Compare small business loans in 2022

Types of small business loans

There are several different types of financing that you can use to fund your business. Here are some of the most common small business loan options.

SBA loans

The Small Business Administration (SBA)’s government-backed business loan programs are designed to help small businesses access funding. SBA loans offer low rates and high loan amounts to businesses that are too small or too new to qualify for your typical bank loan. These are usually secured with collateral.

• Loan amounts: Up to $5 million
• Typical rates: Usually around 5.5% to 8%, but SBA loan program rates vary
• Typical fees: SBA guarantee fee, other fees depending on the lender and loan program
• Typical terms: Five to 25 years
• Best for: Small businesses with strong financials and good credit but can’t qualify for a bank loan

There are several different SBA loan programs that cover almost every type of expense, from working capital to buying commercial real estate. The SBA also had several loan programs to help businesses struggling during COVID-19, such as the Paycheck Protection Program (PPP). The SBA is no longer accepting new PPP loan applications, but you can still apply for other government coronavirus assistance programs.

Term loans

Business term loans offer a lump sum that you repay in installments plus interest and fees. They’re best for funding a one-time expense, like buying a piece of equipment.

Term loans can either be secured with collateral or unsecured. But even unsecured business loans typically require a personal guarantee from all small business owners.

• Typical loan amounts: $5,000 to $500,000
• Typical starting rates: 6% APR
• Typical fees: Origination fee
• Typical loan term: Three to 20 years
• Best for: Funding a one-time purchase or expense

Lines of credit

A line of credit gives your business cash access as needed to cover working capital expenses. It’s a good option if you have a seasonal business, regularly need funds to purchase inventory or want to have funds available for unexpected expenses. Like a term loan, a business line of credit can require collateral or be unsecured.

• Typical credit limits: $5,000 to $250,000
• Typical starting rates: 8% APR
• Typical fees: Origination fee, monthly or annual maintenance fee, withdrawal fee
• Best for: Ongoing expenses and working capital

Most business lines of credit revolving credit, meaning that the credit limit replenishes as you pay it off. Typically, each withdrawal turns into a short-term loan, though some lenders might only minimum monthly payments on your valance.

Invoice financing and factoring

Invoice financing and factoring offer an advance on unpaid customer invoices. Invoice financing is generally available for invoice volumes under $20,000 while invoice factoring can run from around $20,000 to $10 million. Instead of interest, you pay a monthly or weekly fee based on the time it takes for customers to fill their invoices. These can be high compared to your typical business term loan or line of credit.

• Typical advance rate: 85% to 100% of unpaid invoice’s value
• Typical fees: 2% to 15% of your invoice’s value
• Typical terms: 90 days per round of financing
• Best for: Short-term financing needed to fill orders

Invoice financing allows you to maintain control of your unpaid invoices and offers up to 100% of the invoice value up front. Invoice factoring involves selling unpaid invoices to a company. The factoring company usually offers 85% to 95% upfront and the rest, minus a fee, after your customers fill their invoices.

Government business loans

Federal, state and local governments are currently offering emergency loan programs to help businesses recover from the COVID-19 pandemic. These are highly local and options change frequently, as programs tend to run out of funding fast. Learn about the government business loans available to you by visiting a small business center near you.

Read about more types of small business financing to explore more financial products.

How to get a small business loan

Most small businesses can get a business loan by determining how much funding the business needs and comparing lenders. It can be difficult to qualify for a small business loan with:

• Less than three years in business
• A credit score under 670
• Less than $100,000 in revenue

But you may be able to find financing from an SBA loan provider or an alternative lender if bank loans aren’t an option.

Alternative lenders include microlenders, online business loan providers and factoring companies. They might not offer competitive rates compared to a bank, but they can help your business get to a place where it’s eligible for a bank loan.

How to compare lenders

Before you start comparing lenders, calculate how much you need to borrow, assess the state of your business’s finances, check your personal credit report and choose the type of financing you need.

Once you have a better idea of what you need, look for lenders offering the loan amount and type of financing you need — with basic requirements that your business meets.

Then, compare the rates, fees terms and turnaround time for each product. You might want to weigh other factors that are important to you, like no paperwork requirements or lower rates for repeat borrowers. If you’re applying online, you may also want to consider the steps lenders take to protect applicants information.

What should I know before I apply for a business loan?

