Starting a small business is exciting, but it requires capital to get going. Fortunately, many different types of small business loans are available that can provide the funds you need to start, run, or expand your business. From traditional bank loans to online lenders and government-backed options, there are many options to suit different types of companies and funding needs.
We’ll look at some of the best small business loans in 2023 and help you find the right one for your needs. We’ll also discuss what you need to know about applying for a loan so that you can make an informed decision when selecting a lender. By understanding all your financing options, you’ll be better equipped to take advantage and secure the funds needed to launch or grow your business venture.
What is a small business loan?
A small business loan is a type of financing businesses can use to maintain or expand their operations. These loans are typically available from banks, credit unions, and other financial institutions, as well as private lenders. They can be used for working capital, equipment or inventory purchases, real estate investments, and other expenses. Small business loans come with terms ranging from six months to 25 years and repayment schedules that vary depending on the borrower’s qualifications.
How business loans work
Business loans are available to both startups and established businesses. Still, most lenders prefer to lend to companies that have existed for at least one or two years. When applying for a loan, applicants must provide collateral such as equipment, real estate, or accounts receivable, which can be seized if the borrower defaults on the loan. The lender will also review the business’s credit history and financial statements to determine risk and interest rates.
Once a lender approves a business for a loan, borrowers will receive a lump sum they can pay back over time, plus additional fees and interest. Interest rates vary depending on the size of the loan and other qualifications. Repayment schedules may include fixed payments each month or variable payments based on cash flow or sales volume.
Types of business loans
There are several different types of business loans available, each designed to fit a different type of business or set of needs. Loans are issued by banks, online lenders, or programs backed by government agencies such as the Small Business Administration (SBA). Some of the most common types of business loans include working capital loans, business lines of credit, equipment financing, and commercial real estate loans.
Some common types of small business loans include:
Bank loans are commercial financing products that banks provide to help business owners to finance their ventures. Essentially, these are funds lent by a bank or financial institution to a borrower that are repaid with interest over an agreed period. The terms of the loan agreement are negotiated between the lender and the borrower. They can vary based on factors such as creditworthiness, collateral, and the purpose of the loan.
Bank loans are a popular source of funding for business owners who need significant capital to start or expand their operations. However, not all business owners may be eligible for a bank loan, and alternative financing options may be more appropriate for some. Ultimately, the decision to pursue a bank loan should be carefully considered and informed by the specific needs and circumstances of the business in question.
Another common source of business financing is loans that are backed by the Small Business Administration (SBA). These loans are issued by SBA-approved lenders across the country and are partially guaranteed by the government. The application process for an SBA loan can be complex. Still, with the added government backing, businesses can typically receive lower interest rates and longer repayment terms, making SBA loans an appealing option for those without solid banking relationships.
SBA loans are best for established small business owners with a good credit history who still struggle to secure financing through other channels. Whether you are trying to expand your business, purchase new equipment, or hire additional staff, an SBA loan may be the right solution for your business’s financing needs.
Business term loans
Business term loans are a common type of financing used by business owners seeking to secure stable, medium- to long-term funding to expand their operations. These loans are typically taken out in one lump sum and then repaid over a set period at a fixed interest rate.
Overall, term loans can be valuable for established businesses looking to invest in growth, expand their operations, or purchase new business facilities or other significant assets. This is because term loans are often more challenging to qualify for. Business owners with a clear plan for using the funds and an ability to repay the loan are ideal candidates for these types of loans.
Working capital loans
Working capital loans provide businesses extra cash to cover short-term expenses such as payroll, inventory, and other operating costs. Working capital loans give business owners a lump sum of money they pay back over a set period, typically between six and 12 months.
These loans are best for business owners who require quick funding to meet short-term cash flow needs. Whether a small business or a large corporation, working capital loans can be a valuable financial solution that enables business owners to keep their operations running smoothly.
