A thorough guide to small business loan lenders, loan types and terms, and how to apply. Find out how to get a leg up on the competition by obtaining funding for your business.
HOW WE ANALYZED THE BEST SMALL BUSINESS LOAN PROVIDERS
MORE INSIGHT INTO OUR METHODOLOGY
When it comes to loan options, we concentrated on two types: lenders and marketplaces. A lender is an entity that funds the loan itself, whether this be a traditional bank, credit union, or alternative online lender. Marketplaces are aggregators that partner with lenders and can compare loans to offer you the best option. Marketplaces can exist wholly or partially online, be physical brokerage houses, financial advisors, etc. The loan types available to small businesses include term loans, lines of credit, SBA loans, merchant cash advances, invoice financing, and equipment loans.
Banks generally only offer term loans and lines of credit, and are more hesitant to lend money to businesses just starting up. Alternative lenders, especially online, will offer a wider variety of small business loans, but it will generally come at a price in terms of fees and APR because of the less stringent eligibility requirements. Regardless, all lenders will offer differing minimum and maximum amounts, and different repayment terms.
With the advent of alternative lending, small businesses in the United States have more options than ever, despite traditional lenders’ reluctance to provide financing for growing enterprises. However, when seeking funding for their company, small business owners should follow a number of guidelines. The first is taking a good look at themselves and their financial situation, figuring out exactly how much money they really need. Learn the particulars of different types of loans and become familiar with all the terms thereof. Finally, always consider loans backed by the Small Business Administration, though these may take more time to get approved.
Traditionally, small businesses would look to conventional financial institutions when looking for funding, such as banks or credit unions. However, the rise of alternative lenders has considerably broadened the ways in which businesses can obtain access to loans. These include online lenders, peer-to-peer platforms, and marketplace lenders (which connect borrowers with offers from multiple lenders).
Available Loan Types
There are many different types of small business loans. Loans issued by private lenders can take the following forms:
- Short-Term Loans – Though all businesses go through ups and downs, these fluctuations can hit small companies harder than larger, more established concerns. Short-term loans generally have a one-year term, but are often repaid much more quickly than that, within 90-120 days. To qualify, most lending institutions will ask for payment and cash flow histories for the past 3-5 years, income statements for the same period and possibly collateral. In a normal economy, interest rates for short-term loans will be higher than long-term ones, but in a recessionary economy, this can be flipped on its head. For this reason, it’s very important to be aware of the primer interest rate and make sure to do comparison shopping.
- Long-Term Loans – These generally have a fixed maturity of 3-10 years, though some can be extended up to 20, depending on their use. They start around $25,000 and can go up to $200,000. The approval process is more rigorous in direct proportion to the amount of the loan. The principle behind every loan should be to tie up its term according to the life of the asset being purchased, and always measured against the cost of said asset’s lease. So, if you’re buying a piece of equipment that will last ten years, then a long-term loan is the logical solution, (this would also apply to any other long-term plans, such as construction projects or purchasing buildings or other businesses). The interest rates on these types of loans should be a little lower than for short-term ones, but as previously mentioned, this can vary greatly, and you should be aware of the prime interest rate in order to negotiate with your loan officer.
- Line of Credit – This can give owners a sense of calm, as it guarantees cash on hand whenever necessary, to be used for anything from repairs to the purchase of new equipment. If you have time gaps between capital needs and revenue realization, a line of credit can help you ride out the cycle until accounts payable have been received. Obtaining one depends on factors such as the owner’s personal assets, consistent earnings, excellent capital position, cash flow statements, and multiple sources of repayment. Generally, lenders will put a cap on the amount of funds you can draw on, and you’ll only have to pay interest on the outstanding principal.
- Invoice Financing – Many lenders will give you a loan against the balance of your outstanding invoices, which basically means they’re advancing you the funds against your accounts receivable.
- Merchant Cash Advance – Typically marketed towards businesses whose revenue comes mainly from credit and debit card sales, providers say this is technically not a loan. They give you an amount of cash upfront in exchange for some of your future sales, which can be structured in two ways: either through fixed daily or weekly debits, plus fees, from your bank account—Automated Clearing House withdrawals—or the repayment structure can be tied to a percentage of your credit/debit transactions.
- Equipment Loans – These are loans taken out to buy necessary equipment for your business. However, instead of coming up with collateral, the equipment becomes the collateral itself. If the loan defaults, the lender simply repossesses the equipment. They are quick loans that require little documentation.
