Best Small Business Loans
Based on In-Depth Reviews
An in-depth look into the current world of online small business loans and lenders.
Last Updated:November 20, 2024
- 200+Hours of research
- 84+Sources used
- 30Companies vetted
- 3Features reviewed
- 10Top
Picks
Our Team of Researchers:
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What you need to know
Small Business Loans
- SBA-backed loans are the safest type of small business loan, although getting approved can be hard
- Online lenders offer a streamlined application process, but their interest rates can be higher
- Brick-and-mortar lenders usually have the lowest interest rates, but funding times are longer
- Always compare a minimum of 3 different lenders to secure the best offer
Our Approach
How we analyzed the best Small Business Loan Providers
Loan Options
Each lender offers specific loans depending on their specialization in the market. We did the heavy digging on who is best for each type of loan so you can save time on sifting through the myriad of options.
Application Requirements
Across the board, online lenders offer convenient online applications, but the documents they require vary depending on the type of loan and lender. To apply, small business owners generally have to provide personal and business data, bank statements, annual revenue, and credit score and collateral documentation. Furthermore, applications can be processed quickly and applicants can receive their funds a matter of days.
Average Rates & Fees
This is where it can get murky. Some lenders only release this information once the application has been submitted. We recommend using caution here. Averages rates and fees can vary greatly depending on factors like annual revenue and business credit score, among other factors.
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We receive compensation from these partners, which impacts the order they appear on the page. That said, the analyses and opinions on our site are our own and we believe in editorial integrity.
Our Top Picks: Small Business Loans Reviews
Small business lending in the United States has seen significant changes over the last two decades, especially with the introduction of alternative and online lenders who have different qualification criteria and often offer some unique funding solutions. But what does this mean for small business owners and entrepreneurs? Simply put, easier access to funding.
Traditionally, brick and mortar lenders were the leaders in the small business lending arena. In fact, they still originate the highest number of small business loans. Since the dotcom bubble, however, business lending hasn't lagged behind. Financial technology companies saw an opportunity to enter a market that was fraught with complications for small business owners and sought to disrupt what had been the norm prior to online banking technologies.
Across the online lending industry, the application and funding processes have been simplified and demystified. Customers can now apply for loans in minutes and receive their funds in days, if not hours. However, as these lending companies tend to be more lenient regarding credit score and annual revenue requirements, their rates and fees are typically higher than those of traditional bank loans.
We are all for simplification, automation, and demystification when it comes to small business lending, but it should be said that we recommend considering other more affordable options before choosing to apply for a small business loan online.
Advance Funds Network review
Advance Funds Network gets high marks for its wide array of financing options for small to mid-sized businesses, plus its round-the-clock customer support, customized programs, fast approval times, 24/7 account management and flexible credit score requirements. All this, combined with a quick application process, makes AFN a noteworthy option for business owners looking to finance their business endeavors.
AFN offers plenty of financing options for small business owners, including:
- Business term loans
- Business lines of credit
- Equipment financing
- Working capital loans
- Merchant cash advances
- Consolidation programs
To apply, your business needs to have been operating for at least 3 months and make at least $10,000 in monthly revenue. Your credit score must be at least 550 to apply.
AFN offers a quick online application on its website. You must answer how much money your business needs, what you need the funds for and for how long. Then, you'll receive several offers to match your needs.
All Fundy Capital review
Best for Lender Variety
All Fundy is a business lending marketplace with over 50 lenders to choose from. The benefit of applying with a marketplace network is that with just one application you can apply to multiple lenders simultaneously. A strong advantage of going with All Fundy is that they have loan specialists that guide you throughout the length of the process.
Screenshot from All Fundy compared vis a vis traditional lenders. August 15, 2019.
American Express review
American Express® Business Loans are secured loans available to small business owners with fair to good personal credit. Eligibility is based on creditworthiness and other factors. Not all industries are eligible for American Express® Business Line of Credit. Pricing and line of credit decisions are based on the overall financial profile of you and your business, including history with American Express and other financial institutions, credit history, and other factors. These loans are designated for business-related expenses, including but not limited to, procuring inventory, expanding operations, or enhancing working capital.
American Express offers fixed-rate term loans for small businesses. Loan amounts range between $2K and $250K and are available in terms of 6, 12, 18, or 24 months. There are no application or origination fees. There are also no prepayment penalties if you decide to pay your loan off early.
In order for an application to be approved, an applicant must meet the minimum criteria, including but not limited to:
- Must be at least 18 years of age
- Minimum FICO score of at least 640 at the time of application
- Have started your business at least a year ago
- Average monthly revenue of at least $3,000
All businesses are unique and are subject to review and approval.
This information has not been reviewed/updated by American Express since 10/15/24.
Biz2Credit review
Company Overview:
Biz2Credit has been providing small business loans since 2007, facilitating over $7 billion in funding. The company holds a strong reputation for its customer-centric approach and transparent process, boasting an A+ rating from the BBB. Rates vary based on creditworthiness and may include origination and late fees, but there are no prepayment penalties, allowing potential savings with early payoff.
Funding Options:
Term Loans:
- Loan Amounts: $25,000 to $500,000
- Repayment Terms: 12 to 36 months
- Requirements: 18 months in business, 660+ FICO, $250,000 annual revenue
Working Capital Loans:
- Loan Amounts: $5,000 to $2 million
- Repayment Terms: Flexible, shorter terms
- Requirements: 6 months in business, 575+ FICO, $120,000 annual revenue
Application Process:
The application is quick and online, requiring basic business details and financial documents. A soft credit pull is conducted for initial review, with most approvals processed in 1-2 days.
