Gone are the days when an entrepreneur could walk into a bank and get the funding needed to start up, float or expand a business. As traditional institutions have scaled back on loans to small businesses, online lenders are stepping in to provide the financing that keeps Main Street alive.
We show you how to find and compare nontraditional financing options to get your business ideas off the ground, fund equipment or vehicles, cover temporary shortfalls and more. While you may not qualify for them all, you’ll be better equipped to get the financing or capital to keep you thinking big for your small business.
Compare top business loans
What’s a business loan?
A business loan is money you borrow from a lender to cover business expenses. You repay a business loan plus interest and fees over a period of time that could range anywhere from a few months to 25 years.
The main difference between business loans and personal loans is that they’re limited to covering business costs. Business loans are also in your business’s name, not yours. Your loan amount, fees and interest are mainly determined by your business’s finances, though your personal credit score can have an effect on rates, especially if your business is young.
How do business loans work?
How business loans work varies, depending on the loan type. Traditional fixed-term business loan comes in a lump sum that you have a set amount of time to pay off, usually in monthly repayments.
A line of credit, on the other hand, works by giving you access to ongoing funds up to a predetermined limit. Similar to a credit card, you only pay interest on the amount you draw and you have to make monthly, weekly or sometimes daily repayments.
You can also get an advance on your business’s future profits with invoice financing or invoice factoring. Invoice financing works like a fixed-term loan with regular repayments. Invoice financing is a one-time deal where you sell your invoices for a percentage of their total value. Learn about even more business financing options below.
What types of business loans can I get?
Choosing the right type of loan is the one of the first steps to getting funding for your business. Some of the most common types of business financing are:
|Loan type||How it works||Loan amount||Typical APR||Min. speed|
|Term loan||This type of finance is ideal when you know exactly how much you need to borrow and when your business can pay it back. Fixed term loans are available with repayment periods usually between 5 and 20 years.||$5,000–$5 million||7%–30%||48 hours|
|Line of credit||Instead of taking out one lump sum, a line of credit gives businesses additional funds as and when they need it.||$5,000–$5 million||7% to 25%||24 hours|
|SBA loans||Loans and lines of credit secured with a government guarantee — meaning that they come with lower-than-average interest rates.||$5,000 to $5 million||Starting at 6.25%||Three weeks|
|Business credit card||Business owners use both personal and business credit cards when financing small and short-term costs. Some benefits of credit cards are interest-free grace periods and frequent flyer points. But with high interest rates, these can be expensive if not paid off in full each month.||$2,000+||13%–25%||Week|
|Merchant cash advance||Seasonal businesses can get an advance on future sales to get ready for a burst of demand by taking out a merchant cash advance. You repay it — plus a fee — with a percentage of daily sales.||$2,500–$250,000||Fee of 1.14%–1.18% of loan amount||24 hours|
|Invoice financing||If you’re business relies heavily on accounts receivables, invoice financing gives you an advance on your outstanding invoices. Businesses typically repay these loans within three months — as soon as they receive payments on invoices.||80% invoice value||Fee of 2%–5% of invoices||24 hours|
|Invoice factoring||Similar to invoice financing, but instead of getting an advance, factoring involves selling invoices to a third-party company in a one-time transaction. The third-party company buys the invoices at a percentage of the amount due, usually around 85%.||85%–95% invoice value||N/A||24 hours|
|Vehicle finance||Businesses that need to purchase vehicles have access to a range of vehicle financing options. These loans are typically secured, meaning that your business can look forward to more competitive rates, and depending on the use of the vehicle, tax benefits.||$10,000–$10 million||8%–30%||Week|
|Equipment finance||If you need equipment for your business, whether it be for a construction site, a medical lab or an office, you may need financing to lease or purchase it.||90%–100% equipment value||8%–30%||48 hours|
Other types of business financing include:
- Cash flow lending. This type of financing is opted for by businesses that generate cash flow but aren’t able to provide security. The loan is secured by the working capital assets of the business.
- Business overdraft. Similar to a line of credit, this allows you to withdraw from your checking account even when you don’t have the funds you need. You’ll have to repay the extra amount plus interest and fees, and it’s an easy way to have access to cash in an emergency.