There’s a chance you won’t have to provide your current ratio, DSCR or NOI when you apply for a business loan. Instead, your lender may ask for the following information:

• Personal credit score. Many lenders have cutoffs for the personal credit score of each business owner that has more than a 20% stake in the company.
• Revenue. Most business loan providers also have minimum annual or monthly revenue requirements, often starting at around $100,000 a year or $10,000 a month.
• Business debt obligations. It’s likely that your lender will ask how much your business owes each month in repayments on loans and other types of credit. You should have an idea of this if you’ve already calculated your business’s DSCR.
• Value of personal assets. Some lenders require a personal guarantee from all business owners, meaning that you’ll be responsible for paying off the loan if your business can’t.
• Value of collateral. If you’re getting a business loan secured by a specific business asset, your lender will likely ask for its market value during the application.

How the application process works

In most cases, you need to get prequalified for a business loan before you can apply. Prequalification often involves providing basic information about your business assets, revenue and cash flow.

If you accept an prequalification offer, you can move on to the full application. Typically, you need to provide more details and documents to verify the information on the application form. Many lenders also consider the personal finances and personal assets of all business owners with a 20% stake in the company.

If a lender offers online applications, you can typically get credit approval within 24 hours. You can often receive funds within one to two business days after closing. Bank loans and SBA loans often take a few weeks. An unsecured business loan also typically takes less time than a loan that requires collateral.

How should you make the most of your business loan?

Business loans are different from personal loans in a lot of ways, but the key difference is that the funds are essentially an investment. The way you use your business loan funds may be the difference between you increasing your profits and you defaulting on the loan.

1. Buy new equipment

Purchasing equipment can take your operations to a new level, whether it’s industrial equipment or a new point-of-sale (POS) system. If you’re currently leasing equipment, it can also assist your cash flow as you won’t have to make regular lease payments.

When considering whether or not to purchase equipment with your loan funds, look at how much you’ve been approved for and consider how much you really need the new equipment. There’s no need to spend your funds just because you have them.

2. Boost your online presence

Having an online presence, whether it’s a website or a social media page, is invaluable these days. By establishing and maintaining a website and social media accounts, you can increase your customer base and also your marketing capabilities. However, you may need outside help to do this.

Consider the costs of getting yourself set up as well as the ongoing costs of maintaining a website and social media accounts.

3. Market your products or services

Marketing can make or break many businesses, and ignoring marketing due to costs can end up being a costly mistake in itself.

Whether it’s online marketing, an ad campaign or getting some PR expertise, you’ll need money to get started. Make sure you choose the right type of marketing for your business to ensure you get the best return.

4. Expand your operations

If your business is doing well, it might be wise to use your loan funds to expand. You could consider opening up a new retail location, a second warehouse, a new office space or even start selling online products overseas. Restaurants are a great example of businesses that could benefit from having multiple locations.

Expanding your customer base is always a win — just ensure you’ve done your research, so the investment is worth it.

5. Cover cash flow fluctuations

Cash flow is an issue for many small- to medium-sized businesses. Delayed payments can mean your business is left without vital cash flow for up to 90 or even 120 days. Depending on what type of business loan you have, you might be considering using it to cover gaps in cash flow.

For example, a business line of credit is ideal for covering cash flow fluctuations, but a lump sum loan may not be. Using your funds to cover cash flow means you can continue operating as normal and repay the funds once you get paid. Another example is invoice financing, which is best for businesses that rely heavily on accounts receivables.

Approval rate by loan type

You might find easier approval with a business loan backed by some form of collateral — be it a car, a tractor or your business’s future sales. It’s less risky for the lender because it won’t have to take the financial hit if your business defaults.

My application was rejected. What can I do?

1. Find out the exact reason you didn’t qualify. The first thing you should do is contact the bank or lender and find out specifically why your application was rejected. Business loans are usually rejected because the business doesn’t meet the eligibility criteria. But it could be a simple error in your paperwork that you could correct.
2. Build your personal credit. Other than shopping around for loan criteria that you do meet, an advantageous thing you can do is make sure that you’re in a position to make repayments and that you have a positive credit profile.
3. Build your business credit. Next, work on building your business’s credit by staying on top of payments, maintaining healthy relationships with vendors and by knowing your score and actively trying to improve it.
4. Put up collateral. Unsecured loans put the responsibility of your debt on the lender if your business goes under, they often come with tighter eligibility requirements. Putting up collateral can ease that responsibility.
5. Look into crowdfunding. Crowdfunding can offer multiple benefits for your business, like spreading the people talking about your company in addition to raising additional funds.
6. Raise funds from family and friends. Finally, you could reach out to family and friends. They may be excited and truly believe in the direction you want to take your business. This option has the possible advantage of no interest, but can sometimes damage relationships if what has been lent isn’t paid back in time.