Funding Speed:
Approved term loans and working capital funds can be disbursed within 24 to 48 hours, providing businesses with fast access to needed capital.
Blue Bridge review
Blue Bridge offers three kinds of loans: an equipment finance agreement (EFA), a rental inventory loan and a working capital loan. These products are designed to be a quick and easy alternative to a traditional bank loan, as Blue Bridge usually approves loans within four hours and offers flexible terms of 24-72 months. The company offers loans of up to $500,000 and only utilizes soft credit pulls when determining your financial stability.
You can apply for a loan with Blue Bridge of up to $300,000 through its app. Loans larger than this will need to be requested through traditional channels. You will typically need a FICO score of at least 610 to qualify for a Blue Bridge loan, although they consider every case on its own merits. You will also need to prove your business stability and provide collateral depending on the type of loan for which you are applying.
Blue Bridge Financial, Inc. is an accredited business with the Better Business Bureau, with an A rating and just 3 complaints closed in the last three years. You can contact Blue Bridge by calling 866-777-1011 or emailing at sales@bluebridgefinancial.com. The company also provides a number of educational resources including a blog and extended FAQ to learn more about its products and services.
Bluevine review
Best for Businesses with Average Credit
Bluevine offers business lines of credit up to $250,000 to businesses across the U.S. The company presents its service through an easy-to-navigate website, where businesses can submit an application in minutes.
Bluevine's borrower qualifications are small business friendly, which makes them more accessible to a wider array of businesses. Bluevine lines of credit are available to borrowers with personal credit scores of 625 or higher.
Customers are often able to receive a loan decision in as fast as 24 hours. We particularly liked their business blog, which covers relevant topics and updates from the company’s CEO, as well as a helpful FAQ section.
Line of credit customers can also access approved draws instantly through a convenient Bluevine Business Checking account.
Screenshot from BlueVine.com 11/29/2022
Fundbox review
Best for Transparency
Backed by some of the biggest players in fintech (Jeff Bezos from Amazon and General Catalyst partners), FundBox aims to offer “credit at the speed of opportunity.” FundBox’s loan products are lines of credit (Direct Draw) and business-to business-payments to merchants (FundBox Pay). Their approval time can be as short as 3 minutes because they assess their borrowers' financials through their own business accounting software. The maximum amount Fundbox lends is $150,000 which is among the lower limits of lenders we’ve reviewed, but may suit a wide range of borrowers' needs. Some of the pros of applying with FundBox are the relaxed borrower qualifications, easy and straightforward online application, a short, 6-month minimum time in business requirement, and a great customer support network. Another thing that makes this lender standout is their ‘Resources’ section that offers helpful guides on different types of financing, including informattion on the best loans for women. Fundbox is a great option for companies looking for lines of credit to help them grow.
Screenshot from FundBox.com. 1/20/2021
Fundera review
Best for Educational Resources
Fundera partners with over 20 online lenders that offers business loans nationwide. It differentiates itself from other marketplaces by reviewing all offers and lenders on their page. When it comes to the companies they review, they are “lender neutral,” meaning they don’t play favorites.
As we’ve said previously, an informed consumer is an empowered one, and Fundera does just that by offering educational and informative small business financing guides, lender reviews, and additional financial education resources. Their priority is to simplify the lending process so that borrowers can make better financial decisions.
Fundera offers more loan options than other lenders on our list. Included in their loan process are guides on how to apply and how to qualify, with additional information about the different types of loans and lenders. Their application process asks borrowers to fill out a questionnaire that gets reviewed by a representative who communicates with them via phone or email to discuss their best options.
Borrowers can compare multiple offers on Fundera without affecting their credit score. Unlike other online borrowers, Fundera does not charge its clients for connecting them with lenders, therefore bypassing hidden fees. Its credit requirements are reasonable (mid-500s to upper 600s, depending on the loan type) and it claims to fund up to $5 million as quickly as the next day.
Screenshot ofFundera’s lending products. August 15, 2019.
Funding Circle review
Best for Business Term Loans
Based out of Denver, Colorado the tech capital of the Western world, Funding Circle works as direct online lender connecting investors with prospective borrowers. This company is an excellent alternative for established enterprises with plans for expansion, although we would suggest comparing rates with traditional banks as well. As per the established norm with online platforms, their application is accessible and speedy, with approval in as little as 24 hours and funding within 48 hours. Their offer is limited to term loans up to $500,000 marketed towards small to mid-sized businesses looking to pay off their loans within 6 months to 7 years. The qualification requirements are stricter as businesses must be established for 2 years with a credit score of 620 or higher.
Screenshot from Funding Circle’s business term loans webpage. September 22, 2023.
Lend Genius review
Best for Financing Alternatives
LendGenius is a large lender network with a wide range of loan and business financing alternatives. They connect potential borrowers with partner lenders through side by side comparisons. By filling out the online form, clients are connected to lenders like BlueVine, Loan Builder and Kabbage. LendGenius does not issue the loans themselves, their aim is to “simplify your small business loan search” by demystifying the process.
LendGenius explains what each loan is for and presents lender and rate comparisons in easy-to-read tables. Additionally, they offer a helpful breakdown of each type of loan and their corresponding loan amounts, terms, interest rates and time to funding.
Screenshot of LendGenius’s loan option breakdown. August 15, 2019.
LendingTree review
LendingTree is a online lender exchange founded in 1996 and based out of North Carolina. The company connects consumers with lenders and online tools that can assist them in making the best financial decision for them and their family. LendingTree offers various loans, including mortgages, refinance loans and small business loans. The company also offers loans related to the things you own, including home equity loans, auto loans and more. LendingTree is accredited by the Better Business Bureau, which gives it the highest possible rating of A+.
