When it comes to funding your business, there are a lot more options out there than your standard bank loan. Finding the right choice for your business involves deciding what your priorities are and comparing all available options.
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Customizable business loans with no hidden fees.
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- Requirements: $100,000+ annual revenue, 1+ years in business, 600+ personal credit score
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What do you want to learn about first?
What is a business loan?
A business loan is money that your business borrows to cover expenses it can’t afford up front. You repay what you borrow over a period of time, typically several months or years. The exact way you repay — as well as the total cost of your loan — will depend on the funding you want and your lender.
How do business loans work?
Some loans come with interest and fees, which is expressed as the business loan’s annual percentage rate (APR), while others have minimal costs or calculate the cost based on a different method.
Some require your business to put up collateral, while others will be approved based on your personal credit score and the credit score of your business.
And just like personal loans, you can find business loans with monthly, weekly and daily repayments.
How to get a business loan in 7 steps
Small business loans work by giving your business access to funds to expand or cover day-to-day costs. Here’s what you can expect to happen when you apply for a small business loan.
Small business loan types
There are several different types of business financing out there, each offering different terms and benefits. Which one is best for your business depends on its unique situation.
| Loan type | Best for | How it works | Typical loan amount | Typical cost | |
|---|---|---|---|---|---|
| Term loan | Covering a large one-time expense. | Borrow a lump sum and pay it back plus interest and fees in fixed installments, usually between 5 to 20 years. | $5,000 to $5 million | 4% to 99% APR | Read more |
| Line of credit | Working capital to cover ongoing costs. | Qualify for access to a specific amount of funds, which your business draws from when needed. | $5,000 to $5 million | 8% to 80% APR | Read more |
| SBA loans | Businesses that have been rejected for traditional loans, including startups. | Apply for a term loan, line of credit, commercial loan and more, partly backed by the Small Business Administration. | $5,000 to $5 million | APRs starting at 6.25% | Read more |
| Equipment financing | Businesses that need to buy new equipment. | Borrow up to 100% of your equipment cost and pay it back in installments, plus interest and fees. Your equipment is often used as collateral. | 85% to 100% of equipment value | 8% to 30% APR | Read more |
| Vehicle financing | Businesses that need to buy a car, truck or other type of vehicle. | Take out a fixed-term loan to cover the cost of new vehicles for business use, usually using the vehicles as collateral. | $10,000 to $10 million | 8% to 30% APR | Read more |
| Invoice factoring | Businesses that rely on invoices from government agencies or other companies. | Sell your business’s unpaid invoices to a third party at a discount. | 80% to 95% up front and up to 99% of invoice value after your clients pay your lender | Discount rate of 0.5% to 6% of invoice value | Read more |
| Invoice financing | Businesses that rely on invoices from government agencies or other companies. | Take out a term loan backed by your business’s unpaid invoices as collateral. | 80% of invoice value | Fee of 2% to 5% of invoice value | Read more |
| Merchant cash advance | Retail and ecommerce businesses that rely on consumer sales. | Get an advance on your future sales and pay it back plus a fee with a percentage of daily sales. | $2,500 to $250,000 | Fee of 0.14 to 0.30 times your loan amount | Read more |
Guides to other business loan options
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Just some of the top providers we compare
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How can I find the best loan for my business?
Ask yourself the following questions when comparing business loan providers:
- Is my business eligible? Most lenders list basic eligibility requirements online. Otherwise, speak with a representative to learn if your business can qualify.
- Can I borrow as much as I need? If your financing needs don’t fall into the lender’s range of loan amounts, you might want to move on.
- What’s the overall cost? With term loans, the fastest way to compare business loans is to look at the APR — as long as the lenders offer similar loan terms.
- How long can I take to pay it back? If you’re applying for a loan with interest, your loan term affects both your immediate and long-term costs. Shorter terms loans give your business higher repayments but lower overall costs.
Where can I get a small business loan?
It used to be that banks and credit unions were your two main options for business loans. That’s no longer the case. Let’s take a look at some common business loan providers in 2019.
Online providers
Borrowing online is significantly easier than borrowing from a bank: There’s less paperwork and a shorter application.
It’s now also easier to qualify for an online business loan as a small business, thanks to regulatory changes following the 2008 financial crisis. Banks can’t take as many risks.
Here’s a few types of loan providers you might find online:
Banks and credit unions
Bank loans could be a good option if your business has been around for years, makes at least $1 million in annual revenue and needs funds for a large expense — say, over $100,000. You’ll also face higher personal credit requirements to qualify, unless you apply with a local bank.
Credit unions are nonprofits, so you might think they can afford to be more forgiving when it comes to loan amounts and eligibility. But credit unions actually reject more applicants than any other type of lender, according to the 2016 Small Business Credit Survey by the Federal Reserve. You’ll also need to become a member to be eligible, which adds an extra step to your application.
But you probably won’t get your funds fast: Both bank and credit union loans tend to require more documents and require have turnaround than your average online loan — sometimes weeks or months longer.
Where can I get an SBA loan?
The Small Business Administration doesn’t actually fund loans itself. You’ll have to go to a lender that offers SBA financing to apply. You can find SBA loans online through sites like SmartBiz, though the SBA’s top lenders tend to be banks.
Whether you apply online or through a bank, SBA loan applications are typically more involved than other types of business financing. They often require more documentation and details about your personal finances and even your criminal record. It can take a few months from start to finish.
How much do business loans cost?
Fixed-term loans — including general use, equipment and vehicle loans — come with interest and fees.
- Interest. A percentage of your loan balance that your lender applies daily, weekly or monthly, depending on your terms.
