by Stormi Scott

How To Get A Business Loan (2021 Guide)

Whether you are part of a current business or an aspiring entrepreneur, it can be challenging to navigate business financing's sometimes complicated waters. Though there are many types of business loans, they are vastly different, and each business benefits more from some than others.

There is no question that a 2021 guide on how to get a business loan will look very different from a guide written just a few years ago – let alone one written before the financial crisis of 2008. This guide will answer the main questions you might have about how to secure business financing in 2021.

What is Business Financing?

As the name implies, business financing involves a business receiving a loan from a lender. The funding could be used to start a business, keep a business running, or expand it. For large companies, decisions regarding financing will be made by finance committees, while small companies often have an owner-manager making all the decisions unilaterally. Some companies take out a single loan from a bank or other financial institution the entire time they are operating, while others have revolving business financing available to them.

The State of the Business Finance Industry in 2021

Nearly every industry took some kind of financial hit in 2020 thanks to COVID-19 and the resulting changes in the world – and the business finance industry was no different. However, as we look forward to 2021, there are many positive elements to consider .

Many lenders and others that extend credit to businesses (such as business credit card issuers) eased off lending in mid-2020. As the state of the economy was in flux, they were less than enthused about extending potentially risky credit. In fact, some lenders stopped providing business financing altogether.

This has changed in 2021. We are seeing many of these companies back open for business again, which means that many businesses will find it much easier to secure financing that they could not have been approved of a year ago.

The other main change is the increased reliance on technology. Indeed, technology is nothing new for businesses or lenders, but as both have had to pivot to online models, they have embraced newer technologies, and we expect to see this stick around for good.

The Most Common Types of Business Financing and Business Loans Available

There are many types of business loans a company can choose to apply for, and there is no single type of loan that is best for everyone. The right option for a particular business will depend on how much they need to borrow, the type of business they are involved in, and their creditworthiness, amongst other factors.

Some of the most common types of business financing and loans available include:

  • Business line of credit
  • Small Business Administration (SBA) loans
    • SBA 7(a) loans
    • SBA 504 loans
    • SBA Express Loan
  • Short term loans
  • Business term loan
  • Merchant cash advance
  • Business credit card
  • Equipment financing
  • Commercial mortgage
  • Accounts receivable financing
  • Startup loans
  • Business acquisition loan

As you can see, there are as many types of business loans as there are types of businesses.

Business Financing Companies and Lenders – And What They Look For

Just as there are many types of business loans, there are also many types of financing companies and lenders. Each of them might look for something different than another one. Some of the most common are listed below – along with what they are likely to look for.

Traditional Banks

The same bank you go to for your private banking might be willing to offer you a business loan. They might offer:

  • A business line of credit. This flexible line of credit is generally due within a few years but can be accessed (up to the limit) whenever you need it. Lenders of business lines of credits generally look for companies that have been in business for at least six months and bring in at least $50,000 in annual revenue. If your credit score is at least 560, you are likely a candidate for this type of loan.

The Small Business Administration

As mentioned above, the SBA offers many types of loans depending on where a company is in their process and what they need the money for. Generally speaking, the SBA is looking to fund small companies that might otherwise have trouble getting help. Despite the name, the SBA is not funding the loan, but they are guaranteeing most of the loan, which reduces the risk of whatever lender takes on the loan.

Short Term Lenders

There are companies out there that will give you money in as little as 24 hours from the time you applied. These usually need to be paid off in one to three years but can be an excellent solution to pressing issues.

These lenders are looking for good credit and a business history of a few years. Some short-term lenders will also require collateral, such as your home or vehicle.

Merchant Lenders

A merchant cash advance allows you to borrow against future earnings to get the financing you need today. When you are approved, a portion of your daily credit card deposits are funneled directly to the lender. These are fast loans that can be in your bank in as little as 24 hours, but the interest rate is generally very high.

This is a low-risk loan to the lender and comes with high-interest rates, which means that qualifying is generally straightforward. Some merchant lenders do not even require a credit pull. You can expect a potential lender to want to look at your last four to six months of bank statements, and that might be enough.

Business Credit Card Issuers

This might be the most user-friendly of all business financing options, but it can also come with significant interest rates. The process is the same as for your personal credit card, and it can be a good option if you do not want to take on a full loan or you want to take advantage of reward programs.

For most cards, you will qualify if you have a credit score of at least 680 and a solid business history.

Commercial Mortgage Lenders

If you are going to buy a property for your company, whether a warehouse, office space, retail space, or something else entirely, a commercial mortgage is what you are looking for. You can use these funds to get out of a lease, start a new path, build a property, or add square footage to your existing property.

These loans can be more challenging to qualify for. Commercial mortgage lenders are looking for a business plan that clearly outlines how you will use the case. They will request numerous documents related to the property, such as blueprints, market analysis, and budgets.

Do Not Apply for a Loan Unless You Know the Answers to These Questions

Before you apply for a loan, you should be ready to answer several questions. Those specific questions will vary based on the type of loan and your business, but in general, you should have answers to these questions:

  • Why do you need a loan?
  • How long do you need to pay back the loan?
  • What about your company makes it better than your competitors?
  • Can you explain the reason for past business hardships?
  • How do you explain oddities within your accounts payable and accounts receivable?
  • Do you have the insurance coverage we require?
  • What is your personal credit score?

You can expect that lenders will do more than take your word for any of these answers. Be honest and know that if you chose not to tell the truth, they would find out. Be concise but know that the more relevant evidence you give, the better off you will be.

How a Business Owner Can Calculate Their Financing Needs

It would be best if you never let available financing entirely dictate how much money your company needs to borrow. If you borrow more than you need just because you can do so, you could end up with more debt than you can handle. If you qualify for less than you need and accept that amount under the guise of it being better than nothing, you run the risk of not turning that lesser amount into the profit required to pay it back.

The first step in determining how much money you should borrow is looking at what you are borrowing the money for and determining how much value it will bring to your business. If you are borrowing money to replace equipment that you already have, and your sales and profits are not likely to go up as a result, then you want to borrow only the cost of the machine and its installation, and be sure that you can pay it back without an increase in revenue.

On the other hand, a restaurant borrowing money to add tables can look at how much revenue they believe those extra tables will bring in. If you can reasonably expect that they will bring in an extra $500 in profit per day, you can borrow on having an additional $500 day of profit.

Documents Necessary for Business Loans and Business Financing

The specific documents necessary for a business loan or business financing will depend on the type of loan. That said, you can generally expect to need to provide documents that prove your credit history, your capital, your capacity to pay off the loan, any property you have that can act as collateral, and a business plan.

Specifically, this will likely include three years of federal business tax returns, profit and loss and balance sheets, a business debt schedule, and a business plan if you are opening a new business.

For those looking to raise business capital and would like guidance on how to prepare and present to lenders, download our latest ebook, "How To Raise Capital For Your Business In 2021 ."

Read more from our blog