Business Loan Finder

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How do business loans work?

Business loans work by providing your company with funding to grow, cover cashflow gaps and other expenses.

With a traditional business loan, you can typically borrow from $5,000 to $5 million at rates starting at 5%. You repay the funds plus interest and fees in monthly installments, often over over five to 20 years.

Some business lenders require collateral, while others offer approval on your creditworthiness, revenue and other factors. If you can’t qualify for a business loan, there are alternatives.

What is a business loan?

What types of small business loans are available?

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 specific situation. If you’re buying machinery for your business, you might want to consider equipment financing. If you’re struggling with cashflow, a merchant cash advance, invoice financing or factoring might be the way to go.

8 types of business loans – explained

Here’s how the most common types of business loans break down:

• Term loans — cover a large, one-time expense
• Lines of credit — quickly access working capital
• SBA loans — government-backed financing with competitive rates
• Equipment financing — finance new or used equipment and supplies
• Vehicle financing — buy or lease a vehicle for your business
• Invoice financing — use unpaid invoices as collateral
• Invoice factoring — get an advance on unpaid invoices
• Merchant cash advances — access revenue from future credit card sales

Common types of business loans

How much do business loans cost?

Fixed-term business 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. Typically 6% to 60%.
• Fees. One-time fixed costs, typically a percentage of the amount you borrow or a flat rate. Term loans also often come with an origination fee, usually from 2% to 5% of the loan amount.

The total interest and fees is express as an annual percentage rate, or APR. It’s the easiest way to understand how much your loan is going to cost you over time. However, not all business loans display their costs as an APR.

Rates

Business loan rates can range from 6% to 60% APR depending on a variety of factors. These include the type of loan, your time in business, industry, owner credit scores, monthly revenue and lender. They’re typically higher than what you’d get with a personal loan or mortgage — even if it’s secured.

With merchant cash advances, you’ll run into something called a factor rate, which is a number your lender multiples your loan amount by to come up with the amount you’re on the hook to pay back. Rates range from 1.14 to 1.18 but can get as high as 1.30.

Alternative business loans that typically serve high-risk industries and owners with bad credit can come higher costs. The pricing usually works like a factor rate — lenders often express it as cents on the dollar.

Fees

Some business lenders charge the loan cost as a fee rather than an interest rate. Invoice factoring, for instance, typically charges something called a discount fee, often 0.5% to 6% of the value of your invoices. It can be a fixed rate, but the longer your clients take to pay off an invoice, the more you’ll likely pay.

List of costs to expect with a business loan

How to compare business loans

Look into these features when you are considering business loan options.

How to get a business loan

Here’s what you can expect to happen when you apply for a small business loan.

1. Know what your business needs.
   Is it generally short on working capital? Then a line of credit, invoice factoring or a merchant cash advance might be a good place to start. Need a fleet of vans? Look into vehicle loans. Armed with this information, you can begin narrowing down lenders.
2. Compare lenders.
   You know what you’re looking for. Now it’s time to start comparing business lenders. Ask yourself questions about the loan amount, cost, repayments and the company’s reputation while narrowing down your choices.
3. Get prequalified.
   After you’ve narrowed down your options to a handful of lenders, prequalify for a few before making a decision. Most online lenders offer prequalification through a quick form on their website. Large banks might need you to to call customer service or visit a local branch in person.
4. Submit requested documentation.
   After preliminary approval, the lender will likely need to verify your documents. Some lenders ask for a long list of documents and information. Others don’t require any paperwork.
5. Complete the application.
   You’ll typically be assigned an account manager who can guide you through the full process. You might be asked to submit additional documentation. More involved business loan applications might involve a site visit from your lender or even an interview.
6. Review and sign your documents.
   Make sure you understand the terms and conditions of your business loan before you sign the business loan agreement. If you don’t understand a clause or term, ask your lender — or better yet, a lawyer. That way, you won’t be hit with any surprises down the road.

Compare business loans

How much can I borrow?

Business loans typically start at around $5,000 and can top $5 million. How much you can borrow depends on several factors:

• The type of loan you apply for
• Minimum and maximum amounts offered by the lender
• Monthly and annual revenue
• Monthly debt obligations
• Personal and business credit score
• What you need the funding for

How much you can borrow with different types of business lenders

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 2020.

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.

