Small-business loans cover a spectrum of products from various lenders designed to meet small businesses’ unique needs. Small businesses are considered vital to the nation’s economy, and the Small Business Administration was created to provide financial support to America’s heartbeat. Banks, the SBA, and other lenders offer loans to meet the unique needs of small businesses with repayment plans that can also be tailored to small businesses’ quixotic nature.
What Are the Best Small-Business Loans?
If you are a small business owner, the best small business loan is one that will meet your immediate needs in a way that allows your company to survive, flourish, and thrive.
And because small businesses are born from, take root in, and grow from the needs of the broad spectrum of consumers’ desires, their needs for financial support from the finance community span a broad range.
Traditional banks and the Small Business Administration (SBA) generally are considered the best options for small business loans. Still, these options also are conservative in their loan approach and historically have the lowest approval rates for applications (then again, they also get the vast majority of loan applications).
Many online lenders have stepped forward to serve small businesses’ needs by providing rapid funding options with oftentimes competitive rates. But because it’s online and it’s attractive to unscrupulous individuals, we recommend caution and offer some information on some of the best small business loan services.
How Do Small-Business Loans Work?
Small-business loans often are designed to meet the unusual income streams of small businesses to make repayments easier and less threatening. Depending upon the lender, they can take months to receive or can deliver you cash overnight.
Lenders frequently offer a variety of loan types and repayment options that best fit your specific situation. For example, cash advance loans often are repaid by turning a percentage of your credit card payments directly back to the lender, an ideal option for retailers who carry a high volume of credit card transactions.
A different type of loan could be a line of credit, where a lender sets up a pool of money the business can access and then repay as they are able. For example, a housing contractor might need to borrow supplies to build a spec house and then repay the loan in full when the house sells.
Borrowing against unpaid invoices with the lender collecting the invoice payments while you enjoy the cash flow while awaiting payments is another funding option for companies serving business to business.
What Small-Business Loans Are Available?
As we mentioned before, small business loans come in a variety of flavors. The most common ones are:
- Term loans: These are traditional loans from your local bank or an online bank where you borrow a fixed sum of money upfront and then pay it off with monthly payments.
- SBA loans: These are another form of term loans offered through traditional lenders but ones that are partially guaranteed by the Small Business Administration, so they typically carry lower interest rates. These loans require an extensive application process that can take months to complete.
- Accounts receivable loans: Also known as invoice loans, businesses offer their outstanding invoices as collateral for the lender. The company gets the cash upfront, and the lender collects the invoice, plus fees and interest.
- Merchant cash advance: These loans are based on a business’s cash flow and tend to carry higher interest rates and fees as they are considered high-risk loans for the lender.
- ACH loans: Similar to a merchant cash advance, these loans are based on your average daily bank balance. Again, these are high-risk loans that might be more easily accessible for small businesses that don’t have good credit.
- Equipment loans: These loans are specifically to purchase equipment for your business, and the equipment serves as collateral for the loan.
- Line of credit: The lender creates a pool of money the company can borrow from only when needed. Though interest rates are higher, you only pay on what you borrow.
- Short-term loans: These loans are designed to be paid off in a few months or up to a year. These can help a business that needs a quick infusion of cash to expand to a new location or launch an all-important marketing campaign.
- Commercial mortgages: Just like a home mortgage, these offer businesses the chance to buy real estate and pay off the loan over an extended period of time, with the real estate serving as collateral.
- Startup loans: Getting a loan to start a new business can be difficult and often requires the owner to have a good credit score and sign a personal guarantee to acquire the loan.
How Do SBA Loans Work?
SBA loans are issued through a traditional bank or online lender but carry a guarantee from the Small Business Administration for a percentage of the loan, typically 80 percent.
The SBA works with the lender and the business to determine the business’s best type of loan. Loans can range from as little as a $500 micro-loan to $5 million or more for a construction loan.
Because the SBA serves as a guarantor, interest rates are kept low (5.5% to 10.75%) as they would be for a secured loan (one where the business can provide collateral or a long history of financial security).
SBA loans to require the business owner has put some equity (time and/or money) into the business and cannot qualify for other traditional bank loans. Some online banks also provide bridge loans when companies are going through the process of qualifying for an SBA loan.
During the COVID-19 pandemic, SBA also has been offering Payroll Protection Program (PPP) loans and Emergency Economic Injury Loans for small businesses harmed by the economic downturn.
Where Are Small-Business Loans Available From?
Small-business loans are available from a variety of lenders:
- Traditional large banks: Large national banks do offer some small business term loans, but their approval rates are extremely low as they don’t accept a great deal of risk.
