  6. Apply for a loan.

What are the chances of getting a small business loan?

A 2020 report by Biz2Credit found the following loan approval ratings for different lenders:

  • Big banks: 13.6%
  • Small banks: 18.5%
  • Institutional lenders: 22%
  • Alternative lenders: 23%
  • Credit unions: 21.1%

What is the average size of a small business loan?

  • The average short-term business loan amount is around $20,000.
  • The average medium-term business loan amount is $110,000.
  • The average SBA loan amount is $107,000.
  • The average business line of credit loan amount is $22,000. 

How do you qualify for a business loan?

  1. Healthy credit report.
  2. Low debt-to-income ratio.
  3. Two years or more in operation. 
  4. Updated business plan. 
  5. Collateral to secure the loan.
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