Business lines of credit
Business lines of credit provide business owners with credit on an as-needed basis. Essentially, a business line of credit works like a credit card, with the business owner only paying interest on the funds they withdraw. Then, once the business owner pays down their balance, they can often tap those funds again if they run into another short-term financing need.
Lines of credit are ideal for seasonal businesses or those with fluctuating revenue streams, as they provide great flexibility and allow companies to smooth over any short-term dips in revenue. Business owners with established credit, solid revenue, and profitability are best suited for a line of credit. However, it is essential to note that using this financing option is not advisable to cover long-term expenses.
Equipment financing is crucial for any business that requires large or expensive equipment to operate. These loans allow companies to get the necessary equipment and pay for it over time, reducing the need for significant cash outlays upfront.
Equipment loans are used by a wide range of businesses, including restaurants, contractors, and engineering and construction companies. With equipment financing, business owners can invest the capital they need to grow their business without investing all their cash in the tools they need to operate.
Commercial real estate loans
Commercial real estate loans can be used by business owners looking to purchase, renovate, or refinance a commercial property. These loans are specifically designed to meet the unique needs that come with financing major assets like real estate.
They are secured by the property being financed and—because they’re typically long-term loans—require a certain level of financial stability from the borrower. Commercial real estate loans are best for business owners with a solid business plan, a strong credit rating, and a track record of profitability.
Business loan requirements
The requirements for getting a business loan vary based on numerous factors, including lender, loan type, loan amount, and borrower creditworthiness. However, there are several basic eligibility criteria that most lenders consider when making loan decisions.
Time in business
Most lenders require that businesses have been operating for at least one or two years before qualifying for a business loan. The longer your business has existed, the more stable it appears to lenders. Startups and businesses under two years old may still be able to get financing but may need to rely on personal loans made individually to the business’s owners rather than a conventional business loan.
A business’s credit score and the personal credit scores of its owners are important factors in determining a business’s creditworthiness. It can take years to establish a business credit score, but many lenders will look to a company’s owners to personally guarantee business debt, so check your credit score before applying for a loan to ensure that it meets the lender’s minimum requirements. A credit score of 680 or higher is generally considered a good starting point to qualify for business financing at a reasonable interest rate.
Lenders want to see that your business generates sufficient revenue to repay any loans. When you apply, you’ll need to provide financial statements, tax returns, and bank statements that show consistent revenue growth over time. Most lenders will want to review this information for the most recent one to two years.
Depending on the type of loan you’re applying for, you may need to provide collateral to secure the loan. Collateral can include business assets, such as equipment or inventory, or personal assets, such as a home or car. Be prepared to provide documentation proving ownership and an accurate valuation of the collateral.
Lenders also look at your business’s debt-to-equity ratio to evaluate your business’s overall financial health. This ratio compares your business’s total debt to the amount of equity you have. A high debt-to-equity ratio can indicate financial instability and make it more difficult to secure a loan. Aim for a ratio below 1.5:1 to increase your odds of getting approved.
Lenders want to see that your business has sufficient cash on hand to cover your operating expenses and make several months of loan payments if revenue suddenly drops. Be prepared to demonstrate your working capital by providing financial statements that show your current assets and liabilities.
Business loan application checklist
As a business owner, applying for a loan can be stressful and time-consuming. However, with the proper preparation, you can increase your chances of securing the funding you need to grow your business. Here’s a checklist of documentation to gather before applying for a business loan:
- A valid government-issued ID for every individual who has a 20 percent or greater interest in your company
- Personal address verification
- A comprehensive business plan with future projections
- Business financial statements for the last two years
- Copies of your two most recent business and personal tax returns
- At least six months of business bank statements
- Other documentation that proves the financial health of your business, such as contracts in place or proof of receivables
- Verification of business address and lease agreement (if applicable)
- Proof of ownership, such as a business license or articles of incorporation
- Trade references
- A voided check for ACH payment or direct deposit
- Articles of organization
- Proof of incorporation
- Any business operating agreements, franchise agreements, or other organizing documents
Preparing these and any other necessary documents before you apply for a business loan can improve your approval odds and streamline the application and underwriting process. If you need help with this or any other parts of the application process, consider working with an experienced lender who understands your business needs and can offer flexible loan options.