LendingTree offers a wide variety of options for small business loans, given its vast network of loan providers. Loan terms and qualifications can vary widely from lender to lender. You can get competing quotes from vsrious lenders in LendingTree's online marketplace in as little as 24-48 hours. Since quotes can be offer from such a wide variety of lenders, SBA loans on LendingTree range from 6.5% to 9.0% APR. Although the company is highly rated by the Better Business Bureau, complaints of unsolicited calls are common in the company's negative reviews. We recommend applying for a quote on the company's website and weighing your options before deciding if LendingTree is right for your financial situation.
LoanBuilder, A PayPal Service review
Best Overall
Loan Builder’s strongest selling points are its single fixed-fee pricing and no origination fee. Applying is an easy process, with next day funding available if approved. The good news for newer small businesses is that they need only to have been in operation for 9 months and have a minimum revenue of 42k to apply. As for repaying, you don’t need to worry about making payments in a timely manner because they automatically deduct weekly from your business bank account. And, no, there isn’t an option for monthly payments. Their web page is simple and straightforward, making the application process as hassle-free as they come. They offer a wide range of loan amounts and cover all the states in the continental US as well as the District of Columbia. Of the few downsides of using this lender is they do require a personal guarantee for the loan and they don’t have a live chat feature. They do have a customer service line.
Screenshot of LoanBuilder’s repayment terms. August 9, 2019.
OnDeck review
Company Overview:
OnDeck has provided small business loans since 2006, lending over $15 billion. Accredited with an A+ BBB rating, it emphasizes transparency and customer service. Rates depend on the credit profile and may include origination and late fees. There are no prepayment penalties, and early repayment could lead to savings.
Funding Options:
Term Loans:
- Loan Amounts: $6,000 to $100,000
- Repayment Terms: Flexible repayment terms of 12, 18 or 24 months.
- Requirements: 1 year in business, 625+ FICO, and $100,000 annual revenue.
Lines of Credit:
- Loan Amounts: $5,000 to $250,000
- Repayment Terms: Up to 24 months
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Requirements: 1 year in business, 625+ FICO, and $100,000 annual revenue.
Application Process:
The application process is fast and online, requiring you to submit basic business information and bank statements. An initial review involves a soft credit pull, with approvals often completed within a day.
Funding Speed:
Funds can be available the same day for term loans; lines of credit offer immediate access once approved
One Park Financial review
Best for Startups
One Park Financial is a nationwide lending network service that specializes in businesses who have been rejected by other SBL options. Their requirements for qualification are lax and geared toward newer businesses with a min of 3 months in operation, a 450 credit score, and at least $5,000 in monthly revenue. All of this comes at a price, of course. They partner with 20 funding providers who offer MCAs and each has their own fee schedules and high APRs, plus One Park Financial charges a fee for connecting customers to these lenders. Startups who don't qualify for other types of financing have the option of getting a loan through One Park, but while the company won't put many hurdles in their way, they will charge higher fees. But if your business has sufficient revenue to sustain paying off the loan we recommend them as a solid alternative. As always, we cannot stress this enough, read the fine print before signing a binding offer.
Screenshot of One Park Financial’s application guidelines. August 15, 2019.
Rapid Finance review
Best for Merchant Cash Advances
Rapid Finance offers merchant cash advances (MCA) and short-term business loans (STL) as the main lending options although they also offer SBA-backed loans. To qualify for an STL you must have been in business a minimum of 12 months, and a minimum of three months with a credit score of 500 to qualify for an MCA. They don’t have a flat requirement for business revenue, it depends on how much is borrowed.
It's important to note that their fees are not interest-based. Their approach to lending takes the borrowed amount and multiplies it by a “fixed rate” or “factor rate” which yields your interest rate. Essentially you'll be paying back $1.09-$1.20 on the dollar (excluding origination fees.) The final offer on your rates, borrowing amount, and term length are assessed based on the health of your business' finances and time in operation.
The company finances MCA loans based on your pending credit card sales. The MCA is similar to the STL except it circumvents federal regulatory oversight. Technically speaking, an MCA is not a loan, it’s the sale of a lump sum payment with an added interest to future credit card sales. The complete list of options includes lines of credit, SBA-backed loans, small business loans, and small business term loans. In terms of the online user experience, the website features a simple interface and includes relevant information.
Screenshot of RapidFinance’s loan features. August 12, 2019.
Our Research
More insight into our methodology
When we started researching small business loans, we had no idea there were so many options out there. Besides SBA-backed loans and private business loans from traditional lenders, there are now dozens of alternative, online lenders to choose from, each one offering loan products that cater to particular business profiles and segments.
Armed with this knowledge, we browsed dozens of websites with a fine-toothed comb to find out the main differences between online lenders and traditional ones.
While traditional brick-and-mortar lenders have more stringent qualification requirements regarding credit score, time in business, and annual revenue, alternative lenders place greater emphasis on revenue history.
After a thorough investigation, we realized that the lending arena has changed dramatically in the past years. Further on we talk a bit more about this topic.
From Offline to Online
The age of traditional business lending (banks) has been disrupted by financial tech companies looking to accelerate and simplify the otherwise long and slow process of small business capital funding. We know not all businesses are created equal and the same goes for small business loans. The spread of options can be overwhelming for a small business owner looking to borrow funds. For this reason, we’ve broken down the different types of loans and lenders so you have a better idea of the different funding options available to your business.
Kinds of Lenders
There are two main players in the small business loan sector: traditional brick-and-mortar lenders and alternative online lenders. Here we list the companies we consider to be the best lenders and marketplace aggregators in the digital lending realm.
