How to Get a Business Loan in 2023: A Guide for Small Businesses

Learn More About Loans for Small Businesses

Introduction

The ability to obtain a business loan is crucial for the growth and survival of many small businesses. Actually getting a business loan, however, has become a daunting challenge in 2023 as small businesses continue to face a unique set of challenges that have arisen over the past year. Rising inflation and interest rates and increased labor costs have tightened requirements for obtaining financing, and rising rates have made business loans more expensive.

Despite the difficult economy right now, many small business owners in the US have come to rely on some sort of financing to facilitate growth, meet expenses during their off-seasons or downturns in the economy, or for the convenience of having access to capital when they need it. Over 40% of the 32.5 million small businesses in the US applied for a business loan in 2022 for these very reasons, so small businesses’ need for some type of financing remains strong.

A Multitude of Business Loan Options

The good news is that there are still a lot of great, flexible financing options from which small business owners can choose. These financing products offer both fixed and variable rates and can be secured or unsecured depending on the qualifications and preferences of the borrower. Some financing tools are more expensive than others, while some require little paperwork and others require a long application process and stringent requirements such as a high FICO score and several years in business.

Still, obtaining a small business loan or other types of financing can be a daunting process, especially if it’s your first time doing so. Rising interest rates and persistent inflation have made the process even more difficult over the past year, so before you consider applying for financing, it’s best to take it step-by-step and make sure you have all your ducks lined in a row so that you can impress a potential lender and get the cash that you need to strengthen your small business.

The State of Business Lending in 2023

If you’re considering applying for a small business loan, one of the first questions you should ask your- self is whether now is the best time to obtain financing. As such, it’s important to assess the lending market by considering such factors as the current interest rate environment, inflation, and on whether you qualify for a business loan or other financing options.

Some of the biggest factors impacting the small business lending market are rising interest rates and inflation, as well as instability among local and regional banks that provide small business loans. Since March 2022, the Federal Reserve has raised interest 10 times, bringing the overnight rate to its current 5.25% from just 0.25% a little more than a year ago. Also, while inflation has cooled off a bit in the last few quarters, it is still growing at a higher-than-normal rate.

Small business loan applications have been declining since March 2023 and business loan approvals fell to 13.8% from 14.2% in the month prior. On top of this, traditional banks are feeling the squeeze of higher interest rates. Banks – such as Silicon Valley Bank and Signature Bank – were taken over by the feds, much in part due to the fact that a large portion of their cash reserves were held in U.S. Treasury bonds, which plummeted in value when interest rates went up, leading to customer panic and heavy withdrawal volume.

Benefits of Taking out a Business Loan

Despite the rocky economy, the benefits of financing have remained the same, and the ability to borrow money is still crucial for the continued growth and success of many small businesses, be it a small construction company, independent retailer, or business services firm. If your small business needs cash, you can still find a solution that’s right for you and you can still feel the advantages of financing. Some of those crucial benefits include:

1. Enabling growth.
Facilitating rapid growth and taking advantage of unexpected growth opportunities are the most ideal reasons you need to borrow money for your small business. For example, your business may need funds to develop, market, and sell a new product or service, sign a lease for a bigger space, or hire additional employees.

A term loan – be it an SBA 7(a) loan or a bank loan – can help you facilitate the growth of your business, while equipment financing can be used to purchase new, revenue-generating machinery. Depending on your qualifications, they are typically less expensive than other types of financing, and often, the funds must be used for the stated purpose.

2. Covering convenience purchases.
On a personal level, many of us will pull out our credit cards to cover the cost of a purchase, knowing that we’ll have the money later to pay for it. Small business owners can use the borrowed funds in much the same way with working capital loans – short-term lending solutions that enable you to purchase something now for your business and pay it back during your next revenue cycle.

3. Keeping the lights on.
Many businesses face the challenge of meeting expenses during the offseason, while all small businesses struggle during economic downturns and periods of high inflation (such as the one we’re in right now). In addition, emergencies sometimes arise. Having access to cash during these times is imperative.