- Business equity loans. Get discounted rates on a business loans by securing it with the equity you own on your personal or business property.
- Trade finance. Businesses looking to purchase goods from a domestic or international supplier can consider trade finance. Through a letter of credit, bank guarantee or documentary collection you simply pay interest on the amount provided for each trade transaction.
- Commercial loans. If you want to purchase real estate including any type of commercial property such as a warehouse, office building or retail store, a commercial loan could provide the long-term financing you need.
- Point of sale (POS) financing. If you offer high-ticket items or services to your customers, POS financing is a way to offer your customers loans at the time of purchase. Some lenders will give you full upfront payments when a customer signs up for a loan.
Where can I get a business loan?
It used to be that banks were the gold standard for business loans. That’s not necessarily the case any more — it’s never been harder to qualify. Some of common types of business loan providers include:
- Credit unions. The nonprofit cousin of banks, credit unions often have less stringent qualification requirements to join and can offer lower rates because they don’t have to pay off shareholders first.
- Online direct lenders. Faster, sometimes cheaper and definitely easier to qualify for than a bank. Online lenders have taken the lending landscape by a storm by making what can be a long and complicated process relatively painless.
- Peer-to-peer marketplaces. Go to one of these (usually online) spaces to get matched with individual or groups of investors willing to finance a personal loan.
- Online brokers. These sites play matchmaker between you and their network of lenders, helping you cut down on some of the search time. They often guide borrowers through the process and can be a great resource for novices.
- Banks. Banks: Where people get business loans in the movies. The application process is usually more drawn out than less-traditional lenders — sometimes involving interviews, site visits and more. The main draw: you usually know what you’re getting. If you qualify (which can be difficult) you’re likely getting the best deal.
Bank loans for small businesses
Going to your bank for business financing might seem like an obvious choice, but it also might not be your best option. Banks reject around 80% of small business loan applications.
So you know the odds, but you’re dead-set on getting a bank from a bank. You’re not alone: Nearly half of American business owners would rather borrow from a bank.
The good news is not all bank loans are created equal. Local or regional banks are typically more interested in helping out their communities than other lenders so you might want to look there if you’re a local business. Just be aware that only those with spotless applications and excellent credit histories get approved.
Different guides for different financing needs
Fixed Term Business Loan
Get funds for your business with a clear interest rate and predictable repayments throughout the term of the loan.
Line of Credit
Get access to a business line of credit to fund ongoing expenses with the flexibility of only borrowing what you need.
Whether you need construction machinery, medical monitors, IT devices or some other specialized equipment for your business, there are financing options available.
Unsecured Business Loans
You don’t have to put your property or other assets on the line to get a business loan. See if an unsecured business loan could work for you.
How much do business loans cost?
When considering the cost of a business loan, there are two parts to evaluate: Rates and fees. Rates depend on several factors, including your creditworthiness and your loan term. Your lender usually predetermines your fees, which are either a fixed amount or a percentage of the amount you borrow.
Interest rate is what you’ll most commonly see when considering business loan costs. This is the amount charged as a percent of your loan principal. It can be compounded daily, monthly or annually.
Fixed interest rates remain the same throughout the entire term of the loan. Variable interest rates can fluctuate throughout the term of the loan, and your repayment amounts may go up or down depending on the market.
Another type of rate you may see charged on a business loan is a factor rate. Factor rates are decimal figures that act as payment multipliers. They’re applied once on the principal loan amount to demonstrate how much your business loan will cost over the loan term. (Example: A 1.25 factor rate on a $10,000 business loan for a 12-month term would result in you ultimately paying $12,500.)
Many lenders charge one-time fees to get your loan started, such as establishment fees, document fees or origination fees.
Some lenders may charge ongoing fees like monthly fees for invoice financing or line fees for lines of credit.
Some lenders may also charge penalty fees for things like early repayment or late payments.
The annual percentage rate (APR) of a business loan takes into account any fees charged in addition to the interest rate to give you a more accurate idea of how much your loan will cost over time.
