Lending Library

Small Business Administration (SBA) loans are some of the most desirable and sought-after financing options available for small business owners. SBA loans are known for affordable interest rates and generous repayment terms that can help small businesses grow and reach their financial goals. At the same time, SBA loans are also somewhat notorious for featuring tedious application processes and slow funding speeds. 

If you plan to apply for an SBA loan, it’s important to have realistic expectations regarding the overall timeline for these financial products. The SBA loan process can take much longer than traditional and online business loans. Often, it takes weeks to apply for an SBA loan, and the underwriting and funding process for an SBA loan can last as long as 60 to 90 days.The guide below will walk you through the steps borrowers need to take to get various types of SBA loans. You’ll discover how to find an SBA lender, the documentation you need to gather for your loan application, and other important details about each loan option.

The SBA loan process.

Applying for an SBA loan can seem overwhelming at first glance, but understanding each step can make the process more manageable. Here are the key stages of the SBA loan process, from initial preparation to final funding, so you can navigate it with confidence. Knowing what to expect and how to prepare will help you streamline your application and improve your chances of securing the loan your business needs.

Getting matched with a lender: 2 days.

The federal government guarantees a portion (up to 75%) of SBA loans. However, the Small Business Administration itself does not issue loans to business owners. Instead, SBA loans come from the same lenders you would seek out for traditional business loans. 

If you’re interested in applying for an SBA loan, the first step you’ll need to complete is getting matched with an SBA lender that’s capable of meeting your needs. You can complete this step online via the U.S. Small Business Administration’s lender match tool. 

The lender match process requires you to complete a brief questionnaire. After you do so, it could take a few days for the system to locate a lender match for your business (though sometimes the process is faster).

Gathering documentation and applying for the loan: Up to 30 days.

The next step in the SBA loan application process is typically the lengthiest and the most difficult for you, the business owner, to complete. SBA loans feature extensive paperwork and documentation requirements. Below is a sample—though certainly not a comprehensive list—of items your lender may want you to include with your SBA loan application. 

• Business licenses
• Detailed list of debts
• Current income statement
• Personal income tax returns (previous three years)
• Business income tax returns (previous three years)
• Business financial statements (profit and loss statements, cash flow projections, etc.)
• Loan application history
• Resumes for principal owners
• Real estate appraisals (collateral)
• Lease agreements (collateral)
• Franchise, asset purchase, real estate purchase, or other purchase agreements (based on loan purpose) 

Depending on the loan purpose and your business’ record-keeping habits, this step might take anywhere from a few days to an entire month. 

Underwriting: As little as 2 weeks up to 3 months.

Once the application is complete and submitted with all required documents, the loan enters the underwriting phase. This is when the lender reviews all the information and documents you provided to determine your eligibility. The underwriting process for an SBA loan can range significantly in duration. Some lenders are able to expedite their review and make a decision within as little as two weeks. However, for more complex applications or during times of high demand, this process can extend up to three months.

During underwriting, the lender assesses the risk of lending to your business, which includes evaluating your financial statements, credit history, business plan, and the collateral you’ve offered. To improve your chances of a favorable outcome and possibly expedite this process, ensure all documentation is accurate, comprehensive, and well-organized.

Waiting for a loan decision: 1-3 weeks.

Once you submit your loan application, it can take several weeks for a lender to review your documents and underwrite your loan. During the application review and underwriting process, the lender will analyze your creditworthiness (aka your likelihood to repay debts) and your capacity to repay (aka whether you can afford additional debt). 

Other details a lender may evaluate include:

• Value of collateral provided
• Business revenue
• Credit history (personal and business)
• Credit scores (personal and business) 
• Personal and business debts

If your application passes through the underwriting process and a lender approves your application, the next step will be to schedule a loan closing date. 

Receiving your loan proceeds: 1-2 weeks (sometimes up to 90 days).

Once a lender approves your application for an SBA loan, it will put together some paperwork to finalize your loan agreement. This process also takes time. (Note: For commercial real estate transactions, you might also have to hire an attorney to facilitate appraisals and title work, and process other legal documents that could add more complexity and time to this process.)

It’s common for an SBA lender to need several weeks to prepare the paperwork you will need to review and sign before you can receive your loan proceeds. That time frame can easily be doubled, tripled, or more with commercial real estate transactions. And some banks warn that the loan closing process for SBA loans could take up to three months.

How long each loan type takes.

Every SBA loan type has its own unique timeline, shaped by varying application requirements and review processes. Understanding these differences can help you better plan for the future and set realistic expectations for the funding your business needs. Here's a brief overview of how long you might expect to wait for some of the most common SBA loan types.

SBA 7(a) loans: 60-90 days.

The SBA’s most common loan program is the SBA 7(a) loan. This general purpose loan can provide borrowers with up to $5 million in funding. Eligible business owners can use SBA 7(a) loan proceeds for a variety of business expenses, including the purchase of commercial real estate, working capital, business supplies, furniture, and fixtures, and to refinance existing business debt. 

SBA 7(a) loans are popular due to their versatility and the substantial loan amounts they offer. However, these loans also tend to take the longest of all SBA loan types. From start to finish, it's common for an SBA 7(a) loan application and funding process to last between 60 and 90 days.

Additionally, SBA 7(a) loan terms are generally favourable, with repayment periods of up to 25 years for real estate and up to 10 years for other uses such as working capital or equipment purchases. This long-term financing can help businesses manage their monthly payments more effectively. Furthermore, these loans often come with lower interest rates compared to traditional business loans, making them an attractive option for small business owners seeking affordable financing solutions.

SBA Express loans: 30-60 days.

Another popular Small Business Administration loan program is the SBA Express loan. With the SBA Express Program, qualified borrowers can receive up to $500,000 worth of funding for their businesses. And for loans of $50,000 and under, lenders do not have to require collateral from borrowers. 

After you complete your application for an SBA Express Loan, you can expect to receive a response from the Small Business Administration within 36 hours. However, the lender makes the final eligibility decision. From application to funding, the entire SBA Express Loan process could potentially take as little as 30 days. 

It is important to note that the federal government guarantees only up to 50% of SBA Express loans. By comparison, the SBA 7(a) loan features a 75% guarantee that lenders can rely on in the event of a default. As a result, SBA Express loans are riskier for SBA lenders to issue. So, they might not be as easy to qualify for, depending on the details of your loan application.

SBA 504 loan: 60-90 days.

SBA 504 loans can be a helpful financing option for small business owners who need affordable financing options for certain types of commercial real estate purchases, machinery, or equipment. Eligible borrowers may receive up to $5 million in funding. For certain energy projects, the maximum loan amount may extend to $5.5 million.  

504 loans are backed (in part) by the SBA and made available through Certified Development Companies, also called CDCs. These are nonprofit corporations that aim to promote economic development in local communities. Around 50% of the total project is typically financed through a private business lender as well, along with at least a 10% down payment from the business owner (sometimes up to 20% down). The SBA-backed portion of the loan comes in the form of a second mortgage for up to 40% of the eligible project costs.  

You can start the application process for a CDC/504 Loan by searching for a local CDC on the SBA’s website. In general, SBA 504 loans can take several months to process. Most borrowers will wait at least two to three months from the time they submit their initial loan application before they receive their loan proceeds (assuming all goes well and they qualify for funding).

Note that you cannot use a 504 loan for working capital, inventory, consolidating or refinancing debt, or investing in rental properties. However, these SBA loans may work well for purchase of real estate assets or equipment that can promote job creation or business growth. Companies that will use funding to improve or modernize existing facilities, land, streets, landscaping, etc., may also be eligible for this SBA loan program.

SBA microloan: 30-90 days.