4. Consolidating debt.
Having multiple debts with high-interest rates isn’t pleasant. If you took out multiple bank loans for your business when the prime rate was high, or if your FICO score has improved since you took out those loans, you should consider consolidating those into a single bank loan with a lower interest rate by taking out a new term loan. Your lender, be it an online lender or a traditional bank, can work closely with you to zero out your existing high-interest debt with a new, lower-interest loan.

In short, don’t allow current economic conditions to prevent you from receiving the benefits of much-needed financing. Despite the turbulent economy, there’s never a bad time to grow and take your business to the next level. So, let’s cover how to get a business loan in 2023.

Different Types of Business Loans

Financing options for small businesses come in many forms, so if you’re considering obtaining a loan for your business, it’s important to know what options you have; which loans are more expensive than others, and which ones suit your specific needs. Some options are designed to help your business grow, while others are best used to meet immediate expenses.

It’s important that you research and understand the different types of business loans that are available to you and carefully consider which type of business loan you most likely to qualify for and which ones best fit your specific business needs:

Term loans

A term loan is a lump sum of money that a lender will give to a small business for a specified purpose. This type of loan you will pay back over time with interest. Term loans can be either short-term (6 months or less) or long-term (typically up to 10 years).

What to watch for:

These loans usually require a lower FICO score than a long-term loan, but typically charge a higher interest rate depending on your credit score. Some lenders may also require a stringent repayment plan that can be daily, weekly or monthly, as well as balloon payments.

Working Capital Loans

These are typically short-term loans most often used by businesses with uneven cash flows throughout the year. They are typically used to pay the day-to-day expenses of a business during the offseason or, perhaps, when there’s a downturn in the economy.

What to watch for:

Commercial Real Estate Loans

This type of loan is essentially a mortgage for a commercial property that is expected to generate income over time. While virtually any qualifying business can get a commercial real estate loan, these loans are used most often by real estate developers.

What to watch for:

Much like with a personal mortgage, your FICO score must be relatively high to qualify for this loan. You may be able to obtain a personal real estate loan if you have poor credit, but you are likely to face high-interest rates and balloon payments.

Business Acquisition Loans

This is typically a term loan designed for the specific purpose of acquiring another business or buying out an existing business from your partners. If approved, this type of loan often has a quick turnaround time in terms of when you receive the cash that you need for an acquisition, and often are long-term loans.

What to watch for:

Lenders often have a long list of requirements before they approve a business acquisition loan. These include whether or not the buying company can afford to take on the existing debt of the business being acquired. They also may require a new, combined business plan as well as scrutinize any new management team that may be formed after the acquisition.

Personal loans for small businesses.

If you need funds to start your own business or to improve your existing business and don’t qualify for a business loan, there’s always the option of receiving a personal loan. While probably not ideal, personal loans do come with certain advantages: the funds are usually disbursed quickly; your credit score usually doesn’t need to be as high as if you were applying for a business loan, and you don’t have to specify what you intend to spend the cash on.

What to watch for:

While applying for a personal loan to fund business needs is a viable option, it probably isn’t the most ideal. For one, depending on your credit score, you will probably pay a higher interest rate for a personal loan than a business loan. You also risk your personal credit score tanking if things go south for your business, and in most cases, you probably will receive a smaller amount of funding with a personal loan as opposed to a business loan.

Startup loans.

Unfortunately, if you’re looking to start a small business from scratch, there aren’t many loan options available to you unless you are a dentist or an MD seeking to start a new, independent practice. As these are lucrative industries, many banks and alternative lenders offer loans specifically tailored to startup healthcare practices. Some SBA approved intermediaries do provide microloans to startup businesses. A budding entrepreneur can also take out a personal loan or home equity line of credit (HELOC) if they need cash to start a new business.

