Your Guide to The Best Small-Business Loans
Whether you’re looking to purchase more inventory, open a new location, or simply bring on more help, finding the right loan for your business is critical for obtaining much-needed capital.
While most banks and credit unions offer loans for small businesses, there are plenty of other places to get great rates and favorable loan terms. In fact, you can apply for – and gain quick access to – many types of loans for your business online.
From government-funded SBA loans to business lines of credit to short and long-term loans, finding the perfect loan for your business may be only a few clicks away.
Get the Best Small Business Loan Rates
To find the best small business loan rates, comparing the loan APR (not just the interest rate) is the best way to calculate the total cost. The annual percentage rate (APR) is the total interest and fees charged on the loan on a yearly basis. Finding the loan with the lowest APR – and the best repayment terms for your business – can help you keep costs to a minimum.
To compare rates, you may need to get multiple estimates from various lenders, including online lenders and traditional banks. Remember: There’s always room for negotiation, so make sure to ask each lender what their “best and final rate” would be to win your business.
How Do Small-Business Loans Work?
Getting a loan for your small business means borrowing from a bank or financial institution for the purposes of growing your company. There are many types of loans available, and they’re created for specific business needs.
Each type of loan has its own qualifying factors to help determine eligibility: business income, time in business, credit score, business collateral, and cash on hand.
To get the right loan for your company, you’ll want to answer these questions:
- What will we use the loan for?
- How much money do we need to borrow?
- What monthly payment can we afford?
- What happens if we can’t pay back the loan?
The answers to these questions will help you narrow down your best loan options.
Your Small Business Loan Options
Here are a few of the best small business loan options available today.
These government-guaranteed loans are offered by banks which partner with the Small Business Administration (SBA). They’re meant to provide small businesses with low interest rates and longer loan term lengths.
If you’re interested in applying for an SBA loan, here are some quick guidelines:
- Loan size: from $500 to $5.5 million
- Estimated APR Range: 6% - 9%
- Best for: Long-term loans for working capital or fixed assets
SBA Loan Qualifications
SBA qualifications can be strict and typically require a higher-than-average credit score, strong business financials, and specific guidelines on what the loans can be used for. They can also take a longer time to fund, so it’s not recommended to apply in urgent situations.
Here are some of the unique qualifications required for an SBA loan:
- Must be registered as a for-profit business
- Must be located and operate in the United States
- Owner must have invested time and money into business
- Business cannot receive funds from any other lender
SBA loans may offer greater flexibility than their non-guaranteed counterparts, including lower down payments and no collateral to qualify.
Note: There are also loan programs available for nonprofit and faith-based organizations as part of the coronavirus relief bills.
Paycheck Protection Program Loans (Forgivable)
In response to the COVID-19 pandemic, the SBA started offering Paycheck Protection Program (PPP) loans that could qualify for loan forgiveness. These loans were designed to cover rent, payroll, and other operating expenses – but they also come with strict qualifications and very specific uses. Failure to comply with the PPP requirements could mean losing eligibility for loan forgiveness.
To learn more about the PPP and loan forgiveness options, check out the SBA website to see if you qualify.
Online Term Business Loans (Short-Term & Long-Term)
If your business needs short-term capital to make a one-time purchase – or a long-term loan to expand your operations – applying for an online term loan may be a good fit.
Term loans are standard business loans available from online lenders for your business needs. These can include working capital, inventory, fixed assets, and more.
Short-term loans are typically smaller loans (up to $250,000) for large, one-time purchases, and businesses are required to pay them back within 6-12 months. These loans carry higher interest rates than long-term loans (starting at 10%), but may end up costing less due to the shorter payback period.
Long-term loans are used for business operations and expansion projects, with terms up to 10 years (or more) in length. These loans often have lower monthly payment terms and lower interest rates than their short-term counterparts (sometimes as low as 7%).
When applying for a term loan, here are some quick guidelines:
- Loan size: from $500 to $5.5 million
- Estimated APR Range: 7% - 35%
- Best for: Long-term loans for working capital or fixed assets
Invoice Factoring or Financing
Small businesses often find themselves in the position of having a stack of unpaid accounts receivable (AR) invoices. If you can’t wait for payments and need cash right away, an invoice factoring service may be a good choice. Factoring companies purchase your unpaid invoices which are then repaid when the money is collected from clients.
If you want to keep your invoices but need cash, you can apply for invoice financing. These loans will fund up to 85% of your unpaid invoices, with the remaining 15% available after the invoices are paid. There are fees associated with these loans (called “factor fees”) which are 3% of your total outstanding invoices and 1% of your total invoice weekly until the invoice is paid.
When applying for a invoice financing loan, here are some quick guidelines:
- Loan size: up to $5 million
- Estimated APR Range: .025% - 3% (per week)
- Best for: Short-term loans to cover the cost of unpaid invoices
Equipment Financing Loans
Looking to replace old equipment or add more to your expanding operation? Equipment loans are often easier to qualify for, as the equipment you are purchasing acts as the loan collateral.
