If you recently started a business, you might be wondering whether it’s a good idea to take out a small business loan. Small business loans can make it easier for you to buy equipment, hire employees, and get your business off the ground.
And fortunately, it’s never been easier to apply for a small business loan. This article will explain how to apply for a small business loan and seven different online lenders you might consider.
7 Best Small Business Loans
Banks and credit unions used to be the go-to source for small business loans. But borrowers increasingly turn to online lenders because of the easy application process and quick funding. Listed below are seven online lenders we recommend trying.
BlueVine is a one-stop shop for all your lending needs. The company offers small business loans, lines of credit, and invoice factoring for up to $5 million. And unlike other lenders, BlueVine charges minimal fees.
- Our pick for Best for Invoice Factoring
- Invoice factoring for up to $5 million
- No origination, prepayment, or monthly maintenance fees
- Low credit requirements
- Minimum $10,000 in monthly sales to qualify for invoice factoring
- Invoice factoring fees quickly add up
- May not be available in every state
Lendio is a lending marketplace, which means they don’t loan you any money. Instead, they match you with lenders that might be a good fit for your business.
So all you have to do is fill out a 15-minute application, and you’ll be able to compare offers from multiple lenders.
- Best Lending Marketplace
- Simple, straightforward application process
- You’ll gain access to multiple lending offers
- Will save you time shopping for lenders
- Some lenders have higher interest rates
- A possible hard inquiry on your credit report
With just one short application, you could receive up to $250,000 in funding from Kabbage from American Express.
You’ll need to have a business checking account or a PayPal account to apply. The company refers to these loans as lines of credit, but the repayment terms will be the same as a traditional business loan.
- Best for Fast, Convenient Loans
- Low annual revenue and credit requirements
- No origination fees
- Convenient access to funding
- Must have been in business for at least a year
- High APRs on loans
If you can qualify for a small business loan through Funding Circle, the rates will be much lower than what other lenders offer.
- Best P2P Lender
- Low interest rates
- Easy online application
- Can take out a loan for up to $500,000
- Must have been in business for at least two years
- Must have annual revenue of at least $150,000
- High origination fees
Instead of filling out an online application, Fundbox will connect to your bank account or accounting software. Then, using an algorithm, the company will determine whether they want to work with you.
Not only is the application process extremely quick, but Fundbox is an excellent option for borrowers with less-than-ideal credit scores.
- Best for Poor Credit
- Fast approval process
- Low credit requirements
- Quick funding
- Loans come with high APRs
- Loan amounts will be lower than what other lenders offer
Fundation offers loans for up to $500,000 and lines of credit for up to $150,000. All of their loans come with flexible repayment terms and quick funding.
- Best for Flexible Repayment Terms
- Flexible repayment terms
- Low APRs
- Generous loan amounts
- Must have been in business for at least a year
- Must have at least three employees
- Minimum $100,000 in annual revenue
LendingClub is one of the largest peer-to-peer lenders on the market. The company offers competitive interest rates and flexible application requirements.
- Best for Low Annual Sales Requirements
- Offers loans up to $300,000
- Low fixed interest rates
- Borrowers must have a credit score of 640 or higher
- Must have been in business for at least a year
- High origination fees
Understanding Small Business Loans
Small business loans are sums of money given by lenders to business owners. These lenders can be financial institutions, online lenders, or the Small Business Administration. As a business owner, you borrow this money with an agreement to pay it back within a specific period, along with interest.
Different types of small business loans exist, each designed to cater to specific financial needs or situations. Here are some of the commonly known types:
- Term loans: These are traditional small business loans, where you receive a lump sum amount, which you then pay back over time, including interest.
- SBA loans: SBA loans are backed by the Small Business Administration and provide longer repayment terms and lower interest rates compared to most lenders. However, the application process can be quite rigorous.
- Line of credit: A line of credit works much like a credit card. You’re given access to a specific amount, which you can draw from as needed. You only pay interest on the amount you use.
- Equipment loans: These are specifically used for the purchase of equipment, where the equipment itself often serves as collateral for the loan.
- Merchant cash advances: This type of financing allows you to borrow against your future sales. The lender provides an immediate cash advance, which you repay by giving them a percentage of your daily credit card sales.
- Invoice financing: With invoice financing, businesses use their unpaid invoices to secure a loan or a line of credit.
- Working capital loans: These loans are used to finance the daily operations of a business, especially during periods of reduced business activity or seasonal fluctuations in revenue.
What to Consider Before Applying for a Small Business Loan
Understanding Your Business’s Financial Health
Before you venture into loan applications, you need to have a clear understanding of your business’s financial health. This process involves a thorough evaluation of your business revenue, average monthly revenue, and cash flow.
A strong and steady cash flow can demonstrate to lenders that you’re capable of repaying the loan. Additionally, being aware of your business expenses, both fixed and variable, can help you better manage costs and increase profitability.