Aside from these, the Small Business Administration also backs low-interest-rate loans for small businesses. Contrary to popular belief, the SBA itself does not issue loans. Banks, credit unions, community development organizations and other partners do. What the SBA does is provide a guarantee of up to 85% for loans under $150,000 and 75% for loans over $150,000. This reduces the risk for lenders and raises borrowers’ chances of getting approved, as well as receive lower interest rates and longer repayment terms than they might otherwise qualify for. Since they’re essentially guaranteed by the SBA, their rates and terms are generally more favorable to borrowers, but this comes with stricter qualifying requirements.
Max Loan Amount
- Short term loans generally begin at $5,000, regardless of the lender, and can reach up to $250,000. Long term loans start at the same amount, but can reach double at their maximum of $500,000.
- Small business lines of credit can have different maximum and minimum amounts, depending on the lender. Traditional financial institutions offer lines of credit between $10k and $100k. Alternative lenders generally offer similar amounts, up to $100k.
- Invoice financing can pay out anywhere between 50-90% of total invoices outstanding, which may reach amounts between $100,000 and $2,000,000.
- Merchant cash advances can disburse amounts between $2,500 and $500,000, depending on the lender. The approval process is simpler and they’re easier to qualify for than other types of loans, although there may have higher fees.
- Equipment loans can range anywhere from $5,000 all the way up to $2 million plus depending on the industry and type of equipment.
- SBA 7(a) loans have a maximum loan amount of $5 million.
Max Term Length
- Conventional bank term loans tend to be between 3-10 years. Short-term online loans are generally between 3-24 months, and long-term ones are 1-5 years.
- Lines of credit offered by both conventional financial institutions and alternative lenders generally begin with lower limits or have a high-frequency repayment schedule, which may change as the lender becomes more comfortable with the borrowers.
- Invoice financing can offer term lengths in two different ways: either by factoring individual invoices or enter into a contract.
- Merchant cash advances are advances based upon the future revenues or credit card sales of a business, they can have term lengths between 3 and 18 months.
- Equipment loans generally have terms between 2 to 10 years. A good tip is to make sure that the equipment’s life expectancy is not higher than the loan term, to make sure you’re not paying for machinery past its usefulness.
- SBA-backed loans have different term lengths, depending on the type. For SBA 7(a) loans, terms are up to 7 years for working capital, 10 years for equipment, and 25 years for real estate. SBA 504 loans have terms of up to 20 years on real estate and up to 10 years on machinery or equipment.
The application process for any type of small business loan is very similar, whether it’s backed by the SBA or not. Generally speaking, lenders require that the company has been in business for a minimum of two years (alternative lenders can be more flexible in this regard), a minimum personal credit score of 600 (SBA loans require 680), collateral, personal guarantee, and that you provide a business plan and detailed financial data. Short-term loans and lines of credit issued by alternative lenders are slightly more relaxed in their qualifications: credit scores can be as low as 500, they only require 12 months in business, and monthly business revenues above $2,500.
For a list of some of the terms on this page, check out our Small Business Loans Terminology article.
Alternative lenders generally provide the option of completing the full application process online, without having to go through any physical paperwork.
Approval time for any type of small business loan depends on the lender. Generally, potential borrowers will receive a reply within 24-36 hours of completing their loan application. Funding time refers to the time it takes for business owners to receive their financing. Though this depends on each lender, there are some types of loans which are funded in as little as 24-48 hours, such as long and short-term online loans, and merchant cash advances. Online Invoice financing and equipment financing tends to take from five to seven business days. Loans with traditional lenders often require 14 to 60 days, and SBA-backed loans take the longest, at between thirty to ninety days.
Min. Annual Revenue
Minimum annual revenue requirements vary according to each lender’s specific criteria, but most do insist on an amount in the ballpark of $25,000 to $75,000.
Min. Credit Score
Though credit score requirements are less stringent with alternative lenders than with conventional ones, (and some of the former even cater specifically to people or businesses with poor credit histories), a score of at least 600 is advisable in order for consideration.
RATES & FEES
When calculating the cost of your small business loan, we’re looking at the interest rate and any additional fees. These can include origination fees, factor rates (merchant cash advances and invoice financing), guarantee fee (SBA loans), underwriting fee, and application fee. In order to get the best comparison tool we must use this information to calculate the annual percentage rate (APR). The APR considers all relevant fees in addition to the interest rate to determine a true representation of what your small business loan will cost over the course of a year. APRs also take into terms the term of the loan. This can often be misleading as many small business loan solutions, like merchant cash advances, are designed for immediate, short term use (3-6 months). When calculating the added fees the APRs can get very high indeed (100%+).
