Small business loans are easier than ever to access. You can obtain financing from a traditional bank or an online lender, and there are several options to choose from.
However, navigating the loan process from start to finish can be difficult as you will need to find the best lender and the best loan product for your business. You will also need to know what to do to start the application process.
This guide explores small business loan options, the application process, the pros and cons of each, and alternative funding sources if you can’t be approved for a small business loan.
Different options for small business loans
All business loans work the same way: they allow small business owners and entrepreneurs to borrow money and pay it back over time. However, different types of lenders may work better for different types of businesses.
Bank loans are offered by major players in the banking industry. They can take the form of a fixed rate loan or a business line of credit. Funds can be used to open the doors to your business, fill a cash flow gap, purchase equipment or expand your operations.
Whichever form of financing you choose, you should compare lenders and their business loan offerings, as well as rates, terms, and qualifying criteria. Many will look at your personal and business credit scores, cash flow, collateral, and time in business.
If you’re ready to apply for a bank loan, follow these steps to simplify the process:
- Refine your list of lenders. Contact each lender on your shortlist to learn more about the eligibility criteria for the loan products you are considering.
- Select the best lender for your business.
- Gather the required documentation to save a lot of time when applying.
- Complete the application and submit any documents the lender needs to expedite the review process.
Who is it best for: Bank loans are best for small business owners who have bank accounts at physical banks they like to do business with. But if you have minimal business experience, limited reserves, or less than perfect credit, an SBA loan or a loan from an online lending marketplace might be better suited.
The United States Small Business Administration (SBA) works directly with more than 800 lenders in all 50 US states and territories to provide small business loans. Its loan products feature competitive rates and terms, as well as unique benefits such as lower down payments and flexible overhead requirements. Many SBA loans also come with no collateral required, and SBA loan limits can be as high as $5 million with some programs.
SBA-backed loan options include:
- 7(a) Loans: Offers up to $5 million for the purchase of commercial real estate, working capital, commercial debt refinancing, and the purchase of furniture, supplies, and fixtures
- 504 loans: provides up to $5 million in fixed rate financing for major fixed assets
- Microloans: offers up to $50,000 to support business expansion
You can use the SBA Lender Matching Tool to connect with lenders offering SBA loans. Here’s how it works:
- Complete the online questionnaire. It only takes about five minutes of your time.
- Match yourself with a potential lender. You will receive an email with the contact details of lenders who wish to do business with you, usually within two business days.
- Connect with the lender. During the initial call or meeting, the lender will review the terms and conditions of the loan.
- Apply for funding. You will submit a formal application and any required documentation directly to the lender.
Who is it best for: SBA loans are best suited for small business owners who operate in the United States or its territories, have exhausted all other options, and cannot obtain a loan elsewhere. However, if you have access to other small business financing opportunities, an SBA loan may not be suitable.
The internet is also a treasure trove when it comes to finding the best small business loans, and it’s common for online lenders to offer better rates and terms than you can find elsewhere. Websites like Funding Circle can help you shop around and compare multiple business loans in one place, and you might even be able to get prequalified online before you apply. Typically, you’ll need to fill out a short questionnaire to be connected with lenders in its network who can get you financing for your business.
Some online commercial lenders offer unique borrowing options beyond traditional small business loans. For example, you can find small business lenders that offer loans to borrowers in credit difficulty or allow you to borrow against unpaid invoices using a process called invoice factoring.
How to calculate your business loan repayment
To calculate your small business loan repayment, you can use a loan and amortization calculator. To determine how much you might have to pay each month, you need to know how much you plan to borrow, how long your loan will be repaid, and what interest rate you can qualify for.
A loan calculator can also be useful if you’re trying to compare business loan options from different lenders. When you use a calculator to compare loans, you may find that one option is significantly cheaper than another due to a lower interest rate or shorter repayment term.
Less traditional ways to get money for a small business
If you’re having trouble qualifying for a small business loan, there are viable alternatives.
Personal loans may be easier to access than business loans. The downside is that the rates are usually higher, especially if you have bad credit. It’s also highly likely that you’ll be approved for a small amount payable in a short period of time, which means the monthly loan payments could stretch your budget too much. Another significant downside is record keeping, as these loans make it difficult to separate personal and business financial affairs.
Home Equity Loans
Home equity loans should only be used as a last resort to finance your small business. These loans allow you to convert a percentage of the equity you have accumulated in your home, or the value of the property minus the outstanding mortgage balance, into cash.
Depending on the amount of your equity, you could get a considerable amount of money. Plus, the interest rate is fixed, and you’ll usually have an extended period to repay what you borrow in equal monthly installments.
But here’s the catch: your home is used as collateral to secure the loan. So if you’re late, the lender could foreclose on your home.
The bottom line
The best way to get a small business loan is to compare all your options to find the one that meets your needs. Your business might qualify for a loan from a physical bank in your area, but an online lender might offer a lower interest rate or more flexible repayment terms. Try to borrow only what you need and go for the loan product that offers the lowest loan rate and fees you can find.