Here’s a few types of loan providers you might find online:

• Direct online lenders. These lenders fund your loan themselves and often handle all aspects of the application process in-house.
• Peer-to-peer (p2p) platforms.These online platforms act as liaisons between borrowers and investor funding. The platform sets the terms and conditions and is your point of contact if you have questions about the process.
• Online connection services.Also called marketplaces, these free websites help you prequalify with multiple lenders by filling out one form. They’re typically free for business owners.
• Business loan brokers. Hiring a business loan broker works a lot like using an online marketplace. The difference is that you have a chance to sit down in-person and discuss your options. And you’ll have to pay a broker fee.

Best online lenders

Banks and credit unions

Bank loans could be a good option for established businesses pulling in at least $1 million in annual revenue and need large amounts of funding — say, over $100,000.

Credit unions might be nonprofits, but they actually reject more applicants than any other type of lender, according to the 2016 Small Business Credit Survey by the Federal Reserve.

Best bank lenders

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. And since they involve taxpayer money, and you can get disqualified for reasons that other lenders don’t even consider, like having a criminal record.

Benefits of getting a business loan

Getting a loan can help your business in more ways than one. These include:

• Get money to grow. You need money to make money. Done right, a business loan can more than pay for itself by funding revenue-growing projects or bring on new staff.
• Soften the blow of slow months. Lines of credit and other cashflow funding allow you to keep up your regular expenses when things naturally slow down.
• Access the value of business assets. Getting a secured business loan allows you to cash in on items you already own to help expand, get working capital and more.
• Build your credit. A business loan can help build your personal and business credit score if it requires a personal guarantee. This can help you qualify for more funding in the future.

3 main eligibility criteria

Business loan requirements vary by lender, loan type and how much you want to borrow. To find out if you meet most business loan requirements, see how your business stacks up in these three areas:

1. 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.
2. 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.
3. Personal credit score. 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.

You can learn more with our article on credit score requirements for different types of business loans.

Why was my business loan application rejected?

The main reason businesses get rejected for loans have to dow with its ability to repay. These include:

• Weak business performance
• Not enough collateral
• Low credit score
• Too much debt
• Short credit history

If you’re looking for funding to expand, you might want to waiting until your business is more established before reapplying. Taking steps to improve or strengthen your credit report could also help your chances of approval. Or, consider applying for a secured rather than an unsecured business loan.

Why was my business loan application rejected?

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.

Guides to other business financing options

Click to view link Commercial loans

Click to view linkBusiness equity loans

Click to view linkMicroloans

Click to view linkInvoice financing

Repaying a business loan

Most term loans come with fixed monthly repayments, while others types of financing require weekly or even daily repayments. With invoice factoring, your business doesn’t make any repayments at all, because your clients pay your lender.

To save time, consider signing up for automatic repayments. If your lender doesn’t charge prepayment penalties, see if you’re able to pay off your business loan early to save on interest and lower your business’s debt load.

Business loan alternatives

Don’t think you’ll qualify for a business loan? Explore alternative options for borrowing.

Alternative business financing

Frequently asked questions

Answers to common questions about business loans.

How hard is it to get a small business loan?

It depends on the type of financing you’re looking for. Bank loans can be difficult to qualify for if you have a young business or don’t have excellent credit. Online loans can have more relaxed eligibility requirements, but the most competitive rates still tend to go to businesses that have been around a few years and whose owners have excellent personal credit.

Is a business loan considered income?

Generally no, the IRS does not consider a business loan as taxable income. However, if the lender forgives the debt — meaning that you don’t have to repay it — your business will have to pay taxes on the forgiven portion.

Read our guide to business loans and taxes to learn more about when and how the IRS treats business financing.

Can I get a business loan without a personal guarantee?

While most business loans require a personal guarantee, it’s possible to find one that doesn’t. If you’d rather not pledge your personal assets, consider looking for a loan backed by collateral.

Can I get a business loan without collateral?

Yes. Business loans that don’t require collateral are called unsecured business loans. This means that you don’t risk losing your assets. But you might not get as low of a rate as a secured business loan. You might want to weigh the two options first.

Even many unsecured business loans require a personal guarantee from the business owner. This means that you’re responsible for covering the loan amount if your business fails.

This technically isn’t collateral because it doesn’t name any specific assets. But it’s a risk you’re taking on as a business owner.

Why do lenders care about my personal credit score?

Business credit scores aren’t as widely used. The owner’s personal credit score could be better at predicting whether the business is a risk to lend to.

Many business loans — even unsecured loans — also require a personal guarantee from at least one business owner, meaning that you’re responsible for paying off the loan if your business defaults.

Can I get a business loan if I’m not a US citizen or permanent resident?

It’s possible, but you likely won’t have as many options. If you have a partner who is a US citizen or permanent resident, you might have a better chance of qualifying for more competitive rates if you apply with them.