The Role of Credit Score
Lenders look at both your personal credit score and business credit score when assessing your loan application. These credit scores provide a snapshot of your financial responsibility. They look at how you’ve handled debt in the past, both personally and in business, and use this information to predict future behavior. Lenders favor applicants with high credit scores, often offering them more favorable terms and competitive interest rates.
Solid Business Plan
Having a detailed business plan not only helps you run your business efficiently but also increases your chances of securing a loan. This plan should outline your business’s financial path, including a clear strategy for growth and a demonstration of the feasibility of your business model. Lenders, especially traditional and SBA lenders, use this information to gauge your business’s potential for success and loan repayment.
Loan Terms and Interest Rates
Understanding the terms of your loan is crucial. You should know how much you’re borrowing (loan amount), the cost of borrowing (interest rates), and the time you have to repay the loan (loan term).
Additionally, understanding the annual percentage rate (APR) can give you a more accurate picture of the total cost of the loan. Be sure to look out for any additional fees, such as origination fees or prepayment penalties, as these can significantly increase the cost of your loan.
Collateral and Personal Guarantee
Some lenders may require collateral or a personal guarantee for a small business loan. Collateral could be business assets or personal assets, which the lender can claim if you default on the loan.
A personal guarantee, on the other hand, is an agreement in which you, the business owner, are personally liable for the loan if the business defaults. Both of these can significantly impact your personal and business finances, so it’s important to understand these terms before agreeing to a loan.
Evaluating Lenders and Loan Types
There are many lenders out there, each offering different types of small business loans. Traditional banks, credit unions, online lenders, and the Small Business Administration (SBA) are some of the common sources of small business loans. Each lender and loan type has its own set of requirements, terms, and benefits. Hence, it’s essential to evaluate the suitability of the lender and loan type to your specific business needs.
Ability to Meet the Minimum Credit Score and Revenue Requirements
Each lender will have minimum credit score requirements and may also require a certain level of annual revenue. Make sure you’re aware of these requirements and can meet them before applying. If your credit score or revenue falls short, you might want to consider other financing options.
Understanding the Application Process
Loan applications can vary greatly from lender to lender. Some may require extensive paperwork, including detailed business plans, financial statements, and more, while others may offer a more streamlined online application. Understanding what’s expected can help you prepare and streamline the loan application process.
Are small business loans hard to get?
Many people believe that it’s next to impossible to qualify for a small business loan, but this isn’t true. If you go into it with a plan, you can successfully qualify for the funding you need.
One thing that will affect your likelihood of approval is the lender you apply with. Some lenders have more stringent application and credit requirements and make it harder to qualify for a loan.
If you want to apply for a small business loan, there are three main types of lenders you’ll want to consider.
Banks or Credit Unions
If you’re seeking the best interest rates for a business loan, approaching a bank or credit union may be your ideal choice. Not only do they offer competitive rates, but they also provide more flexible repayment terms, which can help you manage your finances efficiently.
However, it’s essential to note that securing these loans can be a tough task if you don’t have an established business already. Apart from meeting strict eligibility criteria, you may have to provide collateral to guarantee the loan, which can be a significant challenge for many entrepreneurs.
Additionally, one potential drawback of obtaining a loan from a bank or credit union is the application process, which can take weeks or even months to complete. This can be discouraging if you’re in a rush to get your business started or have pressing financial needs that require immediate attention.
SBA Loan Program
An SBA loan may be a suitable choice due to its backing by the U.S. Small Business Administration, which makes it less risky for banks to loan you the funds. Notably, the 7(a) Guaranty Loan Program is the most popular SBA loan program available.
While SBA loans offer benefits like low interest rates and longer repayment terms, they are notoriously difficult to qualify for. This can be a significant obstacle for many entrepreneurs. Furthermore, if you require immediate access to the funds, SBA loans may not be the most appropriate option, and you may want to consider other alternatives.
Online lenders are becoming increasingly popular among entrepreneurs due to their streamlined application process, broad range of lending options, and speedy funding. Additionally, there are no shortage of online lenders to choose from, making it easy to find a loan that fits your needs.
One significant benefit of working with an online lender is that you may still qualify for a business loan even if your credit score is not particularly high. However, it’s worth noting that the trade-off for this flexibility is often higher interest rates. As a result, you’ll need to carefully consider the overall cost of the loan before making a final decision.
How do you qualify for a small business loan?
So, now that you know where to go to apply for a small business loan, how can you maximize your chances of getting approved? Below are four steps you should take to qualify for a small business loan.
Step 1: Improve your Credit Score
Having a low credit score doesn’t necessarily rule you out from qualifying for a small business loan, but it makes it much harder. The first place to start is by trying to improve your personal credit score as much as possible.