Many budding small business owners tend to rely on personal finances, loans from family and friends, or crowdfunding to get the cash they need to start up their businesses.

SBA Loans

Loans guaranteed by the U.S. Small Business Administration (SBA) are extremely popular among small businesses because they offer low-interest rates and have much more flexible payback terms than loans backed by the private sector. The SBA does not actually give out these loans, instead, they are administered by banks, alternative lenders and community development corporations (CDCs). Rates are usually lower for SBA loans since the SBA guarantees a large portion of the loan and sets the terms for them, thereby the lender is taking less risk.
The most popular types of SBA loans are:

SBA 7a Loan.

This loan is offered through private banks and is often thought of as the ideal type of loan for small businesses seeking to grow, as it typically offers a lower interest rate than loans backed by private sector lenders. Like a term loan, an SBA 7a loan offers a lump sum of cash that can be paid back over the course of up to 10 years. Based on the length of the loan, the interest rate is usually the prime rate plus an additional percentage that is dependent on the size of the loan and the credit rating of the borrower.

What to watch for:

While the cost of capital is appealing for a SBA 7a loan, it does have some drawbacks. First, depending on the lender, your credit score usually needs to be excellent (700 or above) to qualify. Second, this type of loan is typically inflexible when it comes to prepayment penalties, and third, lenders require a long list of paperwork for you to fill out. Finally, if you qualify for a 7a loan, getting your funds after you are approved may take weeks.

SBA CDC/504 Loan.

This loan comes with a variety of benefits for qualifying small businesses, as it usually is intended to fund new businesses that will help develop their community through their storefronts and by hiring workers from that community. The loans are usually offered by CDCs approved by the SBA, but some private lenders can offer them as well. Some of the biggest advantages these types of loans offer are:

You don’t need a high FICO score to qualify;
While this loan typically isn’t offered to startups, it is offered to newer businesses (minimum 1 year in business) that have a specific use for the funds, such as purchasing real estate or renovating their storefront;
The terms for SBA CDC/504 loans are usually much longer than a standard term loan – they can be 5-, 10, or even 25 years, and
These loans typically don’t require balloon payments.

What to watch for:

Like most loans backed by the SBA, you need to have patience if you’re applying for a 504 loan. All SBA 504 loan applications go through a single underwriting office, which can cause massive delays in getting approval for your application. Much like with the 7a loan, it can take weeks for you to receive the funds once you are approved.

SBA Microloans.

These loans offer small amounts to businesses through not-for-profit intermediaries certified by the SBA. The advantage of these loans is that they have fewer requirements than other types of small business loans and are flexible in terms of what they can be used for. Uses include working capital, the need to purchase more inventory and to purchase small pieces of machinery. It is a popular loan among women- and minority-owned businesses.

What to watch for:

Again, these types of loans require patience, as the time it takes for you to get the funds once you are approved can be weeks. Also, while this type of loan does offer attractive interest rates, the maximum repayment term is six years. Additionally, the most you can borrow is $50,000 with the average loan size being $13,000, so this type of loan is ideal for small projects and business needs.

What to do Before you Apply for a Business Loan

Once you’ve become familiar with the different types of business loans out there, the next step should be to go down a mental checklist to determine why you need a loan and what type of loan is most suitable for your business needs. It’s important to be very thorough in this process and if necessary, consult with a certified small business finance professional (they can be found at your local bank or through an alternative or online lender).

1. Define and prioritize your business needs.

One of the most fundamental questions you must ask yourself before you apply for a business loan is, “What exactly do I need money for?” Once you’ve identified your specific business needs, prioritize them in order of urgency. Perhaps your business needs money to develop and market a new product, or you need to pay immediate expenses until your next income cycle (often referred to as bridge money). Then estimate the cost of each of these needs. This will give you a much clearer vision of what you need to spend money on and therefore, the size and type of loan you need.

