Compare Small Business Loans
When most business owners think of business loans, they instinctively think of term loans. These are the most traditional forms of debt financing that consist of receiving a lump sum amount of cash that is repaid over a predesignated length of time with interest fees on top. However, there are plenty of other forms of debt financing for small businesses as well. From business lines of credit to newer alternative products like merchant cash advances, we've compiled a list of all the forms of debt financing for you. We recommend that every business owner be aware of as many products as possible so that they can make the most informed decisions.
|Term Loans||Large lump sums of cash that are best for large purchases where it'd be advantageous to spread the large payment over a period of time|
|Business Lines of Credit||Large revolving lines of credit that are ideal for cyclical cash flow problems|
|SBA Loans||Variety of loans offered by different lenders that are guaranteed by the SBA, which reduces rates and fees but make the loans harder to qualify for than loans from online lenders|
|Business Credit Cards||Best for small, everyday purchases|
|Commercial Real Estate Loans||Ideal for real estate specific expenses|
|Equipment Financing||Best for purchasing large machinery or vehicles|
|Peer-to-peer Lending||For borrowers who want lower rates than most online lenders but can't qualify with traditional lenders|
|Personal Loans||Easier requirements allow for startups to use personal loans as working capital|
|Invoice Factoring||For businesses that can't qualify for competitive term loans or lines of credit from traditional or online lenders and have invoices that aren't being paid on time|
|Merchant Cash Advance||Businesses with frequent and large volumes of transactions like retail stores will benefit from the lowest rates|
Qualifying for a Small-Business Loan
All loans will typically qualify applicants based on their personal credit history, annual revenue, cash reserves, age of business, their existing debt-to-income ratio and the quality of their business plans. Each lender and product will have different requirements, but those are some of the most common standards by which lenders judge applicants.
Throughout our site and recommendations, you'll see that we list minimum requirements applicants need to have to qualify for certain loans, but be aware that just because you qualify for a loan based on minimum qualifications, it doesn't mean you're certainly going to be accepted. Also, be aware that you always want to try to strengthen your profile as a borrower, as your rates will decrease.
Traditional lenders like banks and credit unions are going to be the most difficult lenders to qualify with, while online lenders tend to be less strict. Of course, online lenders are also going to charge higher rates and fees, given the extra risk they're incurring by accepting "riskier" borrowers. We recommend that if you can't qualify with a traditional lender you use online lenders as stepping stones, but first, you'd have to ensure that your loan would result in a net benefit. If that's the case, you can use the loan from an online lender to improve your profile as a borrower and increase the chances of getting a loan from a traditional lender.
SBA Loans Explained
Before deep diving into the various forms of financing, we do want to talk about the "best kept secret" in small-business financing: The Small Business Administration (SBA) and the various small business loan programs it creates.
SBA loans aren't offered directly by the SBA itself but rather through various lenders that partner with the SBA (usually banks). The SBA guarantees portions of these loans and sets interest rate caps on them, which instantly makes these loans consistently one of the cheapest in the market.
SBA loans are varied and usually come in the form of traditional term loans, but some of the products are specialized for micro loans, real estate uses, veterans and more. We strongly recommend that if you are able to qualify, you always consider a SBA loan no matter the financing need. Many local lenders along with a few larger banks will offer SBA loans.
Loan Types Explained
As one can quickly figure out, small-business debt financing is complex. There are a plethora of loan types available and each caters to specific needs. While we highlighted some of the most immediate callouts for each loan type above, we've also detailed out the minute features of each loan to help you make the best decision when it comes to financing your business.
Term loans are what most borrowers initially think of when they hear "business loans." You receive a lump sum that is repaid at a regularly scheduled interval over the course of several months or years with interest fees on top. The length of repayments will vary. Most loans are amortized, meaning each payment is the same. Term loans are extremely common and can be obtained from both traditional or online lenders.
Term loans need to be repaid immediately, so we don't recommend that you take out a term loan to simply have working capital available. Only use a term loan if you have a large upcoming purchase and you're sure you're going to immediately use every penny of the loan. Since repayment begins immediately whether you use the loan or not, we recommend you be sure that you use the full loan as quickly as possible to be sure you maximize the time during which you'd be realizing a return from the loan.
Business Lines of Credit
Business lines of credit are open-ended, revolving loans that allow you to withdraw funds, repay those funds and withdraw funds again later. The easiest way to think of these are as credit cards with much larger limits. Every line of credit has a credit limit, which is the maximum amount you can have withdrawn at any given time. These are primarily used to increase short-term working capital, manage cash flow gaps, purchase inventory or handle emergency expenses. Business lines of credit are almost as common as term loans and can be found from both banks and online lenders as well.