To clarify, an online lender funds the loan itself, usually via an underwriting financial institution that backs the loan. Keep in mind, however, that not all online lenders are created equal. Some offer SBA-backed loans while others are limited to 2-3 specific options. Conversely, marketplaces such as Fundera and LendGenius allow you to shop and compare these aforementioned lenders. The advantage of using a marketplace is that they offer a wealth of information, although we always recommend you dig deeper than the surface level when it comes to online lending.
Online lenders in different modalities are disrupting the traditional small business lending market. Our list includes and reviews multiple marketplaces, peer to peer lenders, and companies offering invoice and account receivable financing and balance sheet lending.
Loan Options
Besides different types of lenders, there are also a great number of loan options available to small business owners. Here’s a list of the different types of loans offered by both online and brick-and-mortar lenders:
In addition to these, there's also a wide variety of SBA loans available for different business needs. Definitely, a safer bet since it’s government-backed, the SBA provides 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 the borrower's chances of getting approved for lower interest rates and longer repayment terms. It’s important to mention that this comes with stricter qualification requirements.
Application Requirements
Across the board, online applications are fairly similar, easy to fill out, and have a quick turnaround on approval. Small businesses can get approved as quickly as the next day, of course, approval will also depend on the lender and loan product as well as the eligibility. For SBA backed loans, the process can be longer, about 60-90 days. Most lenders require an annual revenue in the range of $2,500 up to $75,000 while credit scores can be on the 500 range. As we've mentioned before, alternative lenders tend to place greater importance on business income and less on credit scores.
Average Rates & Fees
Average Rates & Fees
When calculating the cost of your small business loan you should also take into account the loan's interest rate and any additional fees the lender might charge. These can include but are not limited to:
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Origination Fee
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Factor Rates
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Guarantee Fee
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Underwriting Fee
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Application Fee
Part of the cost of a business term loan includes 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 to 7%.
Most lines of credit don't have any additional fees apart from an annual fee for lines of over $25,000. On the other hand, 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 points for borrowers whose clients pay their invoices on time.
In contrast, SBA loan fees are very different from other forms of financing. For example, lenders aren't allowed to charge an origination fee, and guarantee fees can be more reasonable than for other loans (between 2% and 3.5%). Lenders may charge packaging fees, but they have to be reasonable and in line with comparable, non-SBA-guaranteed loans.
Perhaps the most important factor to consider regarding rates and fees is your Annual Percentage Rate or APR. The APR takes into account your interest rate—or the portion of the principal loan amount a lender will charge you for borrowing— plus any additional fees. In essence, the APR is what gives you a more complete idea of what you'll owe your lender.
Some online lenders don't express their charges as an interest rate, but rather as a percentage or factor rate. You'd have to double the rate they charge and add all applicable fees to get your APR. Let's look at an example:
A lender loans you $100,000 at a six-month term, charging you a fee of 4.5%. That percentage is not your interest rate, it's a fee. The 4.5% fee is applied to your account monthly, adding to your outstanding loan balance regardless of how much you've paid back up until that point. By this example, if you doubled your APR and added all applicable fees (origination, application, underwriting, etc.), your APR could end up being as high as 92.6%.
Some online lenders are less direct about the APRs they charge, as they can be exorbitant. As a result, many choose not to express their rates and fees as an APR, leaving you to do the math yourself.
We try to provide APR ranges when the data is available. Traditional bank loans for small businesses, for example, can range from 5.75%-13%. Some online or alternative lenders may offer similarly low fees, but since the industry is less regulated, you'll have to look closely at the terms and conditions of your loan to avoid overpaying.
Short-term loans, with fees or factor rates, tend to have lenient qualification requirements but can have very high APRs. However, they are sometimes the only immediate solution for some businesses and can be useful for those who are sure the loan will create enough revenue to pay it off quickly.
Minimum APRs
Each loan type has highly variable requirements and specifications, which depend on the loan and lender as well as the borrower's qualifications. Here are some general statistics regarding APRs according to Fundera:
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Term loans for small businesses can have APRs starting at 10% but can be a lot higher, especially if they come from online lenders.
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APRs for lines of credit can vary widely depending on the lender. Lenders with stricter requirements tend to offer better terms, while those who accept lower credit scores or less time in business tend to have higher APRs to make up for the level of risk they're taking on. Because of this, lines of credit from online or alternative lenders can range anywhere between 7% and 25% but can be a lot higher.
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Invoice financing typically has high APRs, with factor fees ranging between 8-30%.
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Merchant cash advances are among the most expensive financing products on the market. Since companies typically quote their costs as factor rates (between 1.14 and 1.18), these can be harder to understand. To know the true cost of a merchant cash advance, multiply your total advance amount by the factor rate.
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Equipment financing can have lower interest rates than other financing options because the loan is generally secured by the equipment, which serves as collateral. Still, current rates according to Fundera range from 8-30%
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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 7.50% to 10%, whereas SBA CDC/504 loans are 3.72% to 7.145%, including fees.
Helpful information about Small Business Loans
As a small enterprise, there are many options for starting or scaling your business. Fret not, we already did all the research so you can easily verify if your operation is likely to qualify for a small business loan.
What Qualifies as a Small Business?
For your venture to be considered a small business, it has to meet certain requirements and depending on the industry you are in, those requirements vary. When you hear the term small business, what might come to mind is your local mom and pop shop. Surprisingly, however, small businesses can rack up annual incomes as high as $750,000 and up to $38.5 million. In short, there isn't a one-size-fits-all, all-encompassing definition for "small business," so we recommend you verify the SBA’s size standards tool to make sure your enterprise qualifies for small business funding.
