Everything small business owners need to know to qualify for a quick business loan.
Do you need business financing fast? Small businesses often require emergency working capital, whether to deal with a cash flow crisis or take advantage of an opportunity. This article will explain all you need to know to get approved for a loan as quickly as possible.
- Figure out what type of financing your business needs.
- Determine if you qualify for a business loan
- Calculate the payments you can afford
- Decide how you will collateralize the loan
- Research small-business lenders
- Gather documents
- Check ratings and reviews
- Apply for business financing and get approved
Figure out what type of financing your business needs.
Different types of business loans serve a range of small business funding options. Some fast business loans can be approved in hours or days. Others could take months. Here are some common types of financing, organized by how quickly applications for them can be approved.
Loan types that are typically approved quickly
Applications for the following business loan options are usually approved fast, or no application is necessary:
- Startup financing, including credit cards and personal loans. Lenders usually require significant cash flow, which helps ensure a loan will be repaid. New businesses in their first year of operation typically arenât able to get business loans. Instead, youâll have to rely on other financing such as personal and business credit cards and loans from friends and family members. Be careful about using these for business because you could lose personal assets if your company doesnât take off and you cannot pay the financing back.
- Business line of credit. This is a flexible financing option. It works much like a home equity line. You tap into the financing as needed to cover expenses. You only pay back the money with interest when you access the cash. Business credit lines are typically approved quickly for small businesses with good credit and solid cash flow. They are a great financial safety net for small businesses to have handy.
- Equipment loans. If youâre purchasing equipment for your business, youâll likely qualify for immediate equipment financing, even if you have poor credit. The piece of equipment you buy acts as collateral for the loan and will be seized by the lender if you canât repay it.
- Merchant cash advance (MCA). If you accept credit cards and have a regular flow of credit card receipts, you could be approved quickly for an MCA, even if you have bad credit. Thatâs because a merchant cash advance is not a loan but an advance on your credit card sales. The cost of MCAs usually exceeds those of many other more traditional financing options.
- Invoice financing. If youâre having cash flow issues because youâre waiting for customers to pay their bills, Invoice financing (invoice factoring) might be a good option. Invoice financing lets you get paid immediately rather than waiting for your customers to pay you. The factoring company keeps a percentage of the invoices’ value and takes over collection responsibilities, which can harm customer relationships.
- Family or friends. If your family members or friends believe in your business, they may be willing to provide you with a loan. However, you want to make certain you get everything in writing to make sure the loan doesnât negatively impact your relationship.
Financing with a relatively long approval process
The following types of loans take a while to get approved:
- Small Business Administration (SBA) loans. SBA loans, including its popular SBA 7(A) loans, are preferred to other financing types by many small business owners because they come with relatively low-interest rates and favorable repayment terms â and can be used for many purposes. The issue: It takes much due diligence to qualify for these advantageous loans. The application process is in-depth, and approval can take one month or more.
- Term loans, including short-term loans. Term loans from traditional banks and lenders typically come with favorable interest rates and terms. They provide a lump sum of cash that you pay back over time. The loan companies that offer them do significant due diligence before approving them, including checking your personal credit score, which can take several weeks or a month, or more. If you have bad credit, itâs unlikely youâll qualify for a term loan. Most require a minimum credit score of 680.
- Real estate loans. If you need cash to purchase commercial property, a real estate loan will provide you with long-term financing at relatively low rates. However, much like a home mortgage, it can take time to get approved.
Determine if you qualify for a business loan
Answer these questions to help you figure out if you will qualify for small business financing. It will help you understand whether or not you can expect a quick approval.
What’s your credit score?
You can access a free credit report from the three major credit bureaus: Equifax, Experian, and TransUnion. You can also access your credit score for free from credit card issuers and finance companies.
Banks and traditional lending companies prefer to approve loans for borrowers with credit scores above 680. If your score is below this, you may be able to get approved by an online lender or microloan provider.
How long have you been in business?
Your business must be in operation for at least one year to qualify for most online small-business loans and at least two years for bank financing.
Does your business earn enough money?
Most lenders require a minimum annual revenue before approving a loan, ranging from $50,000 to $250,000. If your revenue isn’t high enough, look into short-term business loans, SBA microloans, equipment financing, or other alternative sources of cash. Just be aware that many of these funding options come with high-interest rates and short repayment terms.