2. Choose the business loan you need.

Once you’ve identified your business’ spending needs, decide what type of loan would work best for you. The cost of capital and the flexibility of repayment terms, among other factors, should be the basis of your decision. You should speak to a small lending specialist.

3. Determine if you qualify for a business loan.

Once you’ve identified the type of loan you need, realistically assess whether your business qualifies for that loan. This means checking your FICO score and seeing how strong your cash flow history is, among other factors. Some lenders will also consider business credit scores, so be sure to check on that as well. Three of the major business credit score agencies are Experian Business, Equifax Business, and Dun & Bradstreet.

4. Choose a lender.

There are different types of lenders to choose from, and you should base this decision on your specific needs:

Traditional Lenders

Like banks and credit unions, usually offer a slightly lower cost of capital, but for many business loans, they need you to fill out significant paperwork and often have strict credit requirements. Also, it may take a few weeks to get your funds once you’ve been approved.

Alternative lenders.

Alternative lenders often operate online and over the phone, but they are just as legitimate as traditional lenders. The cost of capital is typically slightly higher than those offered by banks and credit unions, but the trade-off is that the paperwork you need to fill out is usually far simpler than that required by traditional lenders, plus you often get your funds within 24 hours once you are approved.

Loan Broker.

Brokers do not directly offer business loans – they give you objective advice by identifying your business’s specific needs and bringing you the best lending options. This will take time, so if you need cash quickly, this probably isn’t the best route.

Marketplace.

A lending marketplace is often administered by alternative lenders and brokers that have partnerships with several direct lenders. Once you’ve identified your needs and the specific type of loan you want, they can offer you several competing options.

The Business Loan Application Process – What to Expect

Once you’ve completed all of your due diligence – determining your needs and selecting your lenders of choice – you’re ready to move forward to the application stage. At a high level, there are 4 primary steps to applying for a business loan:

Step 1: Gather your paperwork
Step 2: Complete the application and submit the applicable paperwork
Step 3: Compare your business loan offers
Step 4: Select the business loan option that best meets your needs

While steps two and four are self-explanatory, steps one and three can be a bit more complex, so we delve into them a bit further.

Get Your Paperwork in Order

Applying for any type of business loan requires paperwork to convince any lender to approve your application. If you’re looking to borrow, getting your paperwork in order beforehand will help expedite the borrowing process. The types of universal paperwork you will need is:

Several years of tax returns.

Past tax returns will show your potential lender your business’ annual revenue for the past few years, which is often crucial to getting approved for a loan.

At least 6 months of bank statements.
Potential lenders want to see that your business has a history of strong cash flow, so it’s best to have at least six months of bank statements from your business checking account.

Business plan.
A business plan is kind of like a resume for your business. At the very least, it will explain to your potential lender your plans to grow your business, which is something lenders want to scrutinize. Some lenders, especially alternative lenders, don’t require this depending on the reason you’re borrowing, but nevertheless, it’s important to update your plan and be ready to present it.

A presentation of future products or services.
If you’re seeking to borrow for growth, most lenders will want to examine any products or services that you are planning to roll out, and a roadmap for why you think they will generate more revenue.

A detailed credit report.
If you get approved for a loan, the cost of capital will greatly depend upon your credit score. It’s important to contact the three main credit bureaus, Equifax, Experian, and Transunion, and obtain your report. The last thing you want is for your score to be dragged down by mistakes on your report. Potential lenders will pull your credit report on their own, but by pulling it yourself before you apply, you will have a realistic picture of what you may qualify for, and it gives you the opportunity to correct any mistakes before you apply.

Having this paperwork ready beforehand will save you time and energy and will show potential lenders how serious you are about getting a loan.

Choose and Compare Lenders!

Choosing a lender can be a difficult process. If you want face-to-face service and are confident in your ability to get a loan, you may want to go with a traditional bank. If you want fast service and still have the ability to consult with a small business lending expert, alternative lenders may be your best bet. If you are inexperienced with business lending and feel like you’re starting from ground zero, you should probably consult with a third-party broker who can give you independent advice.