The SBA—short for Small Business Administration—is a United States government agency that specializes in helping entrepreneurs and small businesses obtain accessible loans. It's important to note that the SBA is not a lender itself. They partner with banks, credit unions, and online lenders to offer a government-backed guarantee to cover a portion of the loan, making it safer for financial institutions to grant loans to small businesses and entrepreneurs.
What Kind of Lender Should I Choose?
The benefits of working with an SBA-backed loan are lower interest rates, longer repayment terms, higher loan amounts, and flexible use. On average, SBA loan amounts range from $5,000 to $5,000,000 with interest rates between 4-13% and term of 5-25 years. A con of applying for an SBA loan, however, is the length of the approval process, which can take from weeks to months.
For term loans, traditional banks offer finance amounts ranging from $25,000-$250,000 and 1-5 year repayment terms with interest rates between 7%-30%. Both of these are great financing options because of their lower overall costs and flexible repayment terms. An SBA loan and a loan issued by a traditional lender can take a longer period of time to be processed, but they can be more cost-effective in the long run. If neither of these options is a good fit for your business, then we recommend you consider a loan with an alternative online lender.
What Do I Need to Apply?
Regardless of whether you apply for financing through an online lender or a brick-and-mortar bank, your lender will likely require three things: collateral, cash, and credit. There are two main types of loans, and all others can be lumped in either category, and that is secured and unsecured loans. If you apply for a secured loan, like a traditional short or long-term loan, you'll need collateral. Even loans backed by the SBA will require you to present a personal guarantee, which is a promise made by the business owner to repay back the amount borrowed if the business is unable to do so. Lenders will also focus on your business’ revenue and your business or personal credit score, depending on the loan product.
Aside from these three things, lenders will also require you to present certain documentation, including your financial statements and business plan. As always, remember that the requirements for application vary depending on the type of loan and the lender. In general, you will need:
Assessing Your Small Business Needs
Now that you’ve decided to seek funding, you have to figure out how much capital to ask for and what kind of loan to apply for. Business lines of credit, SBA loans, term loans; there are many options to sift through.
In general, however, the loan type and amount you go for will depend on your business needs. Are you scaling the business? Need money for payroll or inventory? Whether you need quick working capital, expensive equipment or some funds to lease or rent real estate, there's a type of loan for that. Consider your needs carefully and do your homework before moving forward with a loan application.
Once you've determined the loan amount and type of financing you need, consider preparing a loan proposal or business plan. According to the SBA, a loan proposal should include the following:
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The amount of money you'll need
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How you'll use that money for your business.
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How you’ll repay the loan.
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What you’ll do if your business can't repay the loan.
The proposal should also include additional documentation we've mentioned above, including but not limited to a cover letter, a business profile describing your business model, market, and customers (also called market analysis), your own experience and qualifications, the amount you're applying for and how you'll repay it, the collateral you'll use, your personal and financial statements, and your investments and projections.
Again, what you'll need to apply will depend on the type of loan you're trying to get and on your lender's particular requirements. Read up on the different types of loans available and look up your lender's particular qualification requirements for that product. Finally, compare quotes from at least three different lenders to ensure you're getting the best possible deal.
Besides reading about the different funding options and exploring the different resources available to you, one of the best ways to prepare for starting or expanding a business is to read stories by other entrepreneurs who have gone through the process before.
For first-time small business owner Normarie Piñeiro, securing a loan to finance a food trailer for her acai business was crucial. Piñeiro reckoned that purchasing a trailer over a brick-and-mortar store would ultimately grant her flexibility in her business model: “I wouldn’t say I chose the trailer over the store for the price because the costs are basically the same. One of the advantages of my lease was signing for just one year just in case I didn’t meet my predicted sales. That way it didn’t scare me as much to make the investment because I could always move the trailer if it didn’t meet the expected financial performance.”
As a first time entrepreneur, Normarie Piñeiro began the process of requesting a loan to open an acai food truck franchise. She had been a steady client of Açai Express for many years, a Puerto Rican-owned acai fruit bowls franchise, before deciding to invest. With a background in law and accounting, Piñeiro set out to secure funding via traditional brick-and-mortar lenders to open her store in the town of Canóvanas, Puerto Rico.
“The hardest part about the loan process was when they asked me for financial statements of other businesses so they could see projected sales and a 5-year plan for projected earnings. That was the hardest part for me because this is my first business. Luckily, another franchise owner lent me his financial statements so I could more or less see my projected income and expenses,” said Piñeiro.
Ultimately, banks want to know if you are trustworthy before lending to you, and checking your credit isn't the only way for them to do that. Some will verify your bank statements or financial statements to gauge the health and viability of your business. Fear not, the antiquated financial loans industry has acclimated to the times.
In years prior to the dot com boom, traditional lenders measured your credibility as a borrower through your credit score. With the advent of online lending, there are other measurables to look at besides credit score. Not to be mistaken, lenders still look at credit score standing, but they also prioritize revenue and sales to foresee if the business can pay back the amount borrowed.
COVID-19 Update
The Small Business Administration has a number of programs meant to help struggling small businesses, four of which are part of their COVID-19 response. We'll cover them briefly here.
The Paycheck Protection Program
In late March, Congress passed the $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act, with the aim of helping offset the economic downturn that has resulted from the COVID-19 pandemic. The largest economic stimulus package in history, the program originally allocated $349 billion in funds to the newly created Paycheck Protection Program (signed into law in late April). Since the program—which provides forgivable loans to small businesses for the purpose of payroll and overhead costs—had fully allocated its original budget within 13 days, an additional $320 billion was added with April's Paycheck Protection Program and Healthcare Enhancement Act.
