At Fit Small Business, we’ve written dozens of articles about how to get a small business loan. This guide brings together all of those resources into one place. We will summarize the pros and cons of each of the main business financing options, tell you what you need to qualify, and provide links where you can apply. Consider this your one stop shop for getting a small business loan!
Before getting into the different options, it is important to understand the five primary factors that determine which types of business loan are best for you. They are:
- Time in business
- Personal credit score (check yours here for free)
- Business gross annual revenues
- Business net annual profits
- Collateral to back the loan
In general, the longer you’ve been in business, the higher your personal credit score, business revenues and profits, and the more collateral you have to back the loan, the easier it will be to qualify for a loan and the lower your interest rate will be. The financing options that are best suited for you also depend on how quickly you need financing and on how your customers usually pay you (e.g. invoices, credit cards, etc.). Below, we will first summarize each business financing option and then go into the details.
Summary of Small Business Financing Options
With so many new types of lenders popping up these days, it can be hard to keep all the financing options straight. Here’s an infographic summarizing the different types of business loans and business loan requirements. Below, we explain the options in further detail, starting with the lowest interest rate business loans and ending with higher rate products and personal sources of financing such as credit cards and home equity loans. We round out the article with some general things to keep in mind when searching for a small business loan.
Your Financing Options in Detail
Part 1. Bank and SBA Loans
For established businesses and borrowers with good credit.
SBA 7(a) Loans
A 7(a) loan backed by the U.S. Small Business Administration (SBA) is one of the cheapest ways to get business capital. You can borrow between $5k and $5m. The loans are not made by the SBA. They are made by a partner bank or lender are are partially guaranteed by the SBA in the event the borrower cannot pay back the loan.
In general, you need the following to qualify for an SBA loan for an existing business:
- Be in business for at least 2 years.
- Personal credit score above 680 and good credit history. Check your score for free here.
- May require a down payment, particularly if used towards real estate purchases.
- Must personally guarantee the loan, and in some cases, pledge collateral.
- Need a business plan and detailed financial data on the business.
- Business is profitable.
In some cases, a person look to start a new business can also get an SBA loan, but only if they have industry and management experience, a sizable down payment, and excellent credit.
- Inexpensive (6-9 % APR).
- Large amounts of financing available.
- Long terms (10 years typical) make monthly payments lower.
- In many cases, you don’t have to provide collateral or a down payment.
- Need excellent credit to qualify.
- Can be a slow process, lots of paperwork required.
- Must pay a guaranty fee to the SBA for loans above $150K and referral/packaging fees and closing costs for all loans.
Standard Bank Loans or Lines of Credit
If your bank doesn’t participate in the SBA program or if you need money a bit more quickly, consider applying for a standard bank loan or line of credit.
The requirements for a standard bank loan are much the same as an SBA loan, except you may have to put up more collateral or money down.
- Be in business for at least 2 years.
- Personal credit score above 600 and good credit history.
- In most cases, you must have a 20 % down payment and pledge collateral.
- Must personally guarantee the loan.
- Need a business plan and sound business financials.
- Inexpensive (9-15 % APR).
- Large amounts of financing available – technically no upper limit.
- Long terms (5-10 years typical) make monthly payments lower.
- Need excellent credit
- Quicker than SBA loan process but still requires a lot of paperwork.
- Must have a down payment and collateral.
- Must pay closing costs, and there may be other fees.
Commercial Real Estate Loans
Buying a building or other commercial real estate usually requires a large outlay of capital. For that reason, an SBA 504 loan or a commercial real estate loan from a bank are your best bets.
- Business plan and projected financials
- Great personal credit history (score above 680 – check here for free) for smaller deals and well-experienced team behind the project for larger deals.
- 10-30 % down payment
- Must personally guarantee the loan.
- For income producing property, tenants must be creditworthy.
- For owner-occupied property, SBA 504 loans require that you occupy at least 51 % of the property and produce jobs through your project.
(5-15 % APR).
- Large amounts of financing available.
- Long terms (10-20 years typical) make monthly payments low.
- Need excellent credit
- Requires a lot of paperwork and investigation into the property and (if applicable) tenants.
- Requires a down payment.
- Must pay appraisal fees, closing costs, and there may be other fees.
Been in business for at least 3 years? Have good credit and 15% down? Speak with SmartBiz about qualifying for a long-term SBA 7a loan for commercial real estate.
Part 2. Lending Alternatives
For newer businesses and borrowers with lower credit.
Don’t poo-poo credit cards as a way to finance your business. Whether used for startup capital or for an existing business, credit cards can be convenient and surprisingly inexpensive. There are even services that will help you combine several low-rate cards into a business credit line–no collateral or down payment needed.
Qualification requirements vary based on the credit card, but here are some general guidelines:
- Relatively inexpensive (8-24 % APR), with many cards offering 0 % promotional APRs on purchases and balance transfers.
- It’s fast to get a credit card (you probably already have one) and convenient.
- Many cards offer rewards or cash back for purchases.
- Business credit cards help you build business credit.
- Costs add up if you don’t pay off most or all of your balance each month.
- Having too many credit cards could hurt your personal credit score.