Small business owners can use the SBA microloan program to borrow up to $50,000 to cover eligible business expenses. The average size of an SBA microloan is $13,000. Even though most microloans feature smaller loan amounts, the intermediary lenders that issue the loans (typically nonprofit community-based organizations) may require collateral, plus a personal guarantee from the business owner. 

Although lenders issue microloans for smaller amounts, the loan process can still be slow. If your small business qualifies for funding, it’s common for it to take between 30 and 90 days between the initial loan application and the receipt of your loan proceeds. Remember, both the SBA and an intermediary lender will have to approve your loan application.

Eligible microloan borrowers can use the funding they receive to support their small business in a variety of ways including to purchase inventory, equipment, supplies, machinery, furniture, and to provide essential working capital. However, business owners cannot use SBA microloan funds to purchase real estate or consolidate existing debts.

Factors that affect SBA loan processing times.

Several factors can impact the processing time of SBA loans, making some applications move faster or slower through the pipeline. Understanding these factors can help applicants set realistic expectations and better prepare for the application process. Key elements that affect SBA loan processing times include:

• Business readiness: The more prepared a business is with its financial statements, business plans, and required documentation, the faster the application process can proceed. Incomplete applications or missing documents can significantly delay the process.
• Lender experience: Working with a lender that has extensive experience with SBA loans can also affect processing time. SBA Preferred Lenders, for example, have the authority to process, underwrite, and finalize most SBA loans without direct SBA review, which can speed up the approval and funding process.
• Loan complexity: Larger loan amounts, or loans used for more complex projects (such as purchasing real estate or starting new construction), may require additional documentation and verification, extending the processing time.
• Time of year: Application volume can vary throughout the year, impacting processing times. Periods of high demand can slow down the process, as lenders and the SBA manage a larger queue of applications.
• Accuracy of information: Inaccuracies in the application or documentation can lead to delays as these issues are identified and corrected. Thoroughly reviewing all information before submission can prevent unnecessary setbacks.
• Economic and policy environment: External factors, such as changes in government policy or economic conditions, can influence processing times. For example, during economic downturns or following natural disasters, the volume of applications may increase, slowing down the process for all applicants.

By being aware of these factors, applicants can take proactive steps to mitigate potential delays, such as choosing an experienced lender, ensuring their documentation is complete and accurate, and applying during lower-demand periods when possible.

How to speed up SBA loan processing times.

While the SBA loan process can be lengthy, there are several strategies you can employ to help expedite your application:

1. Get prequalified: Before you formally apply, some lenders offer a prequalification process that can give you an idea of your eligibility and the potential loan terms. This can help you identify and resolve issues that might slow down the full application process.
2. Organize your documents: Ensuring that all your financial documents, business plans, and personal credit histories are in order before you apply can save valuable time. Missing paperwork or unclear details can cause delays, so it's vital to prepare everything meticulously.
3. Work with SBA Preferred Lenders: Choosing to work with SBA Preferred Lenders can significantly speed up your loan processing time. These lenders have demonstrated their proficiency in processing SBA loans and have earned the authority to underwrite and finalize most SBA loans without needing to direct SBA review. This streamlined process can reduce delays and help you receive your funds faster.
4. Clear communication: Maintain open lines of communication with your lender. Promptly respond to any requests for additional information or clarification to avoid bottlenecks.
5. Hire a professional: Sometimes, hiring a loan consultant who specializes in SBA loans can be worth the investment. They can help you navigate the application process smoothly and identify and address potential issues before they become obstacles.
6. Consider smaller loan amounts: If possible, apply for only the amount you need. Smaller loans often require less documentation and can be approved more quickly than larger, more complex loans.

By following these tips, you can enhance your chances of a swift and smooth SBA loan approval process, helping you secure the funding your business needs with as little delay as possible.

SBA loans vs. other small business loan types.

When deciding on the best financing option for your small business, it’s vital to compare SBA loans with other available loan types. This evaluation can help you determine which loan will best meet the needs of your business, considering factors like interest rates, repayment terms, and application complexity.

Traditional business loans.

Traditional business loans, offered by banks and credit unions, are a common choice for many business owners. These loans typically provide funding quickly once approved, often within a few weeks. However, the requirements for obtaining a traditional business loan can be stringent. Lenders usually look for strong credit scores, a solid business history, and substantial collateral. Interest rates can be higher compared to SBA loans, especially for businesses deemed risky.

Merchant cash advances.

Merchant cash advances (MCAs) provide small businesses with an advance on their future credit card sales. They are typically easier to qualify for than SBA loans, making them an appealing option for businesses with less than stellar credit. However, MCAs come with higher costs, including elevated interest rates and fees, which can make them more expensive in the long run. Repayment is usually tied to daily credit card transactions, potentially straining cash flow.

Business lines of credit.

A business line of credit operates much like a credit card, offering flexible access to funds up to a certain limit. Once established, you can draw from the line of credit as needed and repay it over time. This type of financing is ideal for managing cash flow or handling unexpected expenses. While the application process for a business line of credit can be quicker than for an SBA loan, interest rates may be higher, and the repayment terms could be less favorable.

Equipment financing

Equipment financing is specifically designed for purchasing machinery or other business-related equipment. The equipment itself often serves as collateral, making it easier to qualify for this type of loan. Interest rates and terms can be more favorable compared to other forms of financing. However, this type of loan can only be used to purchase equipment, limiting its flexibility compared to an SBA loan.

Invoice factoring

Invoice factoring, or financing, allows businesses to sell their unpaid invoices at a discount in exchange for immediate cash. This type of financing can be quick and relatively easy to obtain, making it a good option for businesses that need to improve cash flow quickly. The downside is that it typically comes with higher fees and interest rates, and relying too heavily on this type of financing can become expensive over time.

In summary, while SBA loans often come with lower interest rates and favorable terms, the application process can be lengthy and complex. In contrast, other small business loan types may offer quicker access to funds or be easier to qualify for, though they often come with higher costs or more rigid usage restrictions. Evaluating your specific business needs and financial situation carefully will help you choose the most suitable loan option for your circumstances.

The bottom line.

The U.S. Small Business Administration provides many attractive financing options to support small business owners throughout the country. And when it comes to the cost of the loan and loan terms, SBA loans tend to be generous in both areas.

With a proprietary application platform that makes uploading documents fast and easy and a dedicated SBA team on call to answer any questions you have and assist you throughout the funding process, we’ve made it as easy as possible for business owners to access an SBA loan. Learn more about applying for an SBA loan.

Lenders use the debt-service coverage ratio (DSCR) to determine whether your business qualifies for a loan and under what terms. This is just one metric that financial teams consider (along with factors like your credit score and tax returns), but it is vital because it helps you get a fair rate and approval for your request. 

Your DSCR highlights any existing debt you may have and if you can realistically pay it off. Learn more about this concept and what it means for your loan application chances.

What is the debt-service coverage ratio (DSCR)?

The debt-service coverage ratio (DSCR) is essentially a numerical figure that represents your business's ability to repay its debts. It's calculated by dividing your business's net operating income by its total debt service obligations over a specific period, usually a year. A simpler way to think about it is comparing the money your business makes to the money it owes. If your DSCR is 1.00, that means your net income exactly covers your debt payments. Most lenders look for a DSCR higher than 1.00, indicating you have more income than debt and can comfortably manage additional loan payments. A lower DSCR, on the other hand, signals potential risk to lenders, as it suggests your business might struggle to meet its debt obligations.

How do you calculate your DSCR?

You can easily calculate your DSCR once you have your ledgers balanced and have developed a clear picture of the financial risks associated with your business. 