Currently, approximately $130 billion of PPP funding remains available, and the program is accepting new applications until August 8, 2020. Since its beginning, the PPP has been fraught with confusion, and many small business owners haven't taken advantage of the program (or have returned their disbursed funds). Guidelines for how and when to use the loans, application deadlines, and an overall lack of transparency has made the PPP somewhat controversial—particularly since subsequent disclosures revealed that many small business owners were denied, while large enterprises such as Shake Shack, Ruth's Chris Steak House, and the Los Angeles Lakers obtained millions. Below, we answer some of the most commonly asked questions.
How do I apply for a PPP loan?
The SBA website states that "You can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating." Other lenders may also enroll in the program, so long as they meet the approval requirements. To see whether a lending institution is enrolled, you can download this nation-wide list.
Who can apply for a PPP loan?
Any small business that meets SBA size standards (either industry-based or alternative) is eligible to apply for a PPP loan, as well as sole proprietors, independent contractors, or self-employed individuals. The same goes for any business with a NAICS code that begins with 72, with more than one physical location and less than 500 employees per location. And finally, any 501(c)(3) non-profit organization, 501(c)(19) veterans organization, or Tribal business concern (sec. 31(b)(2)(C) of the Small Business Act) is also eligible.
What are the terms and conditions of a PPP loan?
PPP loans have a 1% interest rate, and zero fees from either the government or individual lenders. Loans issued after June 5, 2020, must be repaid within 5 years, though payments may be deferred for six months, initially. Loans require no collateral or personal guarantees.
How are PPP loans forgiven?
If the funds are used for payroll costs, utilities, rent or interest on mortgages, PPP loans—and 60% is used on payroll—the loans will be fully forgiven. If full-time headcount declines, or should salaries and wages decrease, then forgiveness will be reduced accordingly.
Economic Injury Disaster Loans
Unlike the PPP, the Economic Injury Disaster Loan (EIDL) program has been a longtime part of the SBA’s available resources to aid small businesses during times of disaster, providing low-interest loans to cover a variety of expenses (from payroll to inventory or debt). However, in response to the current COVID-19 crisis, requirement guidelines have been relaxed to include a larger swath of businesses—including sole proprietors, freelancers, and independent contractors. Interest rates are 3.75% for small businesses and 2.75% for non-profits, with loan terms of up to 30 years, and first payment deferrals of one year.
EIDL also includes a grant program called EIDL Advance, but it’s not currently accepting applications.
SBA Express Bridge Loans
This Pilot Program awards loans of up to $25,000 to businesses that have an existing relationship with an SBA Express Lender. They can be used both as term loans or as a bridge to the SBA’s EIDL program, from which funds can be used for partial or full repayment.
SBA Debt Relief
As per the SBA website, this program pays 6 months of principal, interest, and any associated fees “on any current 7(a), 504, and Microloans in regular servicing status—as well as new 7(a), 504, and Microloans disbursed prior to September 27, 2020,” and will be disbursed automatically. This relief does not apply to loans under the Paycheck Protection Program or Economic Injury Disaster program. However, if you had an SBA Serviced Disaster (Home and Business) loan in “regular servicing status” before March 1, 2020, the SBA will provide automatic deferments through December 31, 2020.
Alternative Ways to Fund Your Small Business
Tap into Savings or Borrow from Your 401k
This might be easier said than done, but we've heard directly from other business owners that the best way to go into business is to do so without debt. While that's not an option for many, there are small business owners out there who have incurred debt needlessly because they've opted to keep their savings separate. That can be a sensible decision, but if you've done your market research and feel confident in your business idea, there's no reason why you shouldn't invest in your own business. If you have some seed money put away or a 401k account, these could be great sources to help you get started without digging yourself into a hole.
Taking funds from your 401k account is perhaps the best and safest option of the two. If you have this type of retirement savings account, know you can borrow against it, cash out your funds, or roll them over as a business start-up (ROBS). There are pros and cons to using your retirement savings to fund your business, the main ones being that you can roll those funds over tax-free, but could easily lose your hard-earned investment. Consider your options carefully and learn more about what ROBS entail to make sure you're making a sound financial decision.
Apply for an Unsecured Business Credit Card
Many lenders recommend this option for startups or small business owners without established credit. Business credit cards tend to have more flexible qualification requirements and because they're a revolving line of credit, small business owners can get a high limit and only pay back what they use. Many business credit cards require a personal guarantee, and the applicant needs to have a good credit score as well as a low debt-to-income ratio.
If you don't want to be personally responsible for your business expenses, you can always look for a business credit card that doesn't require a personal guarantee. However, as with any other credit card, you have to pay your outstanding balance in full each month, or else it accrues interest and you can get into debt quickly. If you opt for a business credit card, use it responsibly and solely for business purposes as opposed to personal ones.
Crowdfund Your Loan
One great highlight stemming from the shift to online lending is the host of alternative funding options now available to small business owners. One such option is crowdlending, a funding solution based on the crowdfunding model. A standout platform in this new arena is Kiva, a non-profit micro-loan crowdfunder that uses “the power of the crowd to get your business funded.” This is a pretty sweet deal for businesses who don't have enough capital to get started and are unlikely to qualify for other types of financing. The benefit of using a platform like Kiva is that you can build a community around your cause while funding your loan, all interest free. This lending model works through what they call "social underwriting," meaning that instead of focusing on credit score and cash flow the company prioritizes your personal character and community standing. How? Well, by asking you to network and get your circle of friends and family to pledge on your behalf by contributing whatever they can to your loan.