- Some cards have an
- Limited by your credit line in what you can purchase.
- When To (And When Not To) Use a Credit Card To Fund Your Business
- Best Small Business Credit Cards
- Best Secured Business Credit Card (for borrowers with lower credit scores)
See our Recommended Business Credit Card
Peer2Business loans connect individual borrowers with individual investors in an online marketplace. You can use these platforms to get business loans of up to $500K.
- Personal credit score above 650 and good credit history. Check your score for free here.
- At least 2 years in business.
- Annual business revenues above $75K.
- Pretty inexpensive (5-30 % APR) compared to other bank alternatives.
- Can get funding in 1-2 weeks, compared to several weeks or months for a bank or SBA loan.
- Need a good
- There’s a revenue minimum.
Apply For A Peer2Business Loan
Short-Term Loans and Lines of Credit
Short-term loans are loans from non-bank lenders that are paid back within 3-24 months. You can borrow up to $250,000. These loans are suitable for borrowers with lower credit scores or borrowers that need money fast–in a few days tops.
- Personal credit score above 500.
- At least 1 year in business.
- Monthly business revenues above $2,500.
- Really fast – you can get funding in 1-3 business days.
- Minimal paperwork, online application.
- No collateral required, though the lender will typically place a lien on your business assets.
- Some short-term lenders offer lines of credit, so you can keep borrowing as you pay down your balance.
- More expensive (40-80 % APR) than most other funding sources.
- Lien can make it hard to a second business loan.
- Best Short Term Providers: Kabbage vs. OnDeck vs. PayPal
- Review of OnDeck, our recommend short-term lender for businesses with annual revenues over $100K.
- Review of Kabbage, our recommended short-term lender for businesses with with annual revenues less than $100K.
Apply For a Short Term Loan
If your business makes more than $100K in revenues per year
If your business makes less than $100K in revenues per year
Do you invoice business or government clients, having to wait 30-90 days to get paid for goods or services that you’ve provided? By going to an invoice factor, you can convert unpaid invoices into working capital. Our recommended invoice factors are discreet (they won’t contact your clients), and they offer fair pricing with no required minimums or long-term contracts.
Other than billing customers by invoice, here are the minimum criteria to use an invoice factor:
- 3-6 months of invoicing history
- Invoices due in 90 days or less.
- Creditworthy customers that pay invoices on time.
- Some lenders require personal credit score above 530.
- Some lenders require the use of bookkeeping software, such as Quickbooks or Wave.
- Fast: get funding in 1-3 business days.
- Having capital while you wait for customers to pay you allows you to stabilize your business’ cash flow.
- Funding works like a line of credit, so you can keep borrowing as you pay down what you borrow.
- Lenders won’t contact your clients. Payment remains in your business’ name.
- More expensive (30-60 % APR) than many other funding sources.
- Amount of financing is limited by the value of your invoices, up to a maximum of $100K.
Apply For Invoice Factoring
If you need more than $25K in capital
If you need less than $25K
Merchant Cash Advances
Businesses that do a large volume of credit card sales and haven’t been able to find other types of financing may want to consider merchant cash advances. This should be a last resort because it can be very expensive. The exception to this is PayPal and Square, which offer lower cost merchant cash advances to businesses that accept credit payments through their respective platforms.
- Process a large volume of credit card payments.
- Some lenders require a personal credit score above 500.
- Some lenders require you to use a specific credit card processor.
- Fast: get funding in 1-5 business days.
- Payment is convenient because it comes out of your daily credit card sales – if you don’t have sales one day, payments resume on the next day that you have sales.
- Less costly (APR around 35 %) options available for Square and PayPal businesses.
- In most cases, no personal guarantee is required.
- Traditional merchant cash advances can be very expensive (APR of 80-100 %), cutting into the small business’ profit margins.
Apply For a Merchant Cash Advance
Part 3. Personal Sources of Capital
These personal sources of financing come in handy for startups and when you’re unable to qualify for a business loan.
If you’re a homeowner, it’s possible to get a loan or line of credit secured by your home. These are very inexpensive, but the main risk is that you can lose your home if you default on the loan.
- No business collateral needed
- Home can be foreclosed if you don’t make loan payments.
- Fees and prepayment penalties may be assessed
If you have a retirement account, you can invest those retirement funds in your business using a Rollover for Business Startups (ROBS). A ROBS allows you to withdraw the funds and put them into your business without income taxes or early withdrawal penalties. This is structured as a rollover of funds, not as a loan. The downside is that you will lose your retirement nest egg if the business fails.
- Eligible retirement account such as a 401(k) or traditional IRA (roth IRAs are not eligible).
- To have at least $50K in your account that you’re willing to invest in the business.
- Not a loan, so no debt or interest is incurred.
- If your business succeeds, your retirement savings will grow.
- ROBS fees aren’t that high.
- Though not very high, ROBS fees must be paid at the outset and then again every year.
- If your business fails, you can lose all your retirement savings.
Get a Free ROBS Consultation
Borrow from Family & Friends
Don’t forget this tried and true method of borrowing money for a business! Borrowing from family and friends can be both convenient and inexpensive. You can treat funds from family and friends as a loan or give them equity in exchange for the funds. Just be sure to get the arrangement in writing to avoid any unpleasantries later on.
