Understand the business loan process loan types credit requirements and documents needed for approval and funding
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Business loans are an important financial tool that help entrepreneurs and companies access the funds they need to start, grow, or manage operations. Even if you’re launching a startup, expanding into new markets, buying equipment, or covering cash flow gaps, business loans offer the capital to make it happen. But before jumping into the process, it’s important to understand how business loans work and what they entail.
A business loan is a sum of money borrowed by a company from a financial institution or lender, which is to be repaid over time with interest. It is specifically designed to help businesses fund operational expenses or achieve specific financial goals. Business loans come in various types, such as term loans, lines of credit, equipment financing, and more, each suited to different business needs.
Below is a summary of the main elements:
In essence, business loans provide a financial bridge that allows companies to seize opportunities or address challenges, all while maintaining day-to-day operations.
The overall process of seeking business loans is often similar regardless of loan type. Here’s an explanation of the general steps most business loans follow:
Now, let’s take a closer look at how popular types of business loans work and which ones might best suit your needs.
Business term loans offer a lump sum of money upfront, which you pay back in fixed installments over a set period of time. They work similarly to mortgages or student loans, making them a familiar option for many business owners.
Best For: Long-term investments and planned business growth, such as equipment purchases, infrastructure upgrades, or expansion projects.
A business line of credit provides flexible funding, letting you draw money as needed rather than receiving the full amount upfront. It works much like a credit card, where you only pay interest on the amount you use.
Best For: Managing cash flow, covering short-term expenses, or accessing emergency funds when needed.
Merchant cash advances (MCAs) provide immediate funding in exchange for a portion of your future sales. Repayment is typically made daily or weekly, based on a fixed rate or a percentage of your sales revenue.
Best For: Businesses needing quick access to capital and expecting consistent sales.
Caution: MCAs can come with high fees and may lead to cycles of debt, so look for other options first.
Invoice financing, also known as accounts receivable financing, allows you to borrow money using your unpaid customer invoices as collateral. This type of loan is ideal for businesses that are waiting on payments but need funds to operate now.
Best For: Businesses with delayed customer payments who need cash to manage inventory, payroll, or operations.
Note: As easier to qualify for, invoice financing can be costly when fees are converted to an annual percentage rate (APR).
The best business loan for your company is the one that balances affordable rates, flexible terms, and realistic qualification requirements. Learning about the pros and cons of each loan type can help you make the most informed decision.
Bank-issued business loans, including term loans, business lines of credit, and commercial real estate loans, are known for offering the lowest interest rates and longer repayment terms. However, these loans come with stricter eligibility criteria and longer processing times.
Best for: Established businesses with strong credit histories and time to wait for approval.
Online lenders offer both term loans and business lines of credit with faster funding and less paperwork than traditional banks. While the approval process is usually easier, the trade-off is typically higher interest rates and shorter repayment terms.
Best for: Small businesses or startups needing quick access to funds with fewer application hurdles.
Alternative lenders include fintech platforms, invoice financing providers, merchant cash advance companies, and nonprofit lenders such as Community Development Financial Institutions (CDFIs).
Although every lender has its own set of criteria, most follow similar guidelines when assessing business loan applications. Here are the major factors that can impact your loan approval and terms:
Your personal credit score often plays a major role in business loan approval, especially for small businesses or startups. Your business credit score may also be reviewed if your company has an established credit profile. In cases of business loans with bad credit, a lower score can impact the approval process, but higher scores normally lead to better loan terms and lower interest rates.
Strong financial records are significant when applying for a business loan. Lenders may request documents like:
These financials help lenders check your company’s profitability, cash flow, and debt capacity. Some online lenders, however, offer fast-tracked applications that require minimal paperwork.
Lenders often view time in business as a measure of stability. Most traditional lenders prefer businesses with at least two years of operating history, while some online lenders may consider companies as young as six months.
You’ll likely need to state how you intend to use the loan, whether it’s for inventory, equipment, expansion, working capital, or another business need. Lenders want assurance that the funds will support business growth or stability, not cover unrelated expenses.
Offering collateral can strengthen your application if your business has valuable assets (like real estate, inventory, or equipment). In cases where collateral isn’t available, lenders might require a personal guarantee, making you personally responsible for repayment if your business defaults.