What to consider before getting a business loan
Before you decide to apply for a business loan, consider these important factors:
- How much you need to borrow: What is the minimum amount you need to accomplish your business goals? Can you afford the payments?
- How quickly you need funding: Depending on how urgently you need financing, you can obtain funding in a few hours, days, or even weeks. Online lending options generally offer faster funding times, while lending types like traditional bank loans can take around a month to be approved.
- When you can pay it back: Short-term loans are usually less than two years, medium terms are around two to five years, and long-term loans are generally longer than five years. Short-term loans usually carry higher interest rates, but long-term loans generally cost more in the long run due to their repayment periods.
- Your credit score: The amount you can borrow is partly based on your creditworthiness, including your personal credit score, business credit score, and information that appears on your credit report.
- Annual revenue: Your lenders will most likely want to know your annual revenue, and many will look into your monthly revenue, cash flow, and debt-to-income ratio. Lenders will also consider the reliability of your revenue, so keep track of contracts for ongoing work.
- Time in business: Younger businesses typically have higher credit risks. Lenders are less likely to extend financing unless your company has been in business for at least a year or two.
- Whether you need collateral: Some types of loans require some form of collateral, such as equipment or real estate.
- Willingness to sign a personal guarantee: Most lenders require personal guarantees from partners who own 20 percent or more of a business.
- Your industry: Some lenders may place restrictions on the types of businesses they will fund. The government uses Standard Industrial Classification (SIC) codes and North American Industry Classification System (NAICS) to categorize companies by their industry. SIC and NAICS codes appear on business credit reports and are used by lenders to determine which types of businesses they will lend to.
How to get a small business loan
Getting a small business loan can be crucial in growing your business. With the proper preparation, you can increase your chances of securing a loan that meets your needs. Follow the steps below to ensure you are well-prepared to apply for a business loan.
1. Evaluate your business financials
Before applying for a loan, pinpoint everything you need to know before getting a loan and where you stand when it comes to your personal and business finances, credit, and debt-to-equity ratio. Gather all required documentation, such as financial statements, tax returns, and bank statements, to get a clear picture of your financial situation. If you have a high credit score and low debt-to-equity, you can access more competitive interest rates and save thousands over the life of the loan.
2. Determine your loan purpose
Identify the specific purpose for which you need the loan. For example, are you looking to expand your business or purchase new equipment? Defining the intended use of your loan will help you determine the loan amount and type of loan that best suits your needs.
The purpose of your loan also helps determine what type of loan you get, so be sure to consider all kinds of business financing. For example, if you are looking for steady cash flow, a line of credit might be your best option. However, if you want to purchase machinery, equipment financing may be best.
3. Research lenders
Conduct research to find lenders that offer loans that fit your business needs. Even if you need financing fast, take your time and compare all of your options before taking out a loan. Compare interest rates, loan terms, fees, and eligibility requirements to determine which lenders best fit your business.
4. Check eligibility requirements
Review the eligibility criteria for the lenders you are interested in to ensure that you meet their requirements. Factors such as time in business, credit score, revenue, and debt-to-equity ratio are key considerations for most lenders.
5. Review loan terms and conditions
Once you identify the lender and loan offer that best meet your business needs, carefully review the loan terms and conditions. Pay special attention to the interest rates, fees, repayment terms, collateral requirements, and prepayment penalties, if any.
6. Prepare loan application
Prepare your loan application by gathering all required documents, including business and personal financial statements, tax returns, bank statements, and other documentation. Also, ensure that you have a solid business plan outlining your business goals, strategies, and how to repay the loan.
7. Submit loan application and await approval
Submit your loan application to the lender of your choice and await a response. If the lender approves your loan application, review the loan agreement carefully before signing it.