As mentioned above, many alternative online lenders do not express their charges as an interest rate at all, rather they express a percentage as a loan fee, or factor rate. Say a lender loans you $100,000, at a fee of 4.5%, with a term of six months. This is not the interest rate, it is a fee. Under this particular lender’s conditions the fee is applied monthly to the entire original loan regardless of how much you’ve paid off. When combining all the monthly fees, and taking into consideration the rate must be doubled to get the annual percentage rate, you end up with an APR more in the neighborhood of 92.6%. For this reason most alternative lender do not advertise APRs.
We have tried as accurately as possible to provide APRs where the data is available. Traditional bank loans for small businesses hover at around 5.75%-13%. Alternative lenders offer similar low rates as well but often skyrocket for reasons explained above. Know that short term loans, with fees or factor rates, have very lenient qualifications but are notorious for translating into high APRs. However, they are sometimes the only immediate solutions for certain businesses and can be useful if you are sure the loan will create the revenue to pay it back quickly.
Each loan type has highly variable requirements and specifications, which depend both on the loan itself, the borrower’s qualifications, and the lender’s policies.
- Bank term loans for small businesses feature APRs that range between 5.75% and 13%. Online term loans, be they from lenders or aggregators, range from 7.30%-98.40%.
- APRs for lines of credit can vary enormously depending on the lender. Lenders with stricter requirements tend to offer better terms, between 5.75% and 21.85%. Those who allow for bad credit or less time in business have higher APRs, commensurate to their level of risk. Because of this, lines of credit from online or alternative lenders can range anywhere from 7.77%-80.00%.
- Invoice financing has unusually high APRs across every type of lender, with rates averaging between 16% and climbing up to 76%.
- Merchant cash advances are, hands-down, one of the most expensive financing products on the market. It can be confusing to understand their rates, as well, since companies typically quote their costs as factor rates (of between 1.10 and 1.25). In order to understand the true cost of a merchant cash advance, you must multiply your total advance amount by the factor rate. This will generate an average APR of 17% to 100%+.
- Equipment financing has lower interest rates than other financing because the loan is generally secured by the equipment itself as collateral.
- SBA rates are set by the government, and can be easily verified with a quick internet search. For SBA 7(a) loans, APR rates are usually between 6.5% to 9%, whereas SBA CDC/504 loans are 3.83% to 4.56% for the CDC part, including fees.
- Part of the cost of a business term loan includes the associated fees, which can include a commitment or loan fee of approximately 1% of the total loan amount, and closing costs, which can range between 1-7%.
- Most lines of credit don’t have any additional fees, apart from an annual fee for lines over $25,000.
- Invoice financing APRs include all fees and interest, such as a weekly fee of 0.5% to 1% of the invoice amount, although this drops by 0.1 to 0.2 percentage point for borrowers whose clients pay their invoices on time.
- SBA loan fees are very different from other forms of financing. For instance, lenders aren’t allowed to charge an origination fee, and guaranty fees can often be more reasonable than for other loans (between 2% and 3.5%). Lenders may charge packaging fees, but these must be reasonable and in line with comparable, non SBA-guaranteed commercial loans. Finally, any fees charged an SBA borrower must be documented thoroughly at time of loan reimbursement.
When you’re looking for a lender for your business, it’s important to verify their trustworthiness and how they stack up to their competition. To that end, it’s vital to do research on consumer-based review websites such as the Better Business Bureau and Trustpilot. Another good tip is to look up the lender in the Consumer Financial Protection Bureau (CFPB) database, which keeps records of consumer complaints. Likewise, a lender’s time in business, though not necessarily a reliable indicator of honesty, does establish a track with which to evaluate said honesty. Lastly, we wanted to make sure that each company was easy to get in contact with, as that is one of the complaints that always crops up, regardless of the type of service.
BBB Positive Reviews
The Better Business Bureau was founded in 1938 focused on advancing marketplace trust. They collect and provide free customer reviews on more than 4 million businesses, as well as provide accreditation for companies that meet their eight “Standards for Trust,” and a letter-based rating system. The total amount of positive and negative reviews are visibly itemized, and individually accessible, so customers can make informed decisions.
Trustpilot is an online review community with over 26 million reviews. Since these are completely user-generated, a good review with the company generally guarantees its legitimacy. Customers use Trustpilot’s star system to provide ratings through a customized system that takes into account factors such as depreciation over time, the Bayesian average, and each reviewer’s star score.