This is the formula to track your debt-service coverage ratio:

Net Operating Income / Debt Service

For example, if you took out a $20,000 loan and have a net operating income of $30,000 for the year, your DSCR is 1.5 ($30,000/$20,000).

Once you calculate your DSCR, you can evaluate whether your income and proposed debt are proportionate or if you need to make changes to become profitable. Here is how you read the ratio:

• If your DSCR is greater than 1.00, you have the operating income necessary to pay off the debt.  
• If your DSCR equals 1.00, you have just enough operating income to cover your debt.  
• If your DSCR is less than 1.00, you do not have the operating income you need to cover your debt. 

Continuing the example, if your business has to close for 6 months and you only have an operating income of $15,000, a $20,000 loan would place your DSCR at 0.75.  

Most lenders prefer applicants to have a DSCR of at least 1.25. This creates a safe cushion in the event that a company’s net operating income decreases unexpectedly.

What is net operating income?

As you learn about the debt-service coverage ratio, you may want to take a step back and learn about net operating income—an important term to help you calculate your DSCR. 

Net operating income tracks a company’s ability to generate a positive cash flow. It is calculated by subtracting your operating expenses from your gross operating income (or revenue). 

For example, someone who owns a real-estate rental property might collect $1,000 each month in rent and $75 monthly in fees for internet and utilities. The landlord would have $1,075 in gross operating income. The operating expenses would include taxes, home insurance, and upkeep like a lawn service. If these expenses cost $475 total, the landlord’s net operating income would be $600.

Why does DSCR matter?

Understanding your debt-service coverage ratio (DSCR) isn't just about getting through the door with lenders—it's about financial health and strategy for your business. It matters because it provides both you and potential financial partners with a clear, quantitative measure of your company's ability to manage and service its debt with the income it generates.

In a real sense, DSCR is a litmus test for financial stability. A strong DSCR indicates to lenders that your business has a healthy cash flow, making it a lower-risk investment. For you, it's a signal that your business operations are generating enough profit to comfortably handle your current debt obligations, plus some. This can give you the confidence to pursue expansion or improvement projects, knowing that your fundamental finances are solid.

Furthermore, understanding and improving your DSCR can open doors to better loan terms, including lower interest rates, more favorable repayment schedules, and higher borrowing limits. In contrast, a lower DSCR might prompt a reassessment of your business strategies and financial management practices to bolster your operating income or reduce debt, protecting your business from over-leveraging and financial distress.

Remember, lenders and financial analysts see the DSCR as a direct reflection of your business's financial health and its future prospects. That's why paying attention to this ratio isn't just about securing loans—it's about securing your business's future.

What is a good DSCR?

A "good" DSCR is somewhat subjective and can vary by industry, but as a rule of thumb, lenders typically look for a ratio of 1.25 or higher. This benchmark indicates that a business has enough income to cover its debt obligations with a little room to spare, which in turn suggests financial resilience. Specifically, for businesses operating in sectors with more predictable cash flows, such as manufacturing or retail, a DSCR closer to 1.00 might still be acceptable because their income streams are more consistent. On the other hand, industries subject to seasonal variations or cyclical demands, like agriculture or construction, might need a higher DSCR to account for periods of reduced income.

It's crucial to understand that a higher DSCR not only improves your chances of loan approval but also may result in more favorable loan terms. This is because lenders perceive a lower risk when a business demonstrates a strong ability to generate profit in excess of its debt obligations. Conversely, a DSCR below 1.00 is a red flag, signaling potential difficulties in meeting debt payments which might necessitate immediate financial restructuring or strategic adjustments to improve profitability.

In essence, while the "ideal" DSCR can vary, aiming for a ratio that comfortably exceeds your lender's minimum requirement is a wise strategy. It positions your business as a sound investment and provides you with leverage during negotiations, potentially saving your business significant amounts in interest and fees over time.

What do lenders learn from your DSCR?

The DSCR is an indicator of risk for your business loan. If you have a low DSCR (or a ratio that is close to 1.00), you are more likely to default on your loan. You may have to miss payments if you don’t maintain your net operating income or you may require additional loans to cover your costs.  

A low DSCR can also cost your business money. Not only are you more at risk for a loan denial because of this ratio, but your lender may charge higher interest levels and have fewer forgiveness options if you get approved. 

You could end up paying more fees and extra expenses to the lender in order to pay off the loan. Your lender might also require you to pay off the loan faster, limiting your other business investment opportunities.

How to improve your DSCR.

There are multiple steps you can take to improve your DSCR, but few offer easy solutions. You may need to make significant adjustments to your business to improve your financial standing. A few options include:

• Decreasing your operating expenses. (Lower payroll costs by adjusting your staff, cancel a few non-essential services.)
• Pay off some of your existing debt. (Wait a few months until your debt is lower to apply.)
• Decrease your borrowing amount. (Take out a smaller loan and apply again after you pay that one back.)
• Increase your net operating income. (Find ways to grow your sales without driving up costs.)

Each solution will have its own benefits for business owners. Some will find it easier to lower their borrowing amount, while others will want to cut expenses to get the funds immediately.

Know your DSCR before you apply for a loan.

You can reduce your risk of loan rejection by calculating your DSCR beforehand. You can understand how likely it is that your loan will get denied based on this score. A higher DSCR isn’t a guarantee for approval, but it can make your loan application look better.

Get to know some of the loan options through Lendio’s comparison guide. You can get an idea of the amount of funding you need and the flexibility required to spend the money how you want. Find what works for you today.

In the fast-paced world of business, maintaining a steady cash flow is crucial for survival and growth. However, even the most well-run businesses can hit a rough patch or find themselves in need of quick capital to seize a growth opportunity. This is where cash flow loans come into play. Think of them as a financial lifeline, designed specifically to keep your business afloat during precarious moments, helping you navigate temporary cash crunches or seize golden opportunities. Whether you're looking to cover operational costs, invest in new equipment, or simply need a cushion during a slow season, understanding how cash flow loans work could be the key to unlocking your business's potential.

What are cash flow loans?

Cash flow loans, in simple terms, are based on the future cash flows of a business. Rather than focusing on the hard assets of the company, lenders evaluate the projected revenue and cash generation capabilities when deciding to fund. This makes cash flow loans particularly appealing for businesses that may not have substantial physical assets, but have strong revenues and profit margins. Essentially, it’s about borrowing from your future self—using tomorrow’s earnings to fuel today’s growth and operations. These loans can be flexible, offering businesses the necessary breathing room to manage expenses, invest in new projects, or expand operations without the immediate burden of traditional asset-based lending requirements.

How do cash flow loans work?

Cash flow loans typically work by allowing businesses to borrow based on their projected cash flows. This is calculated using the business's current financial situation, including income and expenses, to estimate future earnings. Lenders utilize this forecast to determine how much money they can safely lend, ensuring that the business can repay the loan from future income. The process usually involves detailed financial analysis, including a review of the business’s sales history, profit margins, and cash flow statements.

The repayment terms for cash flow loans can vary significantly depending on the lender and the financial health of the business. Generally, these terms include a fixed interest rate and a repayment schedule that may span months or a year. Importantly, because the loan is unsecured, lenders may charge a higher interest rate than traditional secured loans. This higher cost reflects the increased risk the lender takes on by not requiring collateral.

For businesses, managing a cash flow loan responsibly means closely monitoring cash flow projections and making adjustments as needed to ensure the loan does not become a financial burden. It's essential for businesses to consider their ability to manage the loan's repayment schedule, especially during periods where income is lower than expected.

Cash flow loans vs. traditional loans.

When comparing cash flow loans to traditional loans, the key difference lies in the collateral. Traditional loans typically require physical assets as collateral, such as real estate or equipment, making it a challenge for businesses that lack substantial assets but are cash-rich.