Calculate the monthly payments you can afford
Review your current business cash flow and monthly revenue to determine how much you can afford to put toward repaying your loan each month, or more frequently, with some lenders. This is the only way to figure out the loan amount you can afford.
A good benchmark for knowing you can repay your loan is having a total income of at least 1.25 times your expenses, including your loan repayment amount.
Example: If the monthly income of your business income is $10,000, and your expenses, including rent, utilities, and payroll, are $7,000 in rent and payroll, you should be able to afford a $1,000 monthly loan payment. Your income ($10,000) is 1.25 times $8,000 worth of expenses.
Decide how you will collateralize the loan
You can speed the loan approval process by identifying the collateral youâll put up for the loan ahead of time. A secured loan requires business collateral, such as property or equipment, or personal collateral, like a car or home, that the lender can take if you cannot repay the loan.
Putting up collateral is risky. You could lose things you need to conduct business or personal items that help you live a comfortable life. Still, it can increase the amount lenders will let you borrow and possibly qualify you for a lower interest rate.
Some lenders may also require a personal guarantee, even for qualifying for unsecured loans. You will have to personally repay the loan if your business cannot, and the lender can come after things like your house or car if you donât repay.
Research small-business lenders
There are three sources of small business financing:
- online lenders
- nonprofit microlenders.
Selecting the correct type of lender for your business situation will help you get approved quickly. Youâll avoid wasting time on rejections from funding companies that donât want to lend to small businesses like yours.
Online lenders and other alternative lenders are ideal for small business owners who:
- Lack collateral
- Donât have a great credit score
- Havenât been in business for a long time
- Require fast funding.
Online lending companies offer small-business loans and lines of credit from $1,000 up to $5 million. The average annual percentage rate (APR) on loans from online lenders can range from six percent to 99 percent. The APR depends on:
- The lender
- Type and size of the loan
- Repayment term
- Credit history
- Whether the loan is backed by collateral or a personal guarantee.
Bottom line: Loan approval rates for online lenders are higher, and funding is faster than with banks. You may get approved and have funds deposited into your business bank account in one business day after completing an online application.
Banks and traditional lenders
Banks are ideal for small business owners who:
- Have been in business for at least two years
- Can demonstrate excellent credit.
- Donât require cash fast
- Can put up collateral.
Loan options from traditional lenders include term loans, business lines of credit, commercial mortgages, and more. Many also offer loans backed in part by the U.S. Small Business Administration, including 7(a) loans, 504 loans, microloans, disaster loans, and others associated with the loan program. Banks provide small business loans up to $5 million and more.
Bottom line: Bank funding takes longer than other options, and you must have a solid credit and business history. Traditional lenders arenât good if you need fast cash, but theyâre usually the lowest-APR option.
Microlenders are a good option for small business owners who:
- Have bad credit or no credit history
- Have been in business a short time
- Canât get a traditional loan
- Need limited financing.
Microlenders are nonprofits that typically offer short-term loans of less than $50,000. The interest rates on these loans generally are higher than those of bank loans. The application process often requires a current business plan, financial statements, a detailed description of what the funds will be used for, and more, making it a lengthy process.
Bottom line: Microloans may be the only option for some startups, but itâs unlikely youâll get approved for one fast.
Youâll speed up your loan application process and make it more likely to get approved fast if you pull together the required documents before applying. Depending on the lender, you may need:
- Business and personal tax returns
- Business and personal bank statements
- Business financial statements
- Business legal documents, such as articles of incorporation, commercial lease, and franchise agreement
- Business plan
- Social security number
- Proof of identity.
Check ratings and reviews
Take time to learn about lenders that offer the type of financing you need. Check that theyâre financially sound and review online ratings and reviews to determine which ones provide a superior customer experience. You may even figure out which lenders are more likely to approve your application quickly by reading reviews.
If you donât understand anything about a lender or their offer, check out the frequently asked questions (FAQs) on their website or contact a company representative.
Apply for business financing and get approved
Youâve done your due diligence, and now youâre ready to complete a loan application.
Start by looking at two or three similar options from reputable based on loan terms and annual percentage rate. Because APR includes all loan fees and the interest rate, it’s the best way to understand the total cost of a business loan for the year.
Apply for your loan from the providers with the lowest APR that has payments you can afford.
In the end, itâs up to you to find the best combination between fast loan approval and access to cash coupled with small business loan costs to meet your financing needs.