The community-building aspect and the raised awareness about your business, in addition to the interest-free loan, are definitely strong selling points. The potential downside? Funding times are over 2 months and the loan amount caps at 10 grand. Otherwise, this is a great, cost-effective loan option that will create and foster a community around your up-and-coming business.
Another player in the crowdfunding lending arena is Kickstarter. This platform is a great alternative for creative ventures offering a tangible product, such as a gadget or a clothing garment. If you've never used the platform, it works by advertising a finished product and asking people to back the project to get rewarded with said product once it's been mass-produced. Once a project has been funded, the "creator" is responsible for completing the project and issuing the rewards promised to their backers. Following this model, backers run the risk of funding a project that might not reach completion. The risk for creators, however, is very small. If the campaign doesn't reach its funding goal, the backers get refunded whatever they contributed.
Ultimately, you should look into crowdfunding if you’re looking to bypass traditional lending models as a way of saving on fees and interest or want to build a supportive community around your venture. If this is the route you want to take, we recommend that you carefully consider the type of platform that best suits and is compatible with your business needs. After you’ve decided, flesh out a compelling story about why you need funding. If you're looking to start a bakery, for example, let your backers know how your passion for baking cakes motivated you to leave your corporate 9-5 job so you could start baking full-time. Generally speaking, people want to help you! All you need to do is ask for it. Your lenders will relate to your story, your passion, and your drive. And lastly, spread the word within your closest circles. Having your friends and family back your venture from the start can significantly help your project get the funding it deserves.
Consider Peer-to-Peer Lending
Similar to crowdfunding, P2P lending connects you to individuals that will fund your loan, but in this case, with a return on the investment for the lender. The upsides of using peer to peer lenders are significantly lower interest rates, streamlined applications, and quicker funding times when compared to traditional lending institutions. Most P2P loans are personal loans, but some lenders offer business loans as well. Some examples of these are Lending Club and Funding Circle. The pros of using P2P loans are a simple and automated online application and fast funding times. It's also worth mentioning that having good credit is crucial for this type of loan.
Tips for Small Business Owners
Research the Market & Take Your Own Wages Into Account
A common mistake small business owners make is not factoring in their own wages into the cost of running their enterprise. Remember that your business is your income and you should always factor yourself in. And just as importantly, carry out market research before going into business to understand how much it will cost to fund your business and how soon you can expect a return on your investment.
Don't take these numbers as a death sentence, as market conditions vary from one region to another, and most of these statistics fail to include large business segments such as online retail and one-person enterprises. Furthermore, according to the Bureau of Labor Statistics, about two-thirds of businesses survive at least 2 years and about half survive at least 5 years. The most recent data reveals that 79.4% of businesses that opened in March of 2017 made it to 2018. Heed the expert advise of the SBA and do your homework before even considering a loan. Click here to go to SBA.gov and learn more about market research.
Apply for Several Kinds of Funding
Don't limit yourself to one kind of loan, apply for different kinds of funding to ensure you'll have the resources you'll need to start or grow your business. As we mentioned above, many small business owners underestimate the amount of money they'll need to purchase equipment, process payroll, invest in smart technologies, and ultimately keep their businesses afloat.
A good way to counteract that is to aim higher in terms of loan amounts and to supplement their main funding strategy with a different loan product. For example, if you've applied for a short-term loan for your startup, consider applying for a business credit card simultaneously. Unsecured credit, like a business credit card, can be an excellent solution to cover unforeseen expenses. They also have very flexible qualification requirements and you only have to pay back what you use.
Mentorship is Key
A trend that consistently popped up in our research was the importance of finding mentors in your field of business. Acai Express owner Hector Westerband credits the success of his franchise to being mentored by industry veterans and educating himself as much as possible about funding solutions and how to keep his business ahead of the curve.
When we asked him to provide general advice to other small business owners, he told us the best thing an entrepreneur can do is to “... stay educated, educate yourself, read on topic literature and go to conferences, network endlessly; if you’re passionate about it, you will find a way to make it happen. Don’t be afraid. Just do it.” Normarie Piñeiro adds: “Try to learn from their (your mentors’) mistakes so you don’t repeat them yourself. Don’t be afraid. It will be hard but in the end, you get a big reward. I don’t regret this at all.”
Be Aware of High-Interest Rates by Reading the Fine Print
When taking out a short-term business loan, be aware that interest rates will probably be higher than for other types of financing. Online lenders may also charge higher interest rates for both short and long-term lending solutions. To counteract that, the general advice from experts is to do your homework and weigh your options carefully. Choose a loan amount and terms that make sense for your business, always read the fine print, and be diligent with your payments.
A small business loan, whether or not it's SBA-backed and funded via a traditional lender or an online one, should be an instrument that facilitates your business’ growth and development. Choose wisely and stay informed. In any case, always err on the side of caution when it comes to rates and terms. Your pocket will thank you in the long run.
Traditional vs Alternative Lenders
As Matt Harris from Bain Capital Ventures so eloquently put: “No one can fund cheaper than a bank.” While that might be true, traditional banks often fail to deliver the convenience and flexibility that online lenders offer. One thing is for certain, the small business lending market has been disrupted by the online players and they are here to stay.
Online Lending: An Unregulated Market
Online lenders make a profit by charging interest and fixed rates varying on the loan offered. Online lending is not regulated like traditional banking institutions and that has not escaped our notice. Full disclosure compels us to add that, according to Harvard Business School, there is no regulation or government oversight that applies to online lenders, especially when it comes to protections for borrowers.
Screenshot HBS The State of Small Business Lending: Innovation and Technology and the Implications for Regulation, August 2019.