What to do if you’re turned down for a business loan
If the lender turns you down for a business loan, don’t worry. Ask the lender for feedback to understand why your application was rejected and work to address any issues. It may be necessary to improve your credit score, reduce current debt, or find a cosigner. Then, you can reapply or consider working with another lender who understands small business needs and offers flexible loan options.
Finally, remember that getting a business loan isn’t the only way to fund your venture. If you can’t get a loan, you may be able to use other financing options such as crowdfunding, investor funding, and government grants.
Business loan pros and cons
By weighing these considerations carefully, you can determine whether a business loan is right for your venture.
Pros of Business Loans
- Easily accessible cash: Business loans provide businesses with access to money for a variety of purposes, such as purchasing new equipment or expanding into new markets. Some financial institutions even tailor loans to types of businesses or specific business owners, such as business loans for women.
- Flexibility in use: Business owners have the flexibility to determine how they use the money granted by banks and other lenders. Borrowing limits are also high—often up to $1 million or more. This allows them to tailor financing solutions for their specialized business needs.
- Low interest rates: The interest rates on business loans are typically lower than those offered on credit cards, making them a more affordable option for borrowers looking to finance their projects or operations at an attractive rate of return.
- Long repayment terms: Many business loan terms extend up to 10 years, allowing businesses ample time to pay off the debt without putting too much strain on their finances each month or year during repayment periods.
- Tax deductible interest payments: A large portion of the payments made toward interest charges incurred when taking out a business loan are tax deductible. This helps reduce overall costs associated with borrowing funds from third-party sources instead of using one’s capital reserves.
Cons of Business Loans
- Strict eligibility requirements: Qualifying for a business loan can be difficult and requires borrowers to meet specific criteria before approval, such as good credit and a healthy debt-to-equity ratio.
- Loan fees and origination costs: Taking out a loan typically requires paying origination fees and closing costs, which can increase the overall cost of borrowing.
- Risk of default: If a business fails to make timely payments, it may be subject to late fees and interest rate increases, leading to more debt. The longer payments are delayed, or if payment defaults occur, lenders may even choose to repossess the collateral used as security for the loan.
- Personal liability: As is often the case with business loans, borrowers may be required to put up their personal or business assets as collateral. If they cannot repay the loan, they risk losing their business and their homes, cars, or other personal property.
Business loan alternatives
If you’ve been turned down for a business loan, there are other financing options available, including merchant cash advances, crowdfunding, and grants. There may also be other types of loans specifically designed for small businesses with different requirements and terms than traditional business loans.
Consider these alternatives if business loans aren’t a good fit:
Invoice factoring is a financing option that allows businesses to sell their outstanding invoices to a factoring company for a fee. Essentially, the factoring company advances a percentage of the invoice amount to the business, typically between 70 and 95 percent. The factoring company then collects the full amount directly from the customer. Once the invoice is paid in full, the factoring company returns the remaining balance to the business, less its fees. Factor fees usually range from 0.50 to 5 percent per month.
Invoice factoring is an attractive option for business owners experiencing cash flow issues, as it provides immediate funding without increasing the business’s debt. This financing option is best suited for companies with long payment cycles or not qualifying for traditional bank loans.
Invoice financing is similar to invoice factoring but involves borrowing against unpaid invoices instead of selling them. Typically, invoice financing providers will advance up to 90 percent of the invoice value as a loan or line of credit.
In contrast to invoice factoring, you remain responsible for collecting payment from your business’s clients. Once you receive the payment, repay the borrowed amount plus interest and other fees. Fees are high and usually collected weekly, resulting in APRs up to 79 percent.
Personal loans are often overlooked as a financing option for business owners. Unlike traditional business loans, personal loans are usually unsecured and solely based on an individual’s creditworthiness and ability to repay. Personal loans could help business owners access quick cash without the need for collateral or extensive paperwork.