- Fees. Term loans also often come with an origination fee, typically from 2% to 5% of the loan amount. Usually, it’s taken out of your funds before you get the money. So if your business qualifies for $10,000 with an origination fee of 2%, you’d receive only $9,800.
The APR is an expression of a term loan’s interest and fees. It’s the easiest way to understand how much your loan is going to cost you over time.
Calculate the cost of your business loan
Other costs
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Can my business qualify for a loan?
It depends on your lender, loan type and how much you want to borrow. Most loans require you to meet minimum requirements that can include:
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Time in business. For a bank loan, you often need to be around for at least two years, while many online lenders are willing to work with a business that’s been around at least six months.
- Good personal credit. While it’s possible to find alternative loans for business owners with bad credit, most lenders require a minimum FICO score of 660 to 680.
- Minimum monthly or annual revenue. Some lenders want your business to bring in at least $10,000 a month, while others care more that your business makes at least $50,000 a year.
Other common business loan requirements
Top 5 reasons business loan applications are rejected
- Weak business performance: 31%
- Not enough collateral: 31%
- Low credit score: 29%
- Already carrying too much debt: 28%
- Short credit history: 28%
Most of these reasons are related to your business’s ability to repay. To a lender, weak business performance might mean that you’re more likely to default on a loan. If your business already has several debt obligations, lenders might be concerned about your ability to take on more regular costs. And if you want to apply for a secured loan, your business needs to have business assets worth enough to cover the cost of your loan balance should your business default.
The other two reasons have to do with the business owner’s personal credit history. A low credit score could indicate to a lender that you’ve had trouble paying off debt in the past. A short credit history might imply that you don’t have much experience handling credit — also a risk.
Source: https://www.newyorkfed.org/medialibrary/media/smallbusiness/2016/SBCS-Report-EmployerFirms-2016.pdf (p. 18)
Approval rate by loan type
- Vehicle and equipment loans: 79%
- Merchant cash advance: 72%
- Line of credit: 68%
- Term loan: 58%
- Personal loan: 57%
- SBA loan: 55%
Source: https://www.federalreserve.gov/publications/files/sbfreport2017.pdf p.21
You might find easier approval with a vehicle, equipment loans or merchant cash advance. That’s because they’re backed by some form of collateral — be it a car, a tractor or your business’s future sales. This makes it less risky for the lender because it won’t have to take the financial hit if your business defaults.
Lines of credit, term loans and personal loans are typically unsecured — though secured options are out there. Because unsecured loans put the responsibility of your debt on the lender if your business goes under, they often come with tighter eligibility requirements. However, there are some business loans that are easier to get.
You might need to prove you’ve tried and failed to get other types of financing to be eligible for an SBA loan. But that doesn’t mean they’re easy to get. They involve taxpayer money, and you can get disqualified for reasons that other lenders don’t even consider, like having a criminal record. Learn other ways to easily get a business loan.
How secured and unsecured business loans compare
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Can I get a loan to start a business?
Yes, but it won’t be easy to get a traditional business loan. Entrepreneurs looking for funding to cover startup costs might need to get creative. Even if you’ve already opened your business’s doors, you might not find many loan options if it’s younger than six months.
While some alternative lenders and the SBA 7(a) loan program offer startup loans, you might have better luck looking into other types of financing, like angel investors.
What types of documents will I need?
It depends on your lender and your business’s financials. Online lenders typically ask to see fewer documents than banks do. Younger businesses often need to provide more documents than businesses that have been around the block a few times.
However, there are some common documents almost every lender may request:
- Government-issued ID. The federal government requires lenders to verify the identification of all applicants. Typically, lenders do this by requesting to see a driver’s license, passport or other official ID.
- Business bank statements. Lenders often like to look at the past two to six months of your business’s most recent bank statements to get an idea of its current cash flow.
- Tax returns. Your taxes give lenders an idea of how much your business makes annually. Some lenders only ask for business tax returns, while others like to see your personal return as well.
- Business plan. More common with banks and credit unions, some online lenders also ask for a business plan — or at least financial projections.
- Profit and loss statement. Also called an income statement, your P&L breaks down your company’s net revenue and helps your lender verify how much debt your business can afford to take on.
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Compare retail business loans
Business loan alternatives
Don’t think you’ll qualify for a business loan? Explore alternative options for borrowing.
| Alternative | Best for | How it works | |
|---|---|---|---|
| Personal loan | Entrepreneurs and business owners with good credit and high income | Take out a term loan in your name based on your personal creditworthiness. | Read more |
| Business grants | Nonprofits, tech industry Businesses owned by women, minorities or veterans Businesses located in economically disadvantaged areas |
Complete an application for funding from the government or a private organization. You don’t have to pay it back, but grants tend to be smaller than loans and more difficult to qualify for. | Read more |
| Investor financing | Startups and potentially highly profitable businesses with a plan to expand | Sell a percentage of your business’s ownership — it’s equity — to venture capitalists in exchange for upfront financing. | Read more |
| Crowdfunding | Businesses and entrepreneurs with a strong social media presence | Set up a campaign asking for small donations from your friends, family and social network. Many platforms take a percentage of the funds you raise as a fee. | Read more |
| Friends and family | Business owners and entrepreneurs with friends and family interested in investing | Set up an informal agreement or use services like Loanable to make a formal loan contract outlining the terms and conditions for paying back a family loan. | Read more |
| Rollover for Business Startups (ROBS) | Startups | Invest your retirement savings in a new business without paying the usual taxes or fees that come with accessing your 401(k) or IRA early. | Read more |
Small business loan glossary
Definitions
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.