Another notable difference lies in the application and approval process. Cash flow loans often boast a faster approval process since the evaluation is heavily based on financial projections and revenue performance, not the valuation of physical assets. This can be particularly beneficial for businesses needing quick funding to capitalize on immediate opportunities or to address sudden financial shortfalls.

However, the trade-off for the convenience and accessibility of cash flow loans is usually a higher interest rate compared to traditional loans, due to the higher risk lenders assume by not requiring collateral. Businesses should weigh these costs against the benefits, considering their cash flow stability, growth prospects, and ability to manage the loan repayment under varying economic conditions.

Ultimately, the choice between a cash flow loan and a traditional loan depends on the specific needs, circumstances, and financial health of the business. Each financing option offers unique advantages and challenges, making it crucial for business owners to carefully assess their situations and future financial projections before making a decision.

Types of cash flow loans.

Cash flow loans come in several types, making them a flexible financing option for many businesses. The types include:

1. Merchant cash advances: Merchant cash advances are a form of financing where a lender provides a lump sum payment to a business in exchange for a percentage of the business’ daily credit card sales.
2. Business cash advances: A business cash advance is another type of financing where a company receives a lump sum of cash from a lender. This amount is then repaid over time via a fixed percentage of the business’ daily sales.
3. Unsecured line of credit: An unsecured line of credit allows businesses to access funds as needed, without putting up any collateral. These credit lines can be helpful for managing cash flow fluctuations or unexpected expenses.
4. Invoice financing: Invoice financing is a form of funding where businesses can borrow money against the amounts due from customers. This option provides immediate cash flow by allowing businesses to turn their outstanding invoices into immediate capital. It’s particularly useful for businesses with long invoice payment cycles, enabling them to maintain operations and growth without waiting for clients to pay.

Pros and cons of cash flow loans.

Before we delve into the advantages and disadvantages of cash flow loans, let’s remember that every business is unique. What works best for one may not necessarily be the right choice for another. It’s crucial to understand your own business needs and circumstances to make an informed decision. Now, let’s get started with the pros and cons.

Pros of cash flow loans

• Fast access to cash. Unlike traditional lending, which can take weeks or months due to the requirement of extensive documentation and collateral valuation, cash flow loans allow businesses to access needed funds in a matter of days. This rapid turnaround can be crucial for covering immediate expenses or capitalizing on timely opportunities.
• Lower credit score requirements on some loans. Since lenders focus more on the projected revenue and cash flows rather than the creditworthiness of the borrower, businesses with less-than-perfect credit can often still qualify. This makes cash flow loans an attractive option for newer businesses or those that have encountered financial difficulties in the past.
• No collateral required in the traditional sense. Cash flow loans do not necessitate physical assets as security, making them more accessible to businesses without significant tangible assets. This characteristic is particularly useful for service-oriented or tech companies, which might not have the equipment or real estate typically required for traditional loans.

Cons of cash flow loans

• Can be more expensive than other forms of financing. Because cash flow loans often come with higher interest rates and fees due to the lack of physical collateral and the perceived higher risk by lenders, they can be more costly over time compared to traditional loans.
• Relies on business generating enough cash flow to repay the loan. A critical consideration for cash flow loans is the dependency on the business's ability to generate sufficient cash flow to meet repayment obligations. Since these loans are based on future earnings projections, any shortfall in revenue can pose a significant repayment challenge, potentially leading to financial strain or impacting the business's credit.
• Riskier for businesses with unstable or unpredictable revenue streams. Businesses that experience significant fluctuations in sales or operate in highly volatile markets may find cash flow loans especially risky. Since repayment depends largely on consistent revenue, periods of low income can lead to difficulties in meeting loan obligations, potentially exacerbating financial instability.

How to get a cash flow loan.

Navigating the process of obtaining a cash flow loan can seem daunting, but with the right approach, it can be streamlined and successful. Here's a step-by-step guide to get you started:

1. Evaluate your financial health: Before applying, assess your business's current financial status. This includes reviewing your cash flow statements, profit and loss accounts, and future financial projections. Understanding these will help you determine how much you need to borrow and can afford to repay.
2. Research potential lenders: Not all lenders offer the same terms for cash flow loans. Spend time researching to find those that cater to your business type and offer terms that align with your needs and repayment ability.
3. Prepare necessary documentation: While cash flow loans may not require collateral, lenders will still expect a comprehensive view of your business's finances. This typically includes financial statements, tax returns, cash flow projections, and a business plan that outlines how the loan will be used.
4. Apply for the loan: Once you have gathered all necessary documents, fill out and submit your loan application. Be prepared to answer additional questions about your business and financial projections.
5. Carefully consider the terms of your loan agreement: Carefully examine the terms outlined in your loan agreement. Pay close attention to the interest rate, repayment schedule, and any fees or penalties for early repayment or late payments. If there are points or terms that are unclear, don't hesitate to reach out to the lender for clarification. Making an informed decision now can prevent misunderstandings or financial strain in the future.

Remember, transparency with your lender about your business's financial health and clear communication can significantly enhance your chances of success in obtaining and managing a cash flow loan.

Exploring alternatives to cash flow loans.

While cash flow loans can be an excellent solution for many businesses, they’re not the only option. Other financing alternatives may be more fitting, depending on your business’ specific needs. Let’s take a look at a few:

1. Invoice factoring: One alternative to cash flow loans is invoice factoring. This method involves selling your unpaid invoices to a third party (i.e. ‘factor’) at a discounted rate. The factor then collects payments directly from your customers, allowing you to get immediate cash. It’s an excellent choice for businesses that have to wait for long periods to receive payments from their customers.
2. SBA loans: SBA loans are backed by the Small Business Administration (SBA) and often come with lower interest rates and more favorable terms. However, they can take time to process and may require more paperwork.
3. Term loans: Term loans are traditional business loans where a lender provides upfront money, repaid over a specified period with interest. They are used for capital investments like equipment or real estate. While term loans have lower interest rates than cash flow loans, collateral and a solid credit history are usually required.

Remember, the best financing option for your business depends on various factors, including your business’ size, its stage in the business lifecycle, its financial stability, and your specific needs. Weigh your options carefully and consider seeking advice from a financial advisor to make an informed decision.

Cash flow loans can be a versatile and valuable solution for businesses requiring extra cash. They provide flexibility and easy access to funds. However, as with any financial decision, it’s important to carefully consider the potential risks. Understanding the nature of these loans—as well as the differences between them and their asset-based counterparts—is crucial for making informed and beneficial financial decisions.

Ah, the pitch. It’s the proverbial softball throw used to score your business a home run. It’s the conversation that opens the door to a customer believing you can solve their problems and lets you close the deal. Let’s talk about creating the perfect pitch to hit the ball out of the park every single time.

Types of business pitches.

Pitches come in all flavors and sizes, and your first step is to identify why you are pitching. Are you trying to introduce your business? Plant the seed for a future conversation? Win immediate business?

Pitches typically are 1 of 3 types:

Cold pitch

The elevator pitch is an example of pitching to someone you’ve never met before. An elevator pitch is a concise, persuasive summary of your business idea or proposal. An effective elevator pitch should quickly grab the listener's attention and leave them wanting to know more.

Example of an elevator pitch

"Hi, I’m Alex, founder of EcoTech Solutions. We specialize in developing innovative, eco-friendly technology that helps companies reduce their carbon footprint. Our flagship product is a smart energy management system that can cut energy costs by up to 30% and enhance sustainability practices. We’ve already gained traction with several major corporations and are looking to expand our impact. I’d love to discuss how our solutions could benefit your company."