The size and duration of these loans depends on the cost, type, and expected life of the equipment being purchased.
For example, you’re a farmer looking to purchase a tractor with an expected service life of 15 years. You’ll typically get a 15-year equipment loan for the price of the tractor, ensuring that you won’t continue to pay for equipment that is no longer in service.
If applying for an equipment loan, here are some quick guidelines:
- Loan size: up to $5 million
- Estimated APR Range: 6% - 40%
- Best for: Business equipment
Lines of Credit
If you want greater flexibility with your business cash flow, consider opening a business line of credit. This option gives you access to funds and doesn’t charge interest until the money is used.
The line of credit account is revolving, meaning that as you pay back the borrowed amount, your available credit goes back up (just like a credit card). This is great for short-term expenses and operating expenses (like payroll). Instead of an upfront, lump-sum loan, a line of credit lets you borrow only what you need, when you need it.
To qualify for a line of credit, lenders typically look for a good credit score and a minimum annual revenue amount.
If applying for a business line of credit, here are some quick guidelines:
- Loan size: $1,000 - $250,000+
- Estimated APR Range: 10% - 25%
- Best for: Operating expenses, short-term borrowing and unexpected costs
Lines of Credit vs. Small-Business Loans
Choosing between a line of credit or a small-business loan depends on how much you need, when you need it, and what you’ll use the funds for.
If you’re looking to expand your business by purchasing inventory or investing in a large, one-time expense (such as a warehouse), a small-business term loan might be best. This provides immediate access to the money with a smaller, fixed-interest rate.
If you need access to funding – but don’t know how much or for how long – a line of credit may be a better fit. A line of credit gives you access to available credit, but you don’t pay interest until you tap the funds. This helps you keep consistent cash flow for business operations while being able to handle unexpected expenses as they arise.
Merchant Cash Advance (MCA) Option
A merchant cash advance (MCA) allows businesses to borrow against future earnings. This is an option for businesses with a strong record of sales tha need quicker funding than a traditional loan.
To qualify for a merchant cash advance, you need to provide 4-6 months of bank statements and receivables, have a strong record of daily sales, and possess a strong credit score.
If you are interested in applying for an MCA loan, here are some quick guidelines:
- Loan size: $1,000 - $500,000
- Estimated APR Range: 40% - 200%+
- Best for: Quick cash to cover operating expenses or short-term costs
Merchant Cash Advance Warning
MCA loans carry many potential red flags for borrowers. They’re typically paid back by directly taking a percentage of daily or monthly sales and can have interest rates in the 200%+ range (not a typo). The rate is directly influenced by your factor rate and payback period, which can cost you a significant amount of interest in a short period of time.
This can quickly bury a struggling business and force a refinance or bankruptcy if the loan isn’t paid off quickly enough. If you’re considering an MCA loan, be sure to understand exactly how fees and interest are charged.
Other Business Funding Options
In addition to the options above, there are other business funding programs available. There are a few more ways to get a small-business loan:
Commercial Mortgage Loans
If you’re looking to buy commercial real estate (such as a physical location for your restaurant or office space), consider a commercial real estate loan.
These loans are typically 5-20 years in length but are paid on a longer amortization schedule with a balloon payment. This means smaller monthly payments as your business grows – but a large payment at the end of the loan.
To qualify for a commercial mortgage loan, lenders typically evaluate your business credit, net operating income, and debt service coverage ratio (among other factors).
Personal Loans for Business
If you don’t have the history, business credit, or current revenue to qualify for a traditional small-business loan, consider a personal loan for your business. These loans are designed for startup businesses that don’t have the assets or income to get regular financing.
Personal loans for your business are unsecured, meaning you don’t have to provide collateral. These loans don’t usually come with restrictions on use (depending on the terms), so you’re able to use them for any part of your business. They’re often fixed-term loans, so you can pay them back in monthly installments over a set amount of time.
To qualify for a personal business loan, you’ll need a strong credit history and personal income.
Note: These loans put your personal property at risk. Should you default on the loan, the lender may be able to seize your personal assets.
Business Credit Card
For daily operating expenses, a business credit card may be a good option for you and your employees. Many cards offer great introductory interest rates (as low as 0%) as well as cash-back and other rewards.
To qualify, you’ll typically need a good credit score and proof of income (e.g. business, personal income).
An alternative to traditional loans, crowdfunding sites are designed especially for startup companies that aren’t able to secure other funding options.
Crowdfunding allows individuals to help fund an individual business project or startup company in return for the item produced (and/or additional rewards). The capital is regulated by the SEC to protect unsophisticated investors from investing too much and losing their funds due to a failed business venture.
If you’re looking to raise capital without going into debt, crowdfunding could be a great option.
How to Choose the Right Business Funding Option
Whether you’re a brand new startup business or a small company with decades of experience, finding the right funding for your business can help accelerate your growth (and help keep you out of financial trouble).
