How We Choose The Best Small Business Loan
With so many options available, it can be daunting to choose the right one. Which lender has the best reputation? Which offers the lowest rate? Here are the criteria we looked at to rank lenders.
- Loan Features: Every lender offers different loan amounts and terms. We looked at a variety of types of loans and financial products.
- Application process: We considered whether applying for a loan would result in a hard pull or soft pull on applicants’ credit, as well as how complicated the application was.
- Interest rates and fees: In addition to interest rates, some lenders charge other fees, like origination or late fees.
- Qualification process: We explored what it takes to qualify for a loan, including minimum credit score, annual revenue, and business history requirements.
- Customer support: We looked for lenders that are easy to contact through a variety of channels, including phone, email, and chat.
- Online user reviews: We looked at reviews of lenders from customers on independent review sites like Trustpilot.
- Perks and Bonuses: We also looked at what makes a lender stand out, with perks like payment flexibility, advertising transparency, and advanced technology.
What Is a Small Business Loan?
A small business loan provides the capital your business needs to pay expenses or invest in growth. You are given a lump sum of money, which you repay over an agreed-upon period of time, with interest.
A small business loan may be used to hire employees, buy inventory, pay bills, or rent or buy a property such as equipment for starting a bakery. Each small business lender may have certain requirements to qualify for financing, including credit scores, time in business, and annual or monthly revenue.
How Do Business Loans Work?
If you apply for a line of credit, you’ll receive access to a certain amount you can borrow from. Use those funds for whatever business expenses you may have.
You’ll be required to make monthly or weekly payments, including principal and interest until the loan is paid off. Be sure to carefully review your loan agreement to understand how much you will pay in interest and how long you have to repay the loan before you sign it.
If you're not be able to repay the loan, the lender has the right to seize any asset you put up as collateral to cover your debts. That’s why it’s important to only borrow what you are sure you can afford to pay back.
Types of Small Business Loans
There are several types of small business loans available. Which you choose depends on your business needs.
- SBA Loans: These are loans backed by the Small Business Administration, and come with some of the lowest interest rates and most favorable terms. Generally speaking, you need to have good to excellent credit to qualify.
- Term Loans: These are offered by banks and online lenders and may range in their criteria to qualify, as well as their rates and terms. There are term loans available even for businesses with poor credit, though these may charge more interest.
- Lines of Credit: Rather than getting all your money upfront, with a line of credit, you have access to a certain amount of money, which you can borrow from and repay again and again.
- Merchant Cash Advances: This isn’t a loan but rather an advance on future credit and debit card sales. You repay this through automatic payments made daily or weekly from card transactions.
- Invoice Factoring: With invoice factoring, you sell your unpaid invoices to a factoring company, minus a fee. The factoring company then collects the payment on the invoice.
- Equipment Financing: This is specifically for purchasing heavy machinery or company vehicles. The equipment you purchase acts as collateral on the loan, which may help you get a lower interest rate.
Conventional Business Loans vs. SBA Loans
Small business owners with good credit might consider applying for either a conventional business loan or an SBA loan.
- Conventional small business loan: offered through a bank or online lender, such as the ones listed above. Some have strict criteria to qualify, while others may approve borrowers with less than perfect credit. Some require repayment in a few months, while others have repayment periods of a few years.
- SBA loan: Backed by the Small Business Administration, which sets the rates and terms. Those rates and terms tend to be the lowest and best option for small business financing, but you’ll need good to excellent credit and a track record of doing business to qualify. Many banks and online lenders offer SBA loans, but they can take weeks or months longer than conventional loans to process and be approved.
How to Get a Small Business Loan
Though the application process may vary a bit from lender to lender, there are a few basic steps you can expect once you choose the right lender for your business.
Step 1: Gather Documents: Start by seeing what your lender requires with the application. Many lenders will ask for:
- Photo ID
- Social Security number
- Bank or accounting records
- Business licenses
Step 2: Apply: Each application may vary in its complexity. Some may take just five minutes to fill out, while others may take a lot longer. If you’ve gathered your documents, this step should be fairly straightforward. Expect to be asked about:
- Business address
- Annual revenues
- Time in business
- Personal details, including address, Social Security number, income
- Personal and business tax returns
- Amount you want to borrow
Step 3: Wait: Some lenders approve loans instantly whereas others take a few days. SBA loans have the longest approval rate, typically taking a few weeks or more.
Step 4: Review Loan Agreement: Once you’ve been approved, you will be sent a loan agreement that includes how much you are borrowing, the interest rate, and repayment terms. If you agree with the terms, sign and return to the lender.
Step 5: Get Paid: Once the lender receives your signed loan agreement, the loan funds will be deposited into your business bank account in as little as one business day.
Where Can You Get a Small Business Loan?
There are multiple ways you can get a small business loan, including:
- Banks and credit unions. Most banks and credit unions in your area will offer loans and lines of credit to small businesses. The qualifications are typically more stringent than online lenders, but you will typically receive better interest rates if your credit is in good standing. Also, more documentation is required and funding may take up to a few weeks from loan approval.
- Online lenders. Acquiring a small business loan through an online lender is most likely going to be the quickest form of financing. Qualifications are not as strict, with some lenders catering specifically to businesses with less-than-ideal credit, and start-ups may qualify. Due to the speed of funding and flexible requirements for loan approval, interest rates may be higher than other small business lending options.
- Small Business Administration. The Small Business Administration doesn’t lend to businesses directly, but instead partners with online lenders, banks, community development organizations, and microlending institutions to help fund your small business. Requirements for a loan backed by the SBA are higher than other options, but you most likely will receive better interest rates and longer loan terms.
Which Industries are Most Likely to Apply for Loans?
Small business loans are available for almost any industry. The type of funding that's available may depend on your specific business type.
According to the 2022 Small Business Credit Survey, companies most likely to seek financing include manufacturing, retail, leisure and hospitality, healthcare and education, and professional services and real estate. The report found that loans and lines of credit are the most common forms of financing sought by applicants.
Other industries that may need financial assistance to help with growth and day-to-day operations include construction, transportation, restaurants, and specialty niches like vending machine businesses and internet-based companies.
Your small business needs capital to thrive. Whether you need money to get through a slow period or to expand your business by opening a second location, there are financing options available. Most lenders offer both small business loans and business lines of credit, so you can decide which type of financing is right for you.
That being said, take the time to shop around because rates and terms can vary wildly from one lender to the next. You want the loan with the terms that best suit your business. Start with the list we’ve provided here.