Sales pitch

Introduce a product or service to someone you’ve had contact with who isn’t already a customer (e.g., a business peer or someone you’ve already cold-pitched). The main goal of a sales pitch is to convince the listener that your product or service will meet their needs and provide value.

Investment pitch

Pitching to potential investors requires a different approach as it involves convincing them to invest money into your business. The focus should be on highlighting the potential for growth and profitability of your business.

Recommendation

Pitching a new idea or additional products to an existing customer can be less “pitchy” and more of a suggestion. You already have a working relationship with the customer, so your goal should be to show them how your new idea or product can add value and benefit their business.

Know your audience.

It’s important to know if the pitch target is a consumer (B2C) or another business (B2B). A B2C pitch tends to be a shorter pitch process that engages the emotions of one person. With a B2B pitch, you may have to hold a discovery session before creating a pitch to understand the problem and who the decision-makers are. A B2B pitch tends to be a longer process from start to finish. And a B2B pitch uses logic, rather than emotion, as a primary part of its narrative.

Think of it this way. Suppose you are pitching personal fitness training services to an individual client (B2C). In that case, you have to understand what their goal is. Do they want to keep up with their non-stop toddler, fit into a new wardrobe, or live a healthier lifestyle? Your pitch appeals to their emotions (e.g., the joy of chasing the toddler without getting winded).

If, instead, you are pitching your services to a corporate HR department (B2B), then you must meet the needs of all the stakeholders. Emotions take a backseat to meeting business metrics (e.g., you need to show your services will increase participation in the corporate wellness program).

How to create a business pitch.

All pitches—regardless of the purpose or recipient—have the same essential pieces:

• Introduction
• Establish common ground
• Solve a problem
• Ending question
• Close the deal
• Follow-up

Introduction

This is the short and sweet part. Your name and your business name might be all you need here.

If you pitch to a group of decision-makers, consider including historical context such as how long you’ve been in business and how many clients you’ve served. This information allows those who weren’t part of the initial conversation to understand your business’s background.

Establish common ground

With luck, you can establish common ground. People like familiarity as it builds trust and promotes bonding.

If you have mutual business acquaintances, mention them. If you’ve attended the same conference, now is a great time to remind them.

If you’re pitching digitally, you can still establish a pre-pitch relationship. For example, consistently comment on the potential client’s social media posts or reshare their blog posts on your social media channels to create a connection.

Solve a problem

This is the meat of the pitch. A successful pitch is all about solving a potential client’s problem. People care about their own issues—not about you, your product’s features, or your new service protocols.

Don’t blindly pitch. In baseball, opposing teams understand the statistics of a batter before they throw the ball. You need the equivalent (e.g., how long a company has been in business, their pain points, what their competitors are doing differently) before creating your pitch.

You also want to make sure the person you are pitching considers the problem something that needs to be solved. If a business’s founder is a CPA, they’d be unlikely to pay for your accounting services.

Similarly, time your pitch when they have the budget. Knowing the potential client’s funding cycle (e.g., the start of their budget year) can facilitate closing the deal. Depending on the client, you may even want to educate them on funding sources they could use to support the project.

Use your unique selling proposition (USP) as part of the proposed solution. Your USP is what your business is known for. It’s not your niche market. It’s what you do better than your competitors and what people think of immediately when they hear your business name.

Let them say yes.

Never force your idea on the potential client. Instead, invite them into the pitch by using the questions they ask as part of a collaborative process. If both sides of the pitch work together to create the solution, there’s more buy-in.

Give them a chance to say yes by ending your pitch with a question. One option is to use an obvious “yes” question such as “Wouldn’t your business benefit from reducing operational costs by 30%?” Or perhaps use a stepping-stone question like “How about a 30-day trial to see this in action?”

Close the deal.

Remember that the “middle” of a conversation is forgotten territory. People tend to recall the first and last things they hear. Thus, you’ll want to include your key points at the end of your pitch.

If you aren’t closing the deal right then, plan a specific follow-up date. A potential client saying, “We’ll get back to you,” often means they won’t. Be persistent in following up but, of course, learn to accept “no” gracefully. Maybe your solution isn’t the right one today, but it could be 6 months from now.

When you get your “yes,” handle the negotiation process like a pro. Be prepared to meet demands, make concessions, and give the customer confidence that they made the best decision by choosing your business.

Follow-up

A successful pitch and signed purchase agreement is the end of an inning, not the ballgame. Follow through and meet the customer’s exact needs to stay in the game.

Providing excellent customer service helps create a satisfied customer. You can then ask that happy client to write a customer review that you can use in your next pitch.

Tips for Creating a Compelling Pitch

Creating a pitch that resonates with your audience requires strategic planning and execution. Here are some tips to help you craft a compelling pitch:

1. Keep It concise: Time is of the essence. Aim for clarity and brevity. An overly long pitch can lose your audience’s attention. Focus on delivering your key points quickly and effectively.
2. Highlight benefits over features: Clients are more interested in how your product or service will solve their problems or improve their situation. Emphasize the benefits and value rather than just listing features.
3. Use storytelling: Stories can make your pitch more engaging and relatable. Share a success story or a case study that demonstrates how your offering has benefited others in similar situations.
4. Be confident and passionate: Your enthusiasm can be contagious. Show confidence in your product or service and convey your passion. Belief in your solution can inspire the same in your audience.
5. Prepare and rehearse: Practice your pitch multiple times. Rehearsal helps you refine your message, manage time, and deliver with confidence. Be ready to adapt based on feedback and observations.
6. Use visual aids: When appropriate, incorporate visual elements like slides, charts, or prototypes to illustrate your points and make your pitch more memorable.
7. Ask for feedback: After delivering your pitch, seek feedback. Constructive criticism helps you improve and tailor future pitches to meet your audience's needs better.
8. Be ready to answer questions: Anticipate the questions your audience might have and prepare thoughtful, concise responses. Being prepared demonstrates thorough understanding and builds trust.
9. End with a strong call to action: Clearly state what you want the audience to do after your pitch. Whether it’s scheduling a follow-up meeting, signing up for a trial, or making a purchase, make your desired outcome explicit.

Perfect your business pitch.

A successful business pitch doesn’t just happen. It takes thoughtful preparation, practice, and revisions for each customer. The good news is the more you pitch, the easier it is to score a home run for everyone.

More than 30% of American small businesses are not approved for at least some of the funding they apply for.

Reasons for this can range from operating in a risky industry to a low credit score. But what really shouldn’t be a concern is flubbing the preapproval process by not having the required documentation.

If you’re concerned that you might fall into that category, read on—these are the documents you’ll need to apply for a small business loan or other financing.

Which documents will you need to apply for business financing?

The first thing you will do when you apply for financing at Lendio is give us enough information to help our lender network assess your risk. When you click “Apply now,” you’ll start our 15-minute online application.

You’ll need the following documents:

• 3 months of business bank statements (you’ll be given the choice to connect your account or manually upload images)
• A copy of your driver’s license or state ID
• Voided check from your business account
• Proof of business ownership
• Month-to-date transactions

You’ll also be asked to provide:

• The amount of money you want to borrow
• When your business started and some general information about your business
• Your birthday and your social security number

What documents will you need for the next stage?

After we receive your application, our financing network will review your application and we’ll let you know what you’re eligible for. Depending on the types of loans or other financing you’re being offered, you may need to provide some of the following documents before your financing funds. And you won’t be asked to guess at anything: your Lendio funding manager will walk you through all of this.

You may be asked to provide:

Tax returns 

These will objectively show lenders how much money your company makes, how much you draw from the business, and how much money you personally have in the bank.

