How to Get a Business Loan in Just 5 Steps

how to get a business loan

Have you dreamed of taking your side hustle to the next level? When it comes to expanding a business, cash is key. But coming up with the money yourself can be difficult in the first few years of your company’s life.

A small business loan could be the tool you need to build a strong company of your own. Although the process might seem overwhelming, this guide can help you figure out how to get a small business loan for your next endeavor.

Why you need a business loan

There are many ways to get funding for your business — one of the most common is a personal loan, where you borrow money in your own name. Though getting a business loan is more complex than applying for a credit card or a personal loan, it’s worth the time and effort.

If your company fails after you receive a business loan, your personal assets are safe — beyond what you put down as collateral — and you typically are not responsible for repaying the balance of your debt. Instead, the business is liquidated and the proceeds are used to pay the loan.

That approach can be a lifesaver if your business enters bankruptcy. It’s only your business that’s affected, not your personal credit.

That’s not the case with a personal loan. If you have a personal loan and your business goes under, you’re still responsible for paying that debt back. If you can’t afford the payment, you could ruin your credit.

How to get a business loan

Although the application process can be intensive, the more prepared you are, the easier it will be. Here’s how to get a business loan in five steps.

1. Develop a plan for the money

Too many business owners apply for a loan without a concrete plan for how they’ll spend it; they’d just feel more comfortable having the money available to them. Unfortunately, that’s why some banks deny applicants.

Instead, think about what the money can do for your business. You could use it to get more efficient equipment to speed up your workflow and increase your bandwidth, or you could use it to build a new shop. Some borrowers take out the loan if they’re preparing for big changes, such as acquiring a new partner or taking advantage of a manufacturing deal.

As you develop your strategy, write it down and include it as an addendum to your business plan. A good business plan will include a description of your business, market analysis and strategy, competitor analysis, and an operations and management plan for how you’ll handle day-to-day needs. Financial data, such as what money you have available, what you’ve invested to date, and how a loan will help you, should be included as well.

Though you might find some on-demand lenders do not require a business plan, they often charge higher interest rates and fees to compensate for the additional risk.

2. Figure out what loans you’re eligible for

If you’re launching a startup

If you’re thinking of starting a new business, getting a loan can be especially difficult. Most banks insist that borrowers be in business for at least a year before approving them for a loan. From their perspective, showing that the business is earning money minimizes their risk.

One way to get the money you need is to check out peer-to-peer lending, which offers higher approval rates. However, you’ll pay higher interest rates. Depending on your credit and the status of your business, you could pay up to 35% in interest. If you borrowed $10,000, over five years you’d pay back a staggering $21,294.

While you should try to avoid this option, it could be a useful last resort when you need to expand your business.

When your business is in the early stages

If you’re within the first year of operations, your options are still limited. You might be able to get a loan through lenders such as Kabbage, which boasts high approval rates and quick disbursals.

However, if you go this route, you’ll pay higher fees and interest rates. These loans might have shorter repayment terms, too.

For example, if you took out a $10,000 loan with a six-month term with Kabbage, you could pay as much as 10 percent in fees and added charges. In six months of payments, you could pay over $12,400.

Like peer-to-peer lending, taking out a high-interest loan should only be a last resort when you’ve exhausted your other options.

Established business

If you have a more established business, you have more options for business loans. One of the best ways is to apply for a Small Business Administration (SBA) loan. Administered through banks, you can borrow more through SBA and have a longer repayment term; many loans have terms of seven years or more.

The interest rates are much lower. Your actual rate is determined by the bank who distributes the loan, but rates can be as low as 3.96%. There are some additional fees that can add to the balance, as well.

The savings can be significant. If you borrowed $10,000 from the SBA and had a 3.96% interest rate over five years, you’d pay just over $11,000 plus additional fees — that’s around $10,000 in savings compared to a peer-to-peer loan.

3. Compare loans

When looking at loans from different lenders, compare the interest rates, fees, and repayment terms. But the following factors are important to research, too:

  • Does the lender require collateral? Many traditional banks require collateral for business loans. If you default on a loan, the lender can take something of value from you to pay for it, such as your home.
  • What is the minimum credit required? An SBA or bank loan typically requires you to have a high credit score; usually, it must be over 650. If your credit is lower than that, you might have to turn to peer-to-peer lending or a service such as Kabbage.
  • How quickly do you need the cash? SBA loans and bank loans can take months to process, while online lenders can issue your loan in as little as a few days. You’ll pay a premium in interest, which can result in paying thousands more. Only use online lenders with high interest rates if you exhaust other borrowing options.

4. Collect the necessary documents to apply

Once you’ve selected a lender, collect the following documents, if applicable:

  • Personal and business tax returns
  • Personal and business bank statements
  • Business annual report or financials
  • Business plan
  • Rationale for the use of the loan

For SBA and traditional bank loans, you typically will have to meet a representative at a local bank to fill out the application. For online lenders, you can often complete the application in just a few minutes, without meeting a representative.

5. Loan disbursal

Once your loan is approved, your lender will email or send you a letter with your loan closing information. That letter will include your loan disbursement date.

Online lenders work quickly, often giving you the requested funds in just a few days. Usually, the lender will deposit your loan to your bank account electronically. Working with a bank for a SBA loan might take longer, but once the process is complete, they will issue your loan via direct deposit or check.

For most loans, there is no grace period. You have to make monthly payments starting on the date shown in your loan agreement.

Launching a business

Starting your own business can be exhausting and expensive. Figuring out how to get a business loan is a time-consuming process, too. But when you need more money to make your business succeed, a business loan can be a smart way to get the capital you need.

If you’d like to be your own boss and don’t know where to start, check out the complete guide to launching your first side business.

Interested in a personal loan?

Here are the top personal loan lenders of 2018!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

2 Important Disclosures for Citizens Bank.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.29% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.29% APR assumes current 1-month LIBOR rate of 1.34% plus 4.20% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2017, the one-month LIBOR rate is 1.23%. Variable interest rates range from 6.02% – 15.97% (6.02% – 15.97% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with Citizens Bank at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, Citizens Bank checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000Visit Upstart
5.29% - 14.24%1$5,000 - $100,000Visit SoFi
8.00% - 25.00%$5,000 - $35,000Visit Payoff
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print, understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.