How to compare business loan costs
Just some of the top business loan providers we compare
How can I find the best loan for my business?
Ask yourself the following questions when comparing business loans.
Top online lenders by loan type
|Loan type||Top lender||Starting APR||Eligibility||Trustpilot rating|
|Online term loan||LendingClub||5.99%–35.89%||2+ years in business; $75,000+ in yearly sales; No bankruptcies or tax liens; At least 20% ownership of your business; Fair or better personal credit||5.8/10, based on 8 reviews||Learn more|
|Line of credit||Fundbox||4.66%||You must have an established business with regular monthly revenue.||9.7/10, based on 721 reviews||Learn more|
|Equipment financing||Lendio||Interest starting at 7.5%||Be 18 or older Operate a business in the US or Canada Be a citizen of the US or Canada or a permanent resident Have a valid business bank account Have a credit score of 560 or higher||9.3/10, based on 1,157 reviews||Learn more|
|Invoice factoring||BlueVine||Fee of 10%–15% of invoice value||Must be in business at least 3+ months, have a personal credit score of at least 530, and have a monthly revenue of $10,000 or more.||9.3/10, based on 602 reviews||Learn more|
|SBA loan||SmartBiz||6.36-9.57||Personal credit score of 650+; US citizen or permanent resident; Business must be 2+ years old; Annual revenue of $50,000+; No outstanding tax liens; No bankruptcies or foreclosures in past 3 years.||9.5/10, based on 438 reviews||Learn more|
Am I eligible for a business loan?
Eligibility requirements will vary depending on your lender and loan type. However, there are two main factors to consider:
- Business age. Your business will typically have to meet a minimum age requirement, which is usually between six months and two years.
- Revenue. Many business lenders require a minimum annual revenue of $50,000 to $75,000. If your business is under a year old, the requirements are usually higher at around $10,000 per month or more.
Other eligibility requirements may involve your business’s location, its industry and your personal or business credit score. Many lenders also ask to see a business plan or financial projections when you apply.
Sometimes a loan can give a young, fast-growing business a boost to reach its full potential. You might have trouble qualifying for a standard business loan. But some lenders are willing to overlook your business’s age and revenue if you have an impressive business plan and strong personal credit profile.
Learn more about startup loans to see how you can get a business loan in the early stages. If you still can’t qualify, you can also take out a personal loan to finance your new business.
How to get a business loan in 6 steps
Does your business depend on invoices?
You might want to consider invoice financing if your business sometimes has gaps in revenue due to outstanding accounts receivables. Invoice financing lets you borrow against your outstanding invoices and repay the lender once the client pays you. It an ongoing service with loans that you can pay back in up to three months.
Or, look into Invoice factoring. Here, you sell your invoices to third-party for a percentage. You probably won’t get the full value of your invoices but you won’t have to worry about repayments.
Is a business loan right for me?
- Consider a loan if…
- Your business is doing well. A loan can help you buy new equipment, hire more staff and ultimately increase profits as long as you’re doing well enough to qualify for competitive terms and rates.
- You want to expand. Loans can be a great help to businesses that want to grow but need a financial boost.
- You need help through an off season. A loan can help make sure your business doesn’t fold during a seasonal dip in sales.
- Look at other options if…
- Your business is struggling. It’s tempting to take out a loan to get back on your feet, but you can end up in even more financial trouble if you miss payments or default.
- You want to make another investment soon. Taking out a loan can improve your credit in the long run, but getting a credit check temporarily lowers your credit score. Plan to leave some time between loans.
Common reasons business loans are rejected
- You didn’t understand your credit score. Maybe you thought you met the credit requirements but it turns out your score wasn’t good enough. It’s a common mistake — most business owners don’t know their credit score before they apply.
- Your business doesn’t have enough cash flow. Patchy revenue can make a business look like more of a risk — especially if it isn’t in a seasonal industry.
- Your business is too young. Startups tend to have a hard time getting a business loan. You can either wait, or look at other financing options like investors and crowdfudning.
- Weak collateral. If your business doesn’t have real estate holdings or equipment, it can be tough to secure a loan unless you put your personal assets on the line.