Lenders often require a clear explanation of how you intend to use the funds when applying for a business loan and how you plan to repay them. This is especially important if you’re applying for specialized loans like green business loans aimed at sustainability and eco-friendly initiatives.
Business loans offer versatile funding solutions and can be used for a wide variety of qualified business-related expenses. However, loan agreements usually prohibit the use of funds for personal purchases or non-business-related assets. For example, you can’t use the money to buy a home or a personal car, doing so would violate your loan terms.
Business and personal loans may seem alike on the surface, but they have distinct features, requirements, and use cases that make each better suited for different types of borrowers. You may select the financing plan that best suits your needs by being aware of the differences.
Personal loans are generally unrestricted and can be used for a wide range of expenses. Business loans, however, often require that funds be used exclusively for business purposes, and some may demand documentation of how the money will be spent.
Most personal loans are unsecured, meaning no collateral is required. In contrast, many business loans, especially those from banks or the SBA, require assets as collateral. Some lenders may also request a personal guarantee, making you personally liable if your business fails to repay.
Business loans usually allow you to borrow more money with longer repayment terms, sometimes up to 25 years (especially for SBA loans). Personal loans tend to have smaller borrowing limits and shorter repayment periods, often capped at 5–7 years.
Business loans often feature lower interest rates, especially if secured or obtained through traditional banks or SBA programs. As of May 2024, the average personal loan interest rate is around 12%, while business loans from banks can start at single-digit rates, depending on creditworthiness and financials.
Personal loans have a quicker and more streamlined application process, with many lenders offering instant pre-qualification and next-day funding. Business loans, however, often require in-depth financial reviews, business plans, and may take days or weeks to approve and fund.
To qualify for a business loan, lenders will evaluate your business credit profile, financial statements, and possibly your personal credit history. If your business credit alone isn’t strong enough, you might need to sign a personal guarantee to strengthen your application.
Getting approved for a business loan depends on a few core factors. Here’s what most lenders look at:
Lenders assess both personal and business credit. Higher scores mean better loan terms and approval chances.
Healthy, consistent cash flow shows lenders you can repay the loan.
Most lenders prefer businesses operating for at least two years. Some online lenders accept newer businesses.
Too much existing debt can hurt your chances of getting approved.
High-risk industries (like gambling or cryptocurrency) may struggle to get financing.
Picking the right business loan depends on how you plan to use the funds. Here are the most common types available:
You might face different fees when seeking business loans. All of these costs might not be billed to you, however the following are the most general ones in the sector:
The repayment terms for a business loan largely depend on the lender’s specific requirements and the loan type. Lenders may set up repayment schedules that require payments on a daily, weekly, or monthly basis, depending on what best suits the business’s financial situation.
Some loans feature fixed repayment amounts, which remain the same throughout the loan term. Alternatively, certain loans may offer flexible repayment options that adjust according to your business’s cash flow, meaning the payment amounts could fluctuate based on your business’s revenue or existing debt. This flexibility helps businesses manage loan repayments in line with their financial health.
Several lenders generally look for businesses that generate at least $100,000 in annual revenue when applying for a business loan. This is often seen as a benchmark to ensure that the business has the financial stability to handle loan repayments. However, certain lenders may accept businesses with lower revenues, depending on their specific requirements and the type of loan.
Moreover, securing a business loan may require collateral to reduce the lender’s risk. Collateral can include assets such as equipment, inventory, or real estate, which the lender can claim if the business fails to repay the loan. In some cases, you might also be asked for a down payment, which helps to further assure the lender of your commitment and ability to repay the loan.
Yes, you can have more than one business loan at a time, provided you meet the qualifications for each loan. Lenders usually assess your ability to manage multiple loans based on your business’s financial health, credit score, and debt-to-income ratio.
However, managing multiple loans can be financially demanding. It’s important to evaluate your business’s cash flow and budget carefully to ensure you can handle the repayments of all loans without jeopardizing your business’s financial stability.
Fehmida is a versatile content writer with a proven track record of curating latest news stories across business, finance, and beyond. As a contributing writer for Lending Palm, she leverages her expertise in banking, debt management, home buying, personal loans, and budgeting. She brings complex financial topics to life with clarity and precision.
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