Having access to capital can be make or break for small businesses. Thankfully, small business owners now have more options beyond banks and credit unions, as alternative, online and nonprofit lenders have stepped in to fill funding gaps. Our tool can help you compare and find the best small business loans and financing for your company.
*Loan information is presented here without warranty. Annual Percentage Rates (APRs) and other loan terms are estimates based on data provided by you and the lenders. Actual APRs will be determined by the lender and are based on your qualifications as a borrower. Only borrowers who have strong qualifications will qualify for the lowest rates. Loan offers are contingent on credit checks and approval.
Types of Small Business Financing
Business term loan: A business term loan is a lump-sum loan, which is repaid over the course of months or years. Online lenders generally offer loans up to $300,000 to $500,000, with terms between 6 months to 5 years. Term loans are good for larger, one-time investments, such as expensive machinery or real estate. APRs vary from 5% to 98%.
SBA loans: The U.S. Small Business Administration works with banks to provide government-guaranteed term loans to small businesses. SBA 7(a) loans offer some of the most competitive rates and terms. However, only borrowers with strong qualifications will be eligible, and processing times may take several weeks. APRs on SBA loans are between 7% to 8%.
Business line of credit: A line of credit is a type of open-end loan that allows you to withdraw, repay and redraw funds repeatedly. Lines of credit are good for purchasing inventory and equipment and managing cash flow and working capital. APRs on lines of credit can range from 3% to 80% or more.
Invoice factoring: Invoice factoring allows business owners to sell their invoices due in the future at a discount for cash now. Your customers will then typically pay the factoring company instead of you. Invoice factoring is good for managing short-term cash flow gaps. APRs for invoice factoring vary between 17% and 70%.
Merchant cash advance: Merchant cash advances provide funds to business owners in exchange for a percentage of the business’s future income, usually through credit card transactions. Payments are typically made daily through a percentage of the business’s credit card sales. APRs range from 12% to 100% or more.
You can read more about different types of business financing options here.
How to Get a Small Business Loan
Before you apply for a small business loan, think about how much money you need and what you need it for. Knowing how you plan to use the funds will inform what kind of loan you need. For instance, if you plan to make ongoing inventory purchases, a line of credit or short-term loan might be the best choice. On the other hand, a long-term loan or SBA loan would be a better option if you are making a long-term investment in your business, such as opening a new location or purchasing expensive machinery.
Next think about how much money you need. In the case of purchasing large-items, such as equipment, machinery or vehicles, this is typically the cost of the item itself. If you’re making smaller or ongoing purchases, start by taking 10% to 15% of your annual revenue and adjust from there. For example, if your business’s annual revenue is $1 million, start with $100,000 and then adjust up or down based on your needs.
Pick Lenders and Prepare Documents
Since applying for a business loan will impact your personal and business credit score, carefully consider what lenders to apply to. Make sure you meet the eligibility criteria and get your documents together before you apply. As part of the application process, lenders will check your personal and business credit score as well as your business financials. Most lenders will want to see business bank account statements, business tax returns and financial statements (such as cash flow and balance sheets). Some lenders may also want to see a business plan, which is a document outlining your business goals and plans for reaching them, and personal financial information.
Compare Small Business Loan Offers and Review Contracts
Especially if you are applying for a large, long-term loan, it’s usually a good idea to shop around to get the best deal. Once you have a few loan offers in hand, take the time to carefully compare them. Look at what the fees are for each loan, how much you will pay back and when and what the total cost of capital is. Some loans, particularly bank and SBA loans, may have prepayment penalties, meaning you cannot pay off your loan early. Many online loans do not. Also consider how the repayment schedule will work: is each loan payment the same or is there a balloon payment at the end? Does the loan require daily, weekly or monthly repayment? Different repayment schedules will work for different businesses.
Finally, look at the total cost of capital. On a $100,000 loan, for instance, you may only repay a total of $120,000 at one lender, but $175,000 at another lender. Long-term loans will accrue more in interest than short-term loans with the same interest rates. Once you’ve considered these factors, review the loan contract thoroughly before signing. It’s generally recommended to have a lawyer or legal advisor review the contract for any red flags or confusing terms.