- Have friends or family who are willing to loan you money or invest in your business.
- Often inexpensive because family and friends know your history and trust in your potential.
- Family and friends may give you unsolicited advice on how to run the business. If it’s an equity investment, the investor has the right to some control over the business.
- If the business fails, it could create tension with family or friends.
Peer2Peer Consumer Loan
We covered Peer2Business loans above for established businesses. Startup owners can get a Peer2Peer consumer loan.
- Good credit score (ideally, over 650 – check your score for free here)
- The business owner must be a U.S. resident over 18 years old with a U.S. bank account
- Low interest rates
- No restrictions on how you can use the loan proceeds.
- Need good credit to qualify.
- Only small amounts of financing available (less than $35K).
Apply for a Consumer P2P Loan
If your business idea is still in the formation stage, you may want to consider crowdfunding (on a website like Kickstarter) as a way to get startup capital. Crowdfunding allows you get funding from many individual backers. In exchange for the funds, you must provide some small gift or reward to the donor, such as a free product or service from your business. In some cases, you can offer equity to get larger amounts of funding.
- 18 years of age or older.
- A citizen or permanent resident of the country that you’re creating a project in.
- Address, bank account, and government-issued ID in the country that you’re creating a project in.
- Major credit or debit card.
- Not a loan, so no debt or interest is incurred.
- Support of many backers can inspire you to lead your business to success.
- Most crowdfunding sites have an all-or-nothing model: if you don’t reach your pre-set funding goal, you don’t get any money.
Crowdfund Your Next Purchase of Inventory
What to Keep in Mind When Searching for a Small Business Loan
Before looking for financing, consider the following to help guide your search.
Time in Business
Do you need startup capital, or have you been in business for a number of years?
In general, it’s tough to get funding for a startup. Business lenders that do lend to startups typically only provide small amounts of funding or are very expensive. The best option for startup owners is to get a personal loan or use personal assets such as home equity or retirement funds.
Established businesses have many more options available to them. If you run an established profitable business and have good personal credit, you will be a good candidate for an SBA or bank loan, which are the cheapest forms of business financing.
Your Credit Score
Out of all the business loan requirements, your personal credit score is probably the single most important factor. Your credit score will help determine where you should apply.
If you have good credit (above 680 is a good ballpark), it’s much easier to qualify for a bank loan or Small Business Administration (SBA) loan, which are the cheapest sources of business capital. Having bad credit doesn’t make it impossible to find a business loan, but it does make it harder. Instead of a bank, borrowers with lower credit scores will need to seek out costlier alternatives.
Although your personal credit score is most important when you’re just starting out in business, business credit is also something that lenders look at. Having good business credit apart from your personal credit can help you qualify for low-rate business financing on factors strictly related to your business.
Find Our Your Credit Score for Free
Business Revenues/Cash Flow
In order to get a business loan, you must show the lender that you’ll be able to pay it back. Even though you may put up collateral, it’s a costly and time consuming process to collect on a defaulted loan, so lenders want to make sure your business financials are strong and that you can afford your loan payments.
Before looking for a loan, make sure you know your business revenues for the last 2-3 years as well your Debt Service Coverage Ratio (DSCR). DSCR is the amount of debt you have relative to your income. Banks prefer a DSCR of 1.25 or higher. Click here to learn how to calculate it. Your business revenues will also impact which lender(s) are willing to loan you money.
If you’re starting a new business, you will need to project these numbers based on expected performance.
Collateral and Personal Guarantee
Do you have equipment, vehicles, real estate, or other business assets that can be used as collateral for a loan? Collateral is provided as security for a loan in the case of default. If you have a lot of collateral, your application is more likely to be accepted a bank. Alternative lenders typically don’t require collateral, although they may place a lien on your business assets, which allows them to take any asset belonging to your business if you can’t pay back the loan.
Most business loans, whether from a bank or other type of lender, require a personal guarantee. This is a promise to pay the loan out of your own pocket if the business cannot pay. Usually, what happens in the event of a default is that the lender will first foreclose on your collateral and then collect the remainder of the loan balance, if any, by enforcing the personal guarantee.
How quickly do you need a loan? Can you wait a few months, a few days? Or did you need the money, like, yesterday?
If you can afford to wait a while, don’t mind all the paperwork involved, and meet the qualification criteria, you’re a good candidate for a bank loan. In particular, applying for an SBA loan can take several months.
On the other hand, if you need the money fast, you would do better to seek out an alternative lender. Be prepared, however, to pay more in terms of interest rates in exchange for the speed and convenience.
How Customers Pay You
Finally, how your customers pay you can open or close doors to financing. For example, if you bill your clients via invoice, invoice factoring be an obvious solution to cash flow problems. If you accept credit card payments, a business cash advance might be an option. We discuss this in more detail below.
Whether you need financing to start a new business or working capital for an existing business, options abound. You just need to know where to look, and you should understand the different business loan requirements. Hopefully, this guide will put you on the path to successful funding for your small business!