HELPFUL INFORMATION ABOUT SMALL BUSINESS LOANS
Small business loans are funds paid out to small businesses, which are to be repaid with interest and fees over a set period of time. The main types of small business loans are long and short term loans, which function much the same as everyday installment loans, lines of credit, merchant cash advances, invoice factoring, and equipment loans. There are also SBA loans that are guaranteed by the government, via the Small Business Administration, which generally have more favorable terms.
Small business loans are good for any business in need of working capital to promote growth. They can be used to purchase equipment, expand to new facilities, or advertise. Taking out a small business loan can also be a very convenient way to obtain start-up funds. Conversely, small business loans can help established businesses who find themselves in a tight spot, unable to manage day-to-day expenses or meet short-term obligations like payroll.
Regardless of the type of loan, lenders will invariably look at time in business, business plan, personal credit score, gross annual revenues, net annual profits, and what collateral is available to back the loan. Although traditional bank loans usually have the most favorable terms, they are notoriously hesitant to lend to small businesses, especially start-ups. These days, online and alternative lenders are happy to step in to fill the void, with some companies offering quick approval with lax qualifications for borrowers bad credit.
Borrowers choosing between lenders should evaluate and compare the purpose of the loan, its size, interest and APR rates, terms and costs, including prepayment penalties and origination fees. Be aware that companies offering minimal qualifications and low credit score requirements will generally feature much higher APRs and associated fees. Also, small business lenders, especially in the case of merchant cash advances and invoice factoring, offer a percentage rate that is actually a flat fee compounded monthly on the balance or even the entire original amount. If you combine this with a short repayment term the APR can get stratospheric (100%+). These loans are often the only type unqualified businesses can get. We only recommend them if the business is certain the cash influx will generate capital and they can therefore pay it back quickly.
FAQS ABOUT SMALL BUSINESS LOANS
How much do business loans typically cost?
Business loans costs are different for each borrower, as rates depend on a number of factors, unique to each business. However, borrowers should always keep in mind all the associated costs of the loan, including interest rates, APR, factor rate as applies, and any fees for costs such as origination, application, guarantee, late payment or prepayment penalty, check processing, and underwriting.
SBA 7(a) loans also require a guaranty fee of between .25% to 3.75% for the part of the loan that is guaranteed by the agency, depending on the size and maturity date of the loan. Since SBA loans are government regulated, interest rates are set. For June 2017, maximum interest rates on SBA 7A Loans range from 6.25 % to 8.75 %, and currently range from 3.84% to 4.39 % including fees for the CDC portion of CDC / 504 loans.
As a general rule of thumb, the company’s expected profits from the use of the business loan should be greater than the loan’s total cost, and the business should generate enough cashflow to be able to easily cover the monthly payments. Repayment terms also vary depending on the lender and the loan purpose, which affects the total sum the borrower must repay.
Why choose an online lender over a traditional bank?
Online lenders are great options over banks, when businesses are younger, or can’t meet a bank’s requirements for borrowing. To qualify for SBA-backed and traditional bank loans, businesses need excellent credit, strong business revenue, and zero defaults on taxes or government loans.
Online and alternative lenders analyze both traditional credit standards, (such as personal credit score, revenue records, and cash flow), as well as nontraditional metrics like social media and vendor payments. This emphasis on alternative qualifiers enable non-traditional lenders to fund so-called higher risk businesses, such as startups or clients with poor credit scores. These loans are also easier to apply for, as the whole process can be completed from the comfort of your home or office computer. Approval or denial also tends to process much quicker than with traditional lenders.
What is a merchant cash advance?
A merchant cash advance is a lump sum of capital that is repaid automatically using a fixed percent of your daily credit card transactions. They are not loans, but rather an advance based on a business’ future revenues.
Merchant cash advances view risk differently than lenders of traditional loans do, focusing daily receivables or credit card receipts rather than on credit criteria. Rates are typically higher than for other small business financing options, such as loans, but qualifying is substantially easier.
How does invoice factoring work?
Invoice factoring is a type of accounts receivable financing that converts outstanding invoices due within 90 days into immediate cash. Businesses pay a percentage of the invoice amount to the lender as a fee for borrowing the money, while the lender limits its risk by not advancing the full invoice amount.
Invoice factoring can work in various different ways, but the most common is known as factoring. In this case, the company sells its outstanding invoices to a lender, who then pays them between 70% and 85% of what the invoices are worth. When the lender receives the remaining balance, it then remits the remaining 15% to 30% to the business, which in turn, pays interest and/or fees for the service.