There’s more: “No single federal regulator has the authority to oversee business lending. Instead, there is a spaghetti soup of at least seven agencies with overlapping jurisdictions and purviews. This leaves online small business lenders to be governed by an expensive and time-consuming patchwork of state oversight, often with inconsistent rules that can confine online lending to state-by-state silos, undermining what is an otherwise national market for credit.” As stated by Karen Gordon Mills and Brayden McCarthy on this HBS working paper, with the emergence of online lenders and marketplaces the need has emerged for centralized regulation to protect borrowers and lenders alike.
FAQs about Small Business Loans
What is the first step in the loan application process?
The first step is to determine the kind of loan that best fits your needs. The kind of loan you opt for will then determine its particular application requirements. These also vary from one lender to the other, so it's always advisable to do some comparison shopping before making a decision. The different types of small business loans include, but are not limited to, equipment loans, term loans, invoice financing, lines of credit, and merchant cash advances.
When applying for a small business loan, you will need to provide a significant amount of documentation and complete an application either online or at your local bank branch. To ensure the application process goes smoothly, have the following information and documents on hand: your resume and personal identification information, a business plan, income tax returns, your loan application history, bank statements, proof of collateral, the use of the loan, debt schedule, and legal documents.
What are the odds of survival for a small business in the current market?
According to the Small Business Administration (SBA) Office of Advocacy’s 2018 Frequently Asked Questions, four out of five establishments that started in 2016 survived until 2017—roughly 80%. As you can see, more businesses survive past their first year than you might expect, however, from there the numbers fall, as only around half of small businesses exist after five years.
What can I do if my SBA loan application is denied?
The first thing you should do is find out why your loan application was denied. You are legally entitled to a written letter of explanation and, depending on the SBA loan program you applied for and the type of lender you worked with, your denial letter will either come from the lender or directly from the SBA.
Having a low credit score, a criminal record, not enough collateral, business revenue or capital, or a low capacity to repay the debt are all common reasons why lenders deny loan applications. We recommend that you have an honest conversation with your lender about why you were denied so that you can plan your next move.
How are most small businesses financed?
Small businesses can get financing through equity financing or debt financing. Equity means that you sell stock in a company to a buyer, who then has an ownership interest in your company. On the other hand, debt financing means that you owe the person who holds the debt for the amount borrowed.
Contributing your own money to your business is the easiest way to finance it. You can tap into your savings, use a home-equity line of credit, or sell or borrow against a personal asset (stocks, bonds, mutual funds, or real estate.) Other common financing sources include family and friends, SBA loans, bank loans, credit cards, leasing companies, small business investment centers, venture capital firms, trade credit, and more.
How much do business loans typically cost?
As we’ve stated before, there is an array of business loans to choose from depending on your business needs and the lender of your choice. The rates you get directly correlate to your business financials, but borrowers mustn't forget that loan costs include interest rates, APRs, factor rates (if applicable), and any origination, application, guarantee, late payment or prepayment, check processing, and underwriting fees. Generally speaking, a business’ expected profits should be higher than the size of the loan, and its cash flow should be high enough to cover the payments. Securing a loan with an online lender could end up being more expensive in the long run, whereas going with a brick and mortar lender is less costly but more time-consuming. Again, loans should be evaluated on a case by case basis. Like businesses, not all loans are created equal.
Why choose an online lender over a traditional bank?
Online lenders are a solid option for companies that need fast cash and don’t have the time required when going through the loan process with a traditional brick and mortar lender. Across the board, online lenders scope a business's overall health as reflected in their sales, revenue, bank statements, and vendor payments. Many of them have lenient credit score requirements, so businesses that wouldn't normally qualify for a loan with a traditional lender are incentivized to do so via an alternative one. Additionally, there’s the element of convenience. Who wouldn’t want to apply for a loan in just minutes and compare rates from the comfort of their laptop? Approval times are also fast and businesses get the money in their account as soon as the next day, depending on the lender and loan product they choose. If efficiency, speed, and simplicity are your priorities, an online lender might be a solid bet.
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.
Do I need to have good credit to get a loan for my business?
Good news is online lenders have more lenient requirements for credit scores. Therefore if your credit is subpar but your business revenue is solid, your chances of getting a loan are good.
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 many 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 expressly 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?
For business owners with bad credit—usually a FICO score below 670—getting a traditional bank loan can be difficult. However, alternative lenders offer multiple funding options for people with bad credit.
Lenders that don’t have credit score requirements usually consider other factors such as business revenue or length of time in business. In addition to your personal credit score, your business credit score may be a deciding factor in receiving financing, particularly from traditional lenders. Your business credit score reflects your payment history on accounts associated with your business. With good business credit, you may be able to qualify for an SBA loan without having to rely on your personal credit.
Our Small Business Loans Review Summed Up
| Company Name | Best |
|---|---|
| LoanBuilder, A PayPal Service Small Business Loans | Overall |
| American Express® Business Line of Credit (formerly Kabbage) | For Working Capital |
| OnDeck Small Business Loans | For Term Loans & Lines of Credit |
| Rapid Finance Small Business Financing | For Merchant Cash Advances |
| PayPal Working Capital Small Business Loans | For PayPal Merchants |
| National Funding Small Business Loans | For Equipment Leasing |
| Bluevine Small Business Loans | For Invoice Factoring |
| Funding Circle Business Loans | For P2P Term Loans |
| Fundbox-small-business-loans | For Transparency |
| One Park Financial Small Business Loans | For Startups |
| All Fundy Small Business Loans | For Lender Variety |
| Fundera Small Business Loans | For Educational Resources |
| LendGenius Small Business Loans | For Financing Alternatives |
We receive compensation from these partners