Some lenders will want to see profit on your business tax return—and if not profit, then a clear path to profitability. They’ll want to know that you pay your taxes in full and on time. 

Business bank statements

You will have already uploaded 3 months’ worth, but some types of financing can require additional bank info. These documents are used to show lenders your cash flow patterns. BTW, these will need to be business bank accounts, not a personal account.

A business plan

Some lenders will request a copy of your business plan, which they may review from two angles. 

First, they’ll be looking at the legitimacy of both the problem your business solves and your solution to it, as well as how you plan to bring your solution to market and how you plan to make money from it. 

And don’t make the mistake of thinking that only apps and tech platforms solve problems. A hair salon could solve the simple problem of there not being another hair salon closer than 6 blocks away, and it’s a perfectly sound solution to a perfectly reasonable problem.

Second, they’re looking for a good fit, both from your business and from you, and this could mean different things. You may not be a good fit if:

• They have a different idea of how you should be growing
• They don’t share enthusiasm for the category you’re in
• Any of a number of other reasons

Also, don’t worry about not being a good fit, however. Lendio works with 75+ lenders, which opens up a lot of options.

Profit and loss statement and balance sheet

A P&L statement, also known as an income statement, shows a business's revenues, expenses, and profits or losses over a specific period. It helps lenders understand how much money the company is making and where it is being spent.

A balance sheet provides a snapshot of a company's financial position at a given point in time. It lists all of the assets, liabilities, and equity of the business. This document gives lenders an overview of what the business owns and owes.

Business license and related documents

If you didn’t previously upload your business license, you may be asked to by some lenders to provide it now. You could also be asked for a copy of your LLC or articles of incorporation, if relevant.

Debt schedule

A debt schedule is a document that outlines all the outstanding debts of a business, including loans, interest payments, and other financial obligations. It is an important piece of information for lenders when considering a business loan application.

A debt schedule typically includes the following information:

• Outstanding balance: This is the total amount owed on a particular loan or debt.
• Interest rate: The annual percentage rate charged by the lender on the outstanding balance.
• Payment frequency: This refers to how often payments are due (monthly, quarterly, annually).
• Maturity date: The final date by which the loan or debt must be repaid in full.
• Collateral: Any assets that have been pledged as security for the loan.
• Guarantors: Individuals or entities who have guaranteed to repay the loan in case the business is unable to do so.

Documentation requirements for SBA loans.

If you have your heart set on a Small Business Association (SBA) loan, you’ll be asked for the following information in addition to the documentation listed above.

• Why are you applying for this loan?
• How will the loan proceeds be used?
• What assets need to be purchased, and who are your suppliers?
• What other business debt do you have, and who are your creditors?
• Who are the members of your management team?
• Anyone who owns more than 20% of the business will need to complete SBA Form 413.

If any of these seem confusing, don’t worry. If you apply for financing through Lendio’s marketplace, your funding manager will explain any additional documentation required. You’ll also upload everything in your online document center, so you’ll have a record of what you’ve submitted and what’s still missing.

It’s common for companies growing faster than their current income to seek outside capital to keep up their momentum. An under-capitalized business will find it difficult to make the leap required to scale and expand.

A clear first step to lining up outside capital is to determine whether equity investment or debt financing (or a combination of the two) might be the best route for your business.

What is equity financing?

When you own a business concept or company, there’s a subjective value attached to it called equity. The equity of any type of asset—whether intellectual or physical—is the value someone is willing to pay for it, minus its liabilities. That could mean the value of an entity today (measured in time and money invested) versus its value in the future (measured by comparable growth).

Once the owner and investor determine the “valuation” of the asset, the owner can then sell parts of the equity to raise capital. 

Types of equity financing.

There are a variety of methods to raise equity capital, including seed capital, angel capital, and managed venture capital. Here’s a closer look at each of these popular equity financing solutions. 

Seed capital

Seed capital typically comes from private investors (often personal sources like friends and family members) during the startup phase of a company’s development. It only qualifies as equity financing if the investor receives a piece of the company in return for its investment.

Angel capital

Angel capital comes from angel investors—typically high-wealth individuals who invest in businesses (startups included). In exchange for angel capital, an investor will require a piece of the companies in which they invest.

Managed venture capital.

Venture capital funds come from managed, pooled investments. This type of funding is usually only available to startups with the potential for rapid growth and high returns. Again, you’ll have to give up a share of your business in exchange for the investment dollars you receive. 

What is debt financing?

Debt financing is a source of business funding where a lender provides to the business an agreed-upon amount of money that is to be repaid over a period of time, in addition to any associated fees or interest.

Types of equity financing.

There are a variety of methods to raise equity capital, including seed capital, angel capital, and managed venture capital. Here’s a closer look at each of these popular equity financing solutions. 

Seed capital

Seed capital typically comes from private investors (often personal sources like friends and family members) during the startup phase of a company’s development. It only qualifies as equity financing if the investor receives a piece of the company in return for its investment.

Angel capital

Angel capital comes from angel investors—typically high-wealth individuals who invest in businesses (startups included). In exchange for angel capital, an investor will require a piece of the companies in which they invest.

Managed venture capital.

Venture capital funds come from managed, pooled investments. This type of funding is usually only available to startups with the potential for rapid growth and high returns. Again, you’ll have to give up a share of your business in exchange for the investment dollars you receive. 

Key differences between debt financing and equity financing

Understanding the key differences between debt financing and equity financing can help you make an informed decision tailored to your business needs.

1. Ownership and Control

• Debt Financing: You retain full ownership and control of your business. Lenders have no say in business decisions.
• Equity Financing: You give up a portion of ownership in your business. Investors may have input on business decisions and strategic direction.

2. Repayment Obligation

• Debt Financing: Requires repayment of the borrowed amount, plus interest and fees, according to the lender’s terms.
• Equity Financing: No obligation to repay the investment. Investors expect returns in the form of dividends or an increase in the company’s value.

3. Profit Sharing

• Debt Financing: Profits remain with the business owner. There is no requirement to share profits with lenders.
• Equity Financing: Profits need to be shared with investors based on their equity stake. This can reduce the total profit that goes back to the business.

4. Credit Impact

• Debt Financing: Can help build business credit if the lender reports to credit agencies. Poor credit might make it difficult to qualify.
• Equity Financing: Doesn’t impact business credit directly. Credit history is generally not a barrier to obtaining funds.

5. Business Risk

• Debt Financing: Poses a risk if the business is unable to meet repayment obligations, potentially leading to loss of collateral or personal assets if a personal guarantee is involved.
• Equity Financing: Reduces financial risk since there’s no debt to repay, but you risk losing a measure of control and having to share future profits.

Considering these differences can clarify which financing option aligns best with your business goals and current financial situation.

When to choose equity vs. debt financing.

Every business has to choose for itself whether equity financing or debt financing makes the most sense, and many companies opt for a mixture of both types of funding. There are risks with either option you choose. 

If your business closes and it still owes outstanding debts, you may still have to repay those loans plus interest. The same isn’t true with equity financing. On the other hand, if you sell your business for a sizable profit, paying off shareholders could be much more expensive than the cost of paying off a business loan. 

It’s up to you to weigh the pros and cons of each type of financing and figure out which solutions make the most sense for your business. 

Lendio’s mission is to empower your small business by making small business loans simple by providing options, speed, and trust. Whether you are looking for an acquisition loan or a startup loan, Lendio offers hundreds of different loan products from a variety of lenders. Find out which business loan is best for you.

Understanding how credit scores are calculated can sometimes feel like unraveling a complex puzzle. However, breaking down the key components gives a clearer picture of how these scores are derived and what they signify. A credit score is essentially a numerical representation of your creditworthiness, influenced by various financial behaviors and patterns. This guide will delve into the factors that impact your credit score and explain how each element contributes to your overall rating.