Additionally, it’s always good to have options when it comes to business loans. Therefore, when you’re seeking a business loan, talk to more than one lender, or go through a broker or marketplace administrator. It behooves you to be able to compare rates and offers to lower your cost of capital.

What to do if You’re Rejected for a Loan

Lenders may reject your application for a variety of reasons: your debt-to-equity ratio may be too high, your credit score may be too low, or your business doesn’t have a strong enough cash flow history. If your application is rejected, don’t worry, it’s not the end of the world, as there are plenty of ways you can improve your business so that you can get approved next time.

Consider other financing options.
Business loans are not the only type of financing available for small business owners. From a business line of credit to invoice factoring, and equipment financing (to name just a few), there’s a host of alternative business financing options available.

Talk to your creditors.
If you have any outstanding debt, it’s worth contacting your creditors to see if you can modify your payment structures. Remember, creditors would much rather negotiate a new payment arrangement with their borrowers than have to send the debt to collections. Once a new arrangement is agreed upon, you can comfortably make payments without having any late payments show up on your credit score.

Talk to Your Lender.
Keep in mind that small business lenders make money by giving loans and therefore, most of them want you to succeed in getting approved. If you’ve been rejected, they most likely will give you a detailed explanation as to why, and suggest ways to improve.

Pay off or lower your revolving debt.
If you can afford to, make sure the debt on your business line of credit or business credit card is at most 30% of your spending limit, as that is the credit utilization level that lenders and credit agencies prefer to see. Not only will this reduce your interest rate payments, but it also lets potential lenders know that you can properly manage your debt.

Encourage your suppliers to give you trade references.
Having a strong payment history with your suppliers will not be reflected on your credit report. However, your suppliers can give you a trade reference: a verbal or written notice to credit reporting agencies such as Transunion, Experian Business, or Equifax stating that you’ve always made payments on time. These positive references may increase your score and will be looked upon favorably by potential lenders.

Try to increase your credit limits.
If you have a line of credit or a business credit card, increasing your limits on them can increase your credit utilization ratio and help boost your FICO score.

These improvements are not difficult to achieve and can be made fairly quickly in most cases, and making them could make it easier to qualify for a business loan the next time around.

Key Takeaways

There are several points to consider if you’re in the market for a small business loan:

Decide if this is the best time for a business loan.

The federal funds overnight rate has quickly risen over the past year to try to stave off inflation. However, this means that thecost of capital for your business loan will be higher now than it would have been. If you can afford to, honestly assess whether you hold out on getting a business loan for the time being until the interest rate environment has settled down.

Determine if you need a loan

And make sure that the proceeds will truly help your business.

Carefully consider what type of business loan

Of your business to see if you qualify for a loan. This includes checking your credit report, evaluating your cash flow, and updating your business plan.

Shop around.

When you’re shopping for any expensive item, it’s important to see where that item is sold and which dealers offer the best price. The same holds true when it comes to obtaining a business loan. Don’t just go with the first loan offer you are given. Carefully shop around for lenders and get multiple offers to notch the best rate.

Getting a loan this year can be challenging given the current state of the economy. If you need a small business loan now, however, it’s good to know that you still have an abundance of choices out there. If you’re new to business borrowing, it’s important that you educate yourself on the different types of business loans out there, or consult with a small business financing professional to evaluate your situation and give you objective advice on how to get a business loan.

Is a Business Loan Right for You?

Comparing Business Loans with Other Financing Options

What Type of Business Loan is Best for Me?

Pros & Cons of a Business Loan

Where to Get a Small Business Loan

How to Get a Business Loan in 2024

Evaluate & Prioritize Your Business Needs

Does Your Business Meet the Minimum Requirements for a Business Loan?

How to Research & Compare Lenders for Your Business Loan

Compile Required Business Loan Documentation

Comparing Your Business Loan Offers

Using Your Business Loan Funds Wisely