Here are a few things to consider before applying for a small-business loan
Have a Business Plan
For any company to succeed, there needs to be a framework for how the business will grow, compete, and succeed in the marketplace. This includes planning how to create revenue, increase profits, and manage debt.
Before applying for any business loans, put together a business plan that outlines how your company will manage your business funds and use debt to grow your bottom line. This will help you acquire business funding and keep you from overleveraging your business.
Know How Much You Need
Once you have a plan in place – and an idea of what you would like to use the funds for – calculate how much the business loan needs to be.
It’s a best practice to borrow only what you need, even if you qualify for a larger amount. This keeps your debt load at a minimum and gives you the best possible loan terms.
Make sure to account for taxes when estimating the amount needed. For example, if you’re starting a hardware store and need $500,000 worth of inventory, make sure you may also need an additional $50,000 to cover sales taxes and delivery charges.
Compare Multiple Lenders
Don’t just borrow from the first lender you find: Get multiple quotes. Comparing rates and terms from multiple lenders can help you lock in the best option for your small business.
Online Lenders vs. Micro Lenders
Online lenders are financial institutions that provide short- and long-term loans to small businesses. A micro lender is a nonprofit institution that provides small, short-term loans (under $50,000) to small companies.
An online lender is best for businesses with some history of revenue and growth. A micro lender is a better option for startups looking for a small infusion of cash to kickstart their business.
Know Whether or Not You Qualify
Qualifying for a business loan requires a strong credit history, business revenue, and (sometimes) collateral. If you don’t have great credit – or if your business is yet to generate revenue – you can still find funding, but may have to consider a personal loan or other funding options.
You will also need to consider your current debt payments and your debt-to-equity ratio. Make sure you can afford the payments without crippling your business financials before applying.
Knowing whether you qualify for a loan is as simple as filling out an online application. To see how much you qualify for (including the estimated interest rate), many online lenders will show you an estimate without running a credit check.
Have Your Business Documents Ready to Go
When you’re ready to apply for a loan, have all your business documents in order to speed up your application and approval process.
Here is a sample list of documents needed to apply for a business loan:
- Business plan
- Tax returns
- Bank statements
- Business registration and licenses
- Employer identification number (if applicable)
- Financial statements (including other debts)
- Proof of collateral
Depending on the type of loan you are applying for and the lender requirements, you may need additional documentation.
How to Qualify for a Small Business Loan
To qualify for a small business loan, you need to know these 4 factors:
1. Your Credit Score
Your credit score is a major determining factor in qualifying for any loan. If you own an incorporated business, your company’s credit score can help you qualify for a business loan.
To find your personal credit score and history, you can pull a free credit report from the three major credit reporting agencies at Annual Credit Report.
To get your business credit score, the most popular options are:
- Dun & Bradstreet PAYDEX
- Experian Intelliscore℠ Plus
- FICO® LiquidCredit® Small Business Scoring Service℠
- Equifax Business Delinquency Risk Score
2. How Long You’ve Been in Business
Being able to accurately show lenders how long you have been in business can help them determine how much risk they’re willing to take by lending to you.
If you’ve been in business for a while with year-over-year growth, you’ll be able to gain access to more funds with lower rates. If you own a startup – or have been in business for less than a year – it may be harder to secure traditional financing.
3. Your Revenue
Lenders want to know the numbers. A detailed account of your monthly, quarterly, and annual revenue numbers will help them determine the size of loan you can qualify for.
4. If You Can Afford Payments
Don’t sign up for debt that you can’t afford to pay back. When applying for a loan, consider all of your expenses (including other debt obligations) before borrowing more.
You should have a comfortable profit margin (at least 20%) between your total revenue and operating expenses. If your profit margins are already too thin, it probably isn’t wise to borrow more.
Example: If your monthly revenue is $20,000 and your expenses are $16,000, your margin is $5,000 (20%) of revenue. If you want to get a small-business loan and it adds another $2,000 expense to your bottom line, your profit margin just dropped by 10% – putting your margin at 10%.
Ask An Expert About Small Business Loans
Can I Qualify for a Small Business Loan If I Have a Startup?
Yes, but you may need to jump through a few more hoops than an established business would. You may also need to provide collateral (an asset pledged to the lender for the life of the loan) to secure funding. You may also need to consider a personal business loan, using your personal credit score and day job income to qualify.
The 7(a) loan program through the SBA provides no-collateral loans to small businesses (including startups). This may be a good option if you need a business loan but don’t have a history of revenue.
Are Startup Loans Different Than Small Business Loans?
Startup loans are typically tied to the business owner’s personal finances instead of the business. To qualify, a good personal credit score and income outside of your business is required.
A small business loan is typically tied to your business revenue, the time in business, and credit history. These loans usually require at least 1 year in business and a minimum annual revenue to apply.
While startup loans place the risk on your personal assets (lenders can seize your personal property if you default), a business loan is typically tied only to business assets.