What happens if I default on an SBA loan?

There are several steps to defaulting on an SBA loan involving both your lender and the government. That’s because the SBA doesn’t actually issue your loan, but backs it up to 85%. This means that the SBA covers up to 85% of the amount you borrowed when you default. But it’s not as straightforward as it might sound.

Each lender has different procedures it follows when an SBA borrower defaults. Here’s what you might expect to happen.

1. The lender sends a notice

The first step most lenders take is to reach out after you’ve missed a few payments. Typically, you’ll receive a letter or phone call letting you know that your repayments are overdue.

Many lenders are willing to work with businesses to prevent you from defaulting at this stage. They might work with you to renegotiate your repayment plan. Some could even offer interest-only repayments for a few months if it looks like your business is experiencing a temporary loss of profits.

The default process ends here if you’re able to reach an agreement with your lender. Otherwise, it starts the collections process.

2. The lender seizes collateral

The SBA isn’t the only one securing the loan. If you backed your loan with collateral, your lender takes steps to collect that first. If your collateral doesn’t cover the amount your business owes, your lender could force your business to close and sell off anything of value.

It can also typically withdraw money from the bank account linked to your loan account to cover overdue repayments. Or, it can get a judgment from a court allowing it to withdraw from your business accounts at other banks.

3. The lender goes after your assets

Since the SBA requires a personal guarantee from business owners with more than a 20% stake in the company, the lender could come after your personal assets next. Typically, it sends a letter to all guarantors asking for repayment. If the guarantors don’t respond, the lender could file a lawsuit.

So what happens when the lender goes after your assets? If your home was part of your personal guarantee, it could seize that property — though it might decide it’s not worth it if you’re still paying off a mortgage or home equity loan. You could also lose other assets like your retirement and bank accounts.

4. The SBA requests an offer in compromise

When your business and guarantors aren’t able to repay the full amount, your lender turns to the SBA to get funds to cover their guaranteed part of the loan. At this point, the SBA pays off your lender and takes over the collections process. Typically, the SBA sends you a letter demanding payment or an offer in compromise (OIC) within 60 days.

Submitting an OIC involves filling out a form proposing to settle any debt for a lower amount than you originally owe. You must offer proof that you’re able to repay the settlement amount and include a complete list of your assets and debts. Your lender then reviews your OIC and submits it to the SBA. Both must agree to the terms.

If the SBA accepts your OIC, you can pay off the settlement amount. Otherwise, you could submit another request. If not, the SBA turns your case over to the US Treasury Department.

5. The US Treasury Department takes over collections

The US Treasury Department can take more extreme measures to collect the amount you owe once it takes over your case. That’s because there’s no legal limitations to how long they can collect funds, and they don’t need a judgment. They might garnish your wages, take away your Social Security and other retirement benefits or withhold your tax refunds until your loan is paid off.

My business is struggling. What can I do?

No matter what stage you’re in, staying in communication with your lender is key to making the best of the situation. It’ll give you a better grasp of what your options are moving forward and help prevent your lender or the government from taking more drastic measures.

Before you miss a payment

Reach out to your lender as soon as you think your business won’t be able to make a repayment on time. If it’s a one-time incident, there’s a chance your lender agrees to push back your payment’s due date. Or you might just need to pay a late fee and move on.

Otherwise, you could try renegotiating the terms of your business’s loan to avoid missing any more repayments. Typically, you need to provide documentation proving that you aren’t able to repay the loan according to its current terms. This can include balance sheets, tax returns, financial projections and profit and loss statements.

After you miss a payment

Stay in contact with your lender throughout the collections process. If your business and its owners really can’t pay off the loan with their assets, you might want to take steps to negotiate a settlement before it goes to the SBA.

Can’t negotiate a settlement with your lender? In this case, consider hiring a lawyer that specializes in business debt settlement to help you build a strong OIC and navigate the next steps. Otherwise, you could end up losing your future wages and retirement savings if the SBA sends your case to the US Treasury Department for collections.

More ways to finance a business

Before you compare lenders, make sure it’s the right choice by looking into alternatives. For example, businesses with frequent, small expenses might want to compare business credit cards instead — you won’t have to pay interest if you pay off your balance each month.

Startups might also want to look into personal loans rather than business financing. Most lenders don’t offer financing to firms with less than six months in business. And you’ll likely qualify for a lower rate — especially if you put up personal collateral.

If you or another owner have bad credit, you might want to apply for business grants, bring on investors or organize a crowdfunding campaign. That’s because lenders consider the credit score of each small business owner and it can be difficult to qualify with a credit score under 580.

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