Improving your credit score takes time, but here are a few simple steps you can take that can make a difference:
- Check your credit report and request to have any derogatory marks removed
- Dispute any inaccuracies on your credit report
- Make sure you pay all your bills on time since this counts for 35% of your score
- Consider taking out a small unsecured loan to build your business credit score
Step 2: Get Your Paperwork Together
There is a lot of paperwork involved in applying for a small business loan. You’ll make the process much easier on yourself if you organize everything you need before you start the application process. This paperwork includes the following documents:
- Personal tax returns
- Business tax returns
- Bank statements
- A copy of your driver’s license
- Article of incorporation
- Your resume
- A detailed business plan
- Financial projections
Step 3: Shop Around and Compare Lenders
As you shop around for small business loans, it’s wise to be prepared before diving into the application process. Before investing significant time filling out applications, it’s a good idea to create a list of potential lenders to approach. You’ll then need to determine whether you prefer to work with a bank, credit union, or online lender, based on your unique business needs and financial situation.
If you’re considering online lenders, utilizing lending marketplaces can be an effective way to simplify the process. By filling out one application, you’ll be matched with multiple lenders, saving you time and providing more options to choose from. Lending marketplaces can also help you maximize the value of your loan by connecting you with the most suitable lenders for your specific needs.
Step 4: Choose the Lender That’s Right for You
Now it’s time to choose a lender and finalize the application process. Here are a few things you’ll want to consider when you’re choosing a lender:
- What kind of credit requirements does that lender have?
- What is the average loan amount the lender offers?
- How long are the repayment terms?
- What is their average turnaround time for funding loans?
- What is the APR range?
- Does the company have a good reputation?
What if my application is denied?
Even if you do everything right, there’s always a chance you could be denied your small business loan. If this happens, there are other options you can consider.
For example, applying for a business credit card could be a viable option. Business credit cards have more lenient qualifications than small business loans, albeit they charge exorbitant interest rates. Nonetheless, by using an appropriate business credit card, you can profit from cashback rewards.
Alternatively, if you require a lump sum of cash, a personal loan may be a better choice. Compared to credit cards, personal loans have lower interest rates. Even a small personal loan could provide the impetus you need to jumpstart your business.
Alternatives to Small Business Loans
While small business loans are a common route for business financing, they’re not the only option. It’s essential to consider all available funding options and choose the one that best aligns with your business needs and objectives. Here’s a look at some popular alternatives to small business loans, along with their pros and cons:
1. Business Grants
Grants are funds that are given to your business that you don’t have to repay. They can come from government agencies, private companies, or nonprofit organizations.
- It’s free money that doesn’t need to be repaid.
- It doesn’t dilute your company’s ownership.
- Highly competitive and difficult to secure.
- The application process can be time-consuming and complex.
- May have specific usage restrictions.
Crowdfunding is a method of raising capital through the collective effort of friends, family, customers, and individual investors. This approach taps into the collective efforts of a large pool of individuals—primarily online via social media and crowdfunding platforms.
- Great for businesses with a strong community or customer base.
- Can serve as a marketing tool alongside fundraising.
- No need to repay the funds.
- May require a considerable marketing effort to create a successful campaign.
- Your idea is public, which could risk someone else copying it.
- Some crowdfunding platforms take a percentage of your earnings.
3. Venture Capital
Venture capital is financing that investors provide to startup companies and small businesses that they believe have long-term growth potential.
- Large amounts of funding are possible.
- Venture capitalists often provide valuable guidance and business acumen.
- Good for high-growth startups.
- Requires giving up a share of your business.
- The process can be time-consuming and challenging.
- May involve pressure for high and fast return on investment.
4. Personal Savings
Investing your personal savings into your business is a straightforward way of funding.
- Full control over your business.
- No interest or financing charges.
- Risk of personal financial loss.
- Limited to the amount of money you’ve saved.
- May not be sufficient for all business needs.
5. Credit Cards
Business credit cards can be a quick and easy way to finance business purchases, with the bonus of earning rewards.
- Quick and easy access to funds.
- Rewards and cash back on purchases.
- High-interest rates if the balance is not paid in full.
- Could negatively impact personal credit score if not managed properly.
- Limited to your credit limit.
6. Personal Loans
Taking out a personal loan to fund your business can be an option, especially if your business is new and doesn’t qualify for a business loan.
- Availability, even for those with average credit.
- Fixed interest rates.
- Personal liability for the loan.
- Can negatively impact your personal credit score.
- Might not provide sufficient funding for your business needs.
Exploring these alternatives to small business loans may open up opportunities you hadn’t considered. Just like with a business loan, ensure you understand the pros and cons of each option before making a decision.
If you’re interested in applying for a small business loan, there are plenty of options available. The key to getting the lowest interest rates is applying with a bank or credit union. Alternatively, if you prioritize speedy funding and a streamlined application process, an online lender may be the better option.
It’s vital to comprehend the lender’s prerequisites and to be well-prepared before initiating the application process. In the event of an unsuccessful application, don’t despair; there are plenty of other options at your disposal.