Loans
Best Small Business Loans for Startups: 2024 Guide
Best Small Business Loans 2024: Top Options, Lowest Rates, and Fast Funding.
Get the capital you need to grow your business with our expert review of the best small business loans for 2024.
Starting and running a successful small business requires a steady flow of capital. However, not all entrepreneurs have the necessary funds to launch or expand their ventures. This is where small business loans come in handy. In this comprehensive guide, we will explore the various types of small business loans