The biggest advantage to business lines of credit is that you only pay interest on what you use. For example, you could be approved for a $150,000 line of credit. If you only use $10,000 of that line of credit, you only need to pay fees on top of that $10,000.
Business Credit Cards
Business credit cards work in the same fashion as consumer credit cards. They're just as liquid and flexible as personal credit cards but often come with pretty small credit limits. Additionally, business credit cards usually come with impressive rewards programs, which other forms of small business financing do not. Since credit card issuers do not consider your business’s finances when you apply for a business credit card, they are a popular choice for startups. However, this also means that you’re risking your personal credit if your business falters and you get behind on the card's payments.
You don't want to carry a balance on business credit cards month to month because of the high APRs so we only recommend using business credit cards for daily expenses or any purchase that you know you'd definitely be able to comfortably pay off within the same billing period.
Commercial Real Estate Loans
Small businesses use commercial real estate loans to purchase or build commercial property. A commercial real estate loan uses the property being financed as collateral, allowing these loans to have low interest rates. Business owners can get a commercial real estate loan from a bank, commercial mortgage lender or specialty lender. The SBA also offers a commercial real estate loan, called the 504 loan. Commercial real estate loans can vary dramatically in their terms, maturities and repayment schedules.
Niche financing products like these often come equipped with narrow uses but offer some of the most competitive terms. For example, you can only use commercial real estate loans for real estate purchases and expenses, but it'd be tough to find a general use term loan that offers better rates for such expenses.
Equipment loans are used to purchase equipment, machinery or vehicles, and whatever is purchased is then subsequently used to secure the loan. Most equipment loans allow you to finance between 80% and 100% of the purchase price of the equipment, and they normally have low interest rates. They are also easier to qualify for and have a faster application process than a traditional bank loan. However, you can expect to use whatever equipment you're taking the loan out for as collateral to secure the loan.
Similarly to commercial real estate loans, equipment financing is much more competitive compared to more general forms of financing.
Similar to crowdfunding (equity financing), you can fund loans through peer-to-peer (P2P) networks. Instead of lenders, your loan will be constructed and funded by individual investors. Usually, this will be facilitated by a P2P marketplace like LendingClub or Funding Circle. P2P loans have lower interest rates than online loans and fewer eligibility requirements than bank loans. However, it can take up to two weeks to receive funds, as every investor must contribute money before the funds can be disbursed.
While personal loans aren’t technically business loans, most personal loans can be used for business expenses. Similarly to business credit cards, qualifying for a personal loan will only be based on your personal credit history and financial situation, making them another common choice for startups. However, there are two main downsides with personal loans: One is that you’re putting your personal credit on the line for your business, and the other is that you generally can’t borrow more than $100,000. Be sure you carefully consider the decision to use a personal loan as a business loan.
Be careful when applying for personal loans for business expenses. While most don't, some lenders might restrict personal loans from business uses.
Invoice factoring lets business owners sell their unpaid invoices to a factoring company. Factoring companies will generally advance between 75% and 100% of each invoice, and repayment occurs when the business’ customer pays the invoice. In most cases, your customers will pay the factoring company directly. For invoice financing, the unpaid invoices are used as collateral for a cash advance. Repayment may be made as either a lump-sum payment when the invoice is due or be required on a weekly basis. You will retain control over how your customer repays the invoice.
Generally, we don't recommend invoice factoring for businesses because of the high fees and rates that come with this form of financing. Generally, we believe that if you have cash flow problems and delayed revenue cycles, you should be able to use a term loan or business line of credit to help alleviate those problems. However, we do recognize that it is tough to qualify for a sizable term loan or line of credit and that invoice factoring could be the only option that provides enough funding and helps fix the problem of delayed invoice payments.
Merchant Cash Advances
A merchant cash advance (MCA) is similar to a term loan in that you receive a lump sum of cash at the start of the loan term. However, you repay the loan with an agreed-upon portion of your future credit and debit card sales. MCAs are typically much smaller than term loans and also have shorter term lengths.
The cash advance company will take anywhere from 5% to 25% of daily credit card sales as repayment. Merchant cash advances are one of the quickest funding options on the market, with companies approving applications and disbursing funds within the same day. What’s more, this type of financing is even easier to qualify for than an online loan. However, most merchant cash advances carry very high interest rates, sometimes exceeding 100%. Considering the high rates that MCAs usually come with with, we don't recommend these loans other than as an absolute last resort.