Personal loans can be great for entrepreneurs with a good credit history and a stable income stream. They are also an excellent option for startups that haven’t yet established sufficient business credit. However, business owners should be mindful of lower borrowing limits, high interest rates (between 4 and 36 percent), and fees that make it essential to shop around for the most competitive offer.
Business credit cards
Business credit cards function similarly to personal credit cards but with a focus on the unique needs of business owners. Many offer perks such as cashback on purchases or points that borrowers can redeem for valuable rewards. Additionally, they often provide tools and resources for expense tracking and employee spending oversight. Annual percentage rates typically range from 11 to 30 percent, but some cards have 0 percent introductory APRs.
Business credit cards are best suited for owners with a firm grasp on their finances and who regularly make small business-related purchases. These cards can be a valuable tool for simplifying finances and earning rewards while meeting the ongoing costs of doing business.
Merchant cash advance
A merchant cash advance is a type of financing where a business receives a lump sum of cash upfront in exchange for a portion of its future credit card sales. The amount of funds the company receives is typically based on its past sales—not its credit—making it easier for those with less-than-perfect credit to obtain financing.
Rather than having to make set monthly payments, the loan is repaid through an automatic withholding of a percentage of the business’s daily credit card sales. While merchant cash advances may not be ideal for every business, they can be useful for those with high sales volumes.
Crowdfunding allows businesses to pitch their ideas or products to potential investors, who can then pledge to contribute funds to the project—typically through an online platform.
This approach can benefit business owners who struggle to obtain funding through other means, such as startups or businesses in niche markets. Crowdfunding can also serve as a way for startups to test market demand for a new product or service before investing significant resources in its development.
Small business grants
Small business grants are offered by government agencies, private foundations, and corporations to support small businesses. Unlike loans, grants do not have to be repaid and are intended to help business owners achieve specific goals, such as launching a new product or service, expanding, or creating jobs in the local community.
Small business grants are best for entrepreneurs with a clear and compelling project proposal, a strong track record of business success, and a willingness to invest time and effort in the application process.
Bootstrapping means using personal funds and resources to start and grow a business without relying on external funding or investment. This can include things like operating from a home office, using open-source software, and leveraging existing networks and resources.
Not all business owners can bootstrap their companies, but it can be particularly effective for small businesses and startups looking to minimize costs and maximize resourcefulness. By bootstrapping, business owners often find ways to achieve success on their terms without being beholden to external investors or other outside influences.
Frequently asked questions
Are there small business loans for bad credit?
There are small business loans available for those with bad credit. Many lenders offer special programs designed to help those with poor credit access the funding they need to start or grow their businesses. These bad credit business loans often come with higher interest rates and stricter repayment terms than standard small business loans, so carefully research your options before signing any agreement.
Can I get a startup business loan?
It is possible to get a startup business loan, and there are several options for individuals and businesses looking to finance their startup venture. Many lenders offer special programs designed to help new businesses get the funds they need. However, loan amounts may vary depending on the borrower’s credit history and cash flow projections.
What credit score do I need for a small business loan?
The credit score required for a small business loan may vary depending on the lender, type of loan, and other factors. Generally, lenders will consider personal and business credit scores when assessing a small business loan application. Ideally, applicants should aim for a credit score of 680 or higher to qualify for the most favorable rates and terms. However, it is still possible to secure financing with lower scores.
It’s also important to note that having a good credit score does not guarantee approval, as most lenders will also review other criteria, such as a business plan and cash flow projections, to gauge a borrower’s creditworthiness.
How much income do I need to get a business loan?
The income needed to qualify for a business loan varies based on the lender, type of loan, and other factors. Generally, lenders require that applicants have sufficient income to cover their debt payments and their expected operating expenses. Some lenders may also review your cash flow projections and net worth to determine if you can repay the loan.
To maximize your chances of approval, calculate whether your income is enough for your personal needs and those of the business. A solid credit score (ideally 680 or above) will also help you secure more favorable terms with most lenders. Ultimately, every lender is unique, so choose one that aligns with your circumstances and financing needs.
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