Another alternative is invoice discounting. This is structured similarly to factoring, but the business itself collects the invoice payment, not the lender. The lender can advance up to 95% of the total amount, and upon customer payment, the business then repays the lender, minus a fee.
What is a business line of credit?
A business line of credit is an arrangement between a financial institution and a business that establishes a maximum loan balance that the lender permits the borrower to access or maintain. Borrowers can access funds at any time, as long as they don’t exceed the agreed-upon maximum amount, or any other requirements set by the financial institution.
Lines of credit are revolving accounts generally unsecured by collateral. This means that borrowers can spend the money, repay, and then spend it again, in a virtually never-ending cycle. Repayment can be adjusted as needed, opting for minimal monthly payments or settling the entire outstanding balance at once. This differs from installment loans, in which borrowers receive a lump sum, and repay it in equal monthly installments.
What can business loans be used for?
Business loans can be used for a number of different operational needs. Some traditional bank loans may have specific conditions or limits on usage, but loans and financing designed specifically for small businesses can be used for nearly everything, including equipment purchases, inventory, daily expenses, and payroll.
Other uses can encompass the purchase of new technology, hiring, marketing or advertising, education and training, and finally, expansion. In the case of loans guaranteed by the Small Business Administration (SBA), there are generally specific permitted usages.
SBA 7(a) loan proceeds can be used to pay long and short-term operational expenses, to purchase real estate, as revolving funds, to renovate or construct a new building, to establish a new business, and under some circumstances, to refinance existing business debt. These funds cannot be used to refinance existing debt where the lender would receive a loss, to repay delinquent taxes, to affect a partial change of business ownership, to reimburse funds to any owner, or for any purpose that the SBA doesn’t consider sound.
SBA 504 loans, or Community Development Corporation (CDC) loans, are strictly for real estate and equipment purchases. This program is unique in that it pairs a CDC with a lender, and they finance the loan jointly. Finally, the SBA also features microloans, in which they provide funds to nonprofit organizations, who in turn, lend the money to the business.
What do I need to qualify for a small business loan?
You may need a guarantor if your loan application is weak in one of the five following areas: collateral, degree of personal investment, business cash flow and repayment ability, business ownership and management credentials, and credit history. A guarantor can serve to strengthen the application, if he or she has a solid personal financial statement and an excellent credit history.
It’s important to note that a guarantor automatically becomes responsible for satisfying the loan’s terms in case of the business’ liquidation. Their personal assets are therefore at risk, but this can be offset by Personal Guarantee Insurance, which can cover up to 70% of the guarantor’s net liability.
Do I need to have good credit to get a loan for my business?
You must have both good personal and business credit scores in order to qualify for an SBA-backed or traditional bank loan. Alternative lenders, while they do take credit history into account, generally have more lenient requirements, and place more emphasis on the business’ cash flow and track record.
What are the different types of business loans?
There are many different types of business loans. To understand which is the best one for you, first choose the amount and purpose of the loan, how soon you need it, how long it will take to repay, length of time you’ve been in business, its current financial shape, and the amount of collateral you have available.
The answer to these will give you a better idea of the loan type that’s best for you, and whether you should pursue a government-backed loan, a bank loan or line of credit, or seek out an alternative lender for a line of credit, loan, or cash advance. Loans can be used for obtaining working capital, equipment or building purchases, remodels or construction, and in some cases, to refinance business debt. Other types of loans are merchant cash advances (loans based on on the volume of your business’ credit card transactions), professional practice loans (designed specifically for providers of professional services like healthcare, accounting, or engineering), and franchise startup loans.
Government-backed Small Business Administration (SBA) loans provide a guaranty that enables a bank or alternative lender to extend credit it might otherwise have declined. They can be used for a wide variety of purposes, but have generally strict qualifying requirements, additional paperwork, extra fees, and take longer for approval.
Bank loans or lines of credit are the traditional way to fund businesses, but since the Great Recession of the late aughts, getting approval has become more difficult. They tend to carry low interest rates, and approval is slightly faster than SBA loans. However, repayment terms are generally shorter, and often include balloon payments of the outstanding principal sum, interest-only having been paid until then.
Alternative lenders have gradually become pervasive in the lending marketplace, offering loans to startups and small businesses with less than stellar credit history. Their approval requirements are considerably less stringent than for the two previous types of loans, applications are typically fully completed online, approval decisions are quick, and funding can arrive in less than five business days. Interest rates and associated fees can be substantially higher than with traditional lenders, however, as these loans generally carry higher risks.