What is a credit score?

A credit score is a numerical representation of your creditworthiness. It is calculated based on your borrowing and payment history and indicates to lenders how likely you are to repay your debts on time.

It’s also important to understand that you don’t have just one credit score—different lenders and credit reporting agencies use multiple credit scores. While most scoring models assess similar factors such as payment history, amounts owed, length of credit history, new credit, and types of credit, they may weigh these factors slightly differently, resulting in variations in your score.

How is a credit score calculated?

The most common credit score you’ll hear of is FICO or the Fair Isaac Corporation. FICO determines the creditworthiness of an individual with a number, typically between 300 and 850. This FICO credit score is the lending industry standard for making credit-related decisions.

FICO scores are calculated from information pulled from the three major credit bureaus in the United States: Experian, TransUnion, and Equifax. These bureaus, in turn, gather information from lenders like credit card companies, student loan lenders, and banks.

FICO credit scores are divided into several ranges that help lenders assess an individual's credit risk. Here's a breakdown of the different ranges:

• Very Poor (300-579)
• Fair (580-669)
• Good (670-739)
• Very Good (740-799)
• Exceptional (800-850)

Your personal credit score has a large impact on your ability to get a business loan. Most lenders will have a minimum credit score requirement in addition to other eligibility criteria.

FICO determines your credit score based on five factors, but each is weighted differently. Your repayment history and overall credit utilization are the main components of your score.

5 components of your FICO credit score.

1. Payment history

FICO says that payment history determines 35% of your credit score, making this factor the most important aspect of your credit reports. The guiding wisdom here is that past repayment behavior is the best way to determine your ability to pay off new debts.

“Both revolving credit (i.e., credit cards) and installment loans (i.e., mortgage) are included in payment history calculations, although installment loans take a bit more precedence over revolving credit,” financial expert Rob Kaufman of FICO writes. “That’s why one of the best ways to improve or maintain a good score is to make consistent, on-time payments.”

You can boost this portion of your score, and, therefore, greatly boost your FICO credit score overall, by paying down existing debts. One of the fastest ways to push your score skyward is to pay off a debt like a credit card completely. Even ensuring your payments are timely can have an impact, although paying above the minimum will compound your efforts to improve your score.

2. Amounts owed

The next biggest factor FICO uses in determining your credit score is your “credit utilization.” As the term suggests, this metric compares the amount of credit you are using to the credit available to you. This factor accounts for 30% of your FICO score.

Basically, your credit utilization is the percentage of debt you carry. If your credit burden is high, it will lead lenders to believe that much of your monthly income is going toward debt repayments.

“Credit score formulas ‘see’ borrowers who constantly reach or exceed their credit limit as a potential risk,” Kaufman explained.Generally, a “good” credit utilization ratio is 30% or less. Improving this aspect of your credit score can require some strategic thinking. If you pay off a credit card, you might want to keep that account open so the open credit line pushes the ratio in your favor. Similarly, asking for credit limit increases can better your burden percentage.

3. Length of credit history

The number of years you have been using credit has an impact on your score. FICO says it makes up 15% of your score, although this can be a bigger factor if your credit history is very short.

“Newer credit users could have a more difficult time achieving a high score than those who have a credit history,” Kaufman said, “since those with a longer credit history have more data on which to base their payment history.”

It’s smart to always have some lines of credit open, even if you aren’t using them. This approach is especially true if you, or your children, are young adults, although you want to ensure you can responsibly handle credit cards.

4. Credit mix

Credit mix accounts for 10% of your FICO score, so it is a relatively minor factor unless your credit history is limited. Generally, lenders like to see several different kinds of lines of credit on your report, like credit cards, student loans, auto loans, and mortgages.

“Credit mix is not a crucial factor in determining your FICO score unless there’s very little other information from which to base a score,” Kaufman stated.

If you have multiple lines of credit open, you probably don’t have to worry about this factor. Instead, focus on changing your credit utilization ratio or improving your repayment history.

5. New credit

The final 10% of your FICO score is determined by how many lines of credit you have opened recently. This aspect is why people say hard checks on your credit score can actually hurt your standing.

“Opening several new credit accounts in a short period of time can signify greater risk—especially for borrowers with a short credit history,” said Kaufman.

When you apply for a new credit card, loan, or lease, lenders look at your credit history. This check itself shows up on your credit report, even if you were denied the line of credit.

Inquiries can remain on your credit report for 2 years, but FICO only includes credit checks made in the last 12 months in determining scores. “Soft” checks on your credit, like credit monitoring services, are not included.

What doesn't affect your credit score?

Several factors contribute to your credit score, but some things don't impact it:

• Personal information: Age, race, ethnicity, nationality, sex, and marital status don't influence your credit score.
• Soft inquiries: Background checks by potential employers or when you check your own credit report don't affect your score.
• Salary and employment: Salary, employment history, and occupation are not considered when calculating your credit score.
• Location and rental payments: These are not factors unless reported to and recorded by credit bureaus.

Lenders may use this information to evaluate credit applications, but it doesn't directly affect your numerical credit rating.

Established online marketplaces like Etsy are another way to strengthen your online presence. Etsy can help you market your business to a broader customer base and increase your online sales. We’ll walk you through everything you need to know to set up a successful Etsy shop— from who benefits to a step-by-step walkthrough on how to open a shop and what steps you can take to help your business stand out from the competition.

Before you set up your Etsy shop.

Before starting any business venture, you should perform market research. Etsy is no different. You can take a few simple steps before you begin that will help inform your Etsy shop setup to save you time and maximize the impact of your efforts.

Peruse the site’s navigation.

Spend some time looking through Etsy’s menus. Look at the different categories and subcategories. How easy is it for the casual user to find your product category? Does your product clearly fit into one of the categories? If not, where would your product best fit?

Get a sense of the competition.

Imagine that you are your target customer. Enter the keywords you think they’d search to find your product. How many results come up? How is your product different from what’s already offered? This step will give you a sense of how steep the competition is and what you’ll need to do to stand out from the crowd (more on that later).

How to set up an Etsy shop.

1. Register for an Etsy account.

2. Create a shop.

3. Set your shop preferences.

4. Choose your Etsy shop name.

5. Create listings

6. Choose how you want to accept payments.

7. Set up billing information.

8. Open your shop.

9. Market, sell, tweak, repeat.

How to set up an Etsy shop.

Setting up an Etsy shop is an easy 8-step process. Grab yourself a fresh cup of coffee or a glass of water, and let’s do this. Your shop can be up and running before you even need a refill.

1. Register for an Etsy account.

If you already have an Etsy account, you can use your email login. You can also choose to log in using your Facebook or Google accounts. If you want to separate your personal browsing from your business selling account, you can set up a new account using your business email. Registering for an Etsy account is totally free. 

To set up an account, click the “Register” button at the top of the site. It will prompt you to enter your email and first name and create a password. As with any online platform, you’ll want to review Etsy’s Terms of Use and Privacy Policy. Once you click “Register,” Etsy will email you to confirm your account. Click the link and voila, you’re up and running with your very own Etsy account. 

With your brand-spanking-new Etsy account, you can:

• Add items to your favorites
• Use Etsy’s on-site messaging system
• Set up your shop
• Post in the community

Log in to your account, and we’re ready to move on to the next step. 

2. Create a shop.

Once you’re logged in, you want to click on “Sell on Etsy.” Again, it’s on the top of the home page. You should find it just to the left of the “Register” button. Stuck? You can also use this link, and it’ll take you right there. 