- Your business already has a lot of debt. Multiple debts could mean you have limited capital for repayments. Try paying these off first before applying for another loan.
Business loan alternatives
So what happens if your business is too young or small to qualify for a loan with good terms? Or maybe it’s just a bad time to take on debt? You still have financing options.
- Get funding from investors. Very small or young businesses could benefit the most out of selling a share of their enterprise in exchange for financing.
- Start a crowdfunding campaign. Set a fundraising goal, invest a little in marketing and collect small donations from family, friends, fans and other interested individuals.
- Apply for a business grant. It’s not easy to qualify for a grant and the resources it takes to apply could have you questioning how much this free money is going to cost you. But it could be worth taking on the paperwork if you’re strapped for cash and can’t get a loan.
- Personal loans. That’s right. If you’re struggling to find funding for your business, you can always take out a personal loan to cover business expenses — though your personal finances are on the line if your business goes under.
- Borrow from friends or family. You probably won’t have to pay interest but that doesn’t mean it’s totally free — failing to pay it back in time could seriously damage your relationships.
Business loans vs. equity financing: Which is better for your business?Choosing to go for equity financing — where you sell shares of your business in exchange for financing — or taking on regular business debt can be crucial to your business’s success.
Business loans can be a great option for companies that are already established and want to grow — they have the financial records to convince banks and other lending institutions that they’re stable enough to pay off a loan.
For startups, venture capital (VC) investments can be one of the only financing options you have. VCs are particularly drawn to tech and healthcare startups that can bring some kind of change to the industry. They they often take a large percentage of the company’s control, however.
More-established businesses might want to consider selling off smaller shares to the less-aggressive private equity investors. These tend to work with businesses that are looking to expand — by acquiring another business or opening other locations.
Both private equity and venture capitalists can be more expensive than your typical business loan — investors tend to want a higher return — but it could be worth it if you don’t want to take on debt.
Small business loan glossary
A to H
Accounts receivable. Money that a company is owed by its clients, usually in the form of outstanding invoices. This count as an asset.
Accounts payable. Money that a company owes a supplier, vendor or other source when it purchased goods or services on credit. These count as a liability.
Asset. Anything of value that a person or business owns or buys, as well as money they are owed (accounts receivable).
Bridge financing. A high-interest short-term loan, usually two weeks to three years to cover gaps in longer-term financing. Typically used to cover the initial costs of a project or change to a business that hasn’t yet been finalized.
Business assets. Generally, business assets refer to property or equipment that a business owns, including inventory, real estate, securities and accounts receivable.
Commercial and industrial (C&I) loan. Usually a short-term secured loan only available to businesses to provide either working capital or to fund a major expense like acquiring another business, maintaining property and real estate or undertaking a new project.
Daily holdback. When a creditor takes a percentage of a business’s daily sales as repayment for a cash advance.
Cash flow. The amount of money going into a business, minus the amount of money going out. Positive cash flow means that you have enough money to cover your expenses. When you get into negative territory, you might need a working capital loan to keep afloat.
Debt-service coverage ratio (DSCR). Also, debt coverage ratio. A business’s cash flow (usually the net operating income) divided by debt service payments (loan repayments and leases). Used by creditors to determine how able a business is to repay a loan (similar to a debt-to-income ratio).
Gross profit. The total amount a business made, minus the cost of producing goods or delivering a service.
I to P
Lien. A legal agreement that allows a creditor to take certain assets if the borrower is unable to repay a loan. A form of collateral.
Microloan. A small loan — typically less than $35,000 — that can help cover small expenses when a business is getting off the ground.
Net income. The difference between how much a business makes and how much it costs to run.
Net operating income. The difference between a business’s profits and its expenses, taxes and interest.
Payback period. The estimated amount of time it will take for a business to repay a cash advance — similar to a loan term.
Personal guarantee. A promise to repay a loan if the business is unable to, usually backed by your personal assets.
Q to Z
Split withholding. When a credit card processor automatically sends a portion of a sale to a creditor and another portion to a business.
Working capital. Money used to cover the cost of a business’s day-to-day operations.
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Frequently asked questions about business loans
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