- Traditional small banks: Community banks are more likely to support small businesses and approve term loans at a much higher rate than large banks.
- SBA loans: As mentioned above, SBA does not offer direct loans but works through traditional banks and online banks.
- Online lenders: In the past decade-plus, more online lenders have stepped up to fill a void for small businesses by providing various loans. These loans typically come with higher interest rates and fees because the lenders are accepting riskier loans. These loans often are available within 1 to 3 business days.
- Seed money investors: Though not typical for small businesses, some seed investors will invest in a small business for a business percentage if they expect it to grow from a small business into a large corporation.
Who Can Apply for a Small-Business Loan?
Any small business (generally considered those with fewer than 500 employees) can apply for a small-business loan, though success rates will vary.
Many lenders give preferential treatment to businesses with 1 to 3 years (or more) in business and with solid annual revenues. You should check each lender’s basic requirements before you invest time in making a loan application, as you don’t want to waste time if you don’t meet the necessary requirements.
Many online lenders are willing to offer loans to businesses with less time in business and lower annual revenues if you can prove a steady cash flow or a seasonal surge in business. Just remember, you will pay a higher cost for these loans, but it might be worth the investment to help your business survive and thrive.
Your personal credit also can affect your business’s ability to get a loan. Some lenders will work with owners with poor credit if their businesses can prove their revenue flow is sufficient to pay the loan.
Can You Get a Small-Business Loan with Bad Credit?
You can get a business loan with bad credit, but it will be more costly and could depend upon the business’s cash flow.
ACH loans and merchant cash loans are two good options for owners with bad credit, as their repayments are set up based upon the business’s cash flow, so you can get the funds you need to improve your business’s position right away. Again, you will pay higher interest rates and fees, but it could be worth keeping your business open or helping through a growth spurt.
How Can You Get a Small-Business Loan?
Starting with local resources always is the best first option for getting a small-business loan. A recent survey by credit bureau Experian found that even small traditional banks and alternative lenders, such as online lenders, are pulling back on loan approvals during the pandemic.
Local lenders also can help you navigate the SBA loan process if you fail to qualify for a traditional term loan.
Your next line of options would be the variety of online lending services that offer online applications that can be completed in as little as 15 minutes and offer next-day or 1-3 business-day approval.
How Can You Choose the Best Small-Business Loan?
Choosing the best small-business loan will depend entirely on how your small business operates and its strongest needs. You will want to make sure you review interest rates and fees to ensure you are getting the best cost and savings for your business.
If you’re unsure of what type of loan could be best for your business, discussing the situation with the experts at one of the online lenders that offers different kinds of loans can help you clear things up to choose your best option. Traditional banks, especially small ones, might not provide as many loan options as online lenders. For example, they may not offer lines of credit or loans based on revenues instead of requiring equipment or real estate as collateral.
What Can You Do if You’re Denied a Small-Business Loan?
If you’ve been denied a small-business loan, there are steps you can take to improve your personal credit and your business’s credit and cash flow to make a new business application.
Because many small-business loans will require a personal guarantee from the owner, you need to have your personal credit as solid as possible. Review your credit reports, correct errors, and make a concerted effort to boost your score. Some things that can help to improve your credit score are:
- Paying your monthly bills on time
- Reducing personal debt, such as credit cards
- Increasing income, if possible, with a part-time job or a side gig.
You also can improve your company’s credit by getting a short-term loan that might not meet your more significant needs. But if you can get that approved and paid off in a few months, you’ll increase your chances of getting a different type of loan.
Also, consider if your business has property or equipment that can serve as collateral to get a secured loan.
FAQs about Small Business Loans
We have answered a few common questions:
Are small business loans a good idea?
Sometimes, small business loans are a necessity. Small companies are unique creatures, and sometimes they need creative financing to make it through a money crunch or to take advantage of a growth opportunity. A small-business loan often is the only way to make that possible. Though they come with a cost, that cost might be the difference between a small business failing or growing into its next phase.
What is a good credit score for a small business?
Business credit scores vary from the traditional FICO score you might be used to seeing in your personal credit score. Some business credit bureaus score ratings between 0 and 100, while others rank from 0 to 500. For the former, traditional lenders like to see a score of at least 75, but other lenders are willing to go lower if they see a steady cash flow.
Can I get a small business loan with bad credit?
Some lenders will consider extending business credit for individuals with a FICO score as low as 500. Again, they are going to rely on seeing good cash flow numbers from the business.
Now that you understand all the options for the best small business loans get started with your application to secure your funds as early as you need.