Click on the “Open your Etsy shop” button. Boom. We’re onto the next step. Oh, and if you skipped step one, Etsy will prompt you to create an account or log in here. 

3. Set your shop preferences.

Next, you will be prompted to enter your preferences for language, country, currency, and your time commitment to operating the shop:

• Shop language: The default language you will use to describe your items. If you want to add translations into other languages, you’ll be able to make that adjustment after you open your shop. 
• Shop country: What country you’re based in. 
• Shop currency: The currency you will use to price your listings. Generally speaking, it’s recommended that you use the same currency as your bank currency, as currency conversion fees may apply if your bank’s currency is different from the currency used in your shop. 
• Time commitment: Is this a full-time job or a part-time job? Etsy requests this detail for informational purposes. Your answer will not affect the setup of your shop. 

4. Choose your Etsy shop name.

Choosing your shop name may look different for new businesses than for established businesses.

Naming an Etsy shop for an established business.

Since your business already has a name, you’ll want to follow it as closely as possible. If that username is already in use or doesn’t meet the Etsy shop name requirements, it’s advisable to use the same username as your other social media handles. Maintaining consistency across multiple platforms makes it easier for your customers to find you and follow you from platform to platform in addition to adhering to brand standards. 

Naming an Etsy shop for a new business.

If this is your first time naming your business, we recommend you consult our post on “How to Name Your Small Business.” It will walk you through considerations like checking if the trademark is already in use and choosing a name that makes your business easy to find. 

As a rule, the best business (and Etsy shop) names are easy to remember, unique, and tell your customers what you sell. 

Requirements for naming an Etsy shop.

Whether you’re launching an Etsy shop for a new or existing business, Etsy shop names must meet the following requirements:

• 4-20 characters long
• No spaces, punctuation, or special characters
• No profanity
• Not already in use by an existing Etsy member
• Does not infringe on another’s trademark

If you’re still at a loss for what to name your new shop, Etsy has provided some helpful tips for choosing a shop name. 

5. Create listings

Now that you have a shop, it’s time to fill it. Add product listings to your shop by adding photos, creating the listing description and name, completing inventory information, etc. For each listing, you will need to follow these steps:

Add photos and videos.

Click “Add a photo” to upload photos from your computer. You can upload photos individually, or you can save time by selecting multiple photos so all the photos for a listing upload at once. Hit “Choose” to upload the photos. Etsy recommends that you upload at least 5 photos per listing with a variety of angles. 

Photos need to be at least 2,000 pixels wide, but they can vary in height. You don’t have to worry about reducing the size of the photos, either. Larger photos give shoppers the ability to zoom in, allowing them to achieve a more tactile-feeling online shopping experience. Once photos have been uploaded, you can easily rearrange them by clicking and dragging them into your preferred order. 

You can also upload a video showcasing specific features or details of your products. Videos can be 5–16 seconds long. Once uploaded, they will not contain any audio, so be sure your video works as a visual-only feature.

Choose the thumbnail photo.

Now that you have all these stellar photos, you need to choose which one you want customers to see first. This is the thumbnail photo. You can set the thumbnail photo by clicking and dragging it into the number 1 slot. 

To adjust what customers see in the thumbnail preview, click “Adjust thumbnail” below your first photo. This will allow you to change the square’s position in the photo or zoom in. Once you’ve chosen your new thumbnail orientation, click “Save.”

Add listing details.

Listing details are how Etsy users find products. Without accurate and complete listing details, trying to find your listing will be like looking for a needle in a haystack. Remember that there are 2.5 million sellers on Etsy. Filling out the listing details will help shoppers find you. 

For each listing, you’ll need to include the following:

• Title: Give your item a descriptive title. Including the most searchable words at the beginning will increase the likelihood that your product will show up in appropriate searches. 
• About the listing: These dropdowns will help you to categorize your item. Because you select from predetermined categories, completing this section is a matter of a few clicks. In this section, you can mark attributes like “handmade,” “vintage,” etc. 
• Listing categories: Choose the categories to which your listing belongs.  Instead of combing through the list and picking every category that could tenuously apply, take a more discerning approach. Consider where buyers might look to find your specific item, and choose the categories that will increase their chances of finding it easily and swiftly. 
• Add attributes (optional): Attributes include characteristics like color, occasion, or holiday. This is another way Etsy makes it simpler for shoppers to find your items more easily.
• Choose a renewal option: An Etsy listing will stay live on the site for 4 months at a time. Listings automatically renew after that time as a default setting. If you want to control when your listings renew, you can select the “Manual” setting.

Describe your listing.

The next step is to describe your listing. This description is the meat and potatoes of what shoppers will read when they view your listing. You’ll need to indicate whether it’s a digital or physical item. Then you can add a description of the item, its dimensions (if applicable), the production process, etc. 

You’ll want to take the time to include information about materials, size, how it was made, unique features, etc. to give buyers as much information as possible. It may also save you from having to answer many repeat questions. 

You can also include the following optional information:

• Your production partner (if applicable)
• Whether or not the item can be customized
• Which section of your shop the listing falls into if your shop has sections
• Tags (Etsy recommends using all 13 tags available to you)
• Materials
• Price per unit (applies to sellers in the EU)
• Main features (for sellers in Germany)

Add inventory and pricing.

Decide how much your items will cost, and let Etsy know how many you have to sell. In this section, you can also select preferences or include the following: 

• Shop tax rates
• SKUs
• Variations (if you offer different sizes and colors, you can include up to 2 variations per listing)
• Personalization

Add files (for digital items).

If shoppers can digitally download your items once purchased, be sure to add the files to your Etsy shop. This reduces your manual labor and increases the speed at which buyers will receive the items, a winning combination for exceptional customer experience. 

Set up shipping.

Choose how you want to ship your physical items. You have options!

Marketing

If you’re running an Etsy Ads campaign, you can choose to include your listing in that campaign. If you are running a campaign, listings added from the “Sell on Etsy” app will be automatically added to the campaign. If you want to choose which listings you advertise, you can find what you need to control those settings here. 

Publish or save your listing.

Your listing won’t be saved until you click “Save as Draft” or “Publish.” Be sure to save your listing so you don’t lose the progress you’ve made and have to enter it all over again. 

6. Choose how you want to accept payments.

If you’re in an eligible country, you’ll receive payments through Etsy Payments. Etsy Payments allows customers several payment options while simplifying and consolidating payments in your seller account. 

If you’re in a country ineligible for Etsy payments, you can receive payments via PayPal. 

7. Set up billing information.

Depending on your country, you will need a credit card to open your shop. Sellers in certain countries will be asked to keep a card on file as a means of identity verification. The card should be a: 

• Visa
• Mastercard
• American Express
• Discover
• Carte Bleue (France)

8. Open your shop.

Once you’ve completed these steps, click “Open Your Shop.” You can always add listings and make updates or changes to your shop after it’s open.

9. Market, sell, tweak, repeat.

Congrats! Your Etsy shop is up and running. Now you can dedicate your efforts toward making your listings and your shop stand out. Track how your listings perform. If they don’t get traction at first, don’t lose hope. Trial and error is a part of business, and you’ll likely have to do some testing before you find the best strategy, especially if you’re in a competitive category. Etsy Ads may be helpful to get your product seen. Tools like eRank can help you learn more about your listings’ search performance. And of course, if you have an established audience, don’t forget to let them know you’re on Etsy!

Etsy fees

Etsy charges a $0.20 fee for each listing (regardless of whether the item sells). When you sell an item, Etsy collects a 5% transaction fee. They also charge payment processing fees, and you may encounter some additional seller fees. To learn more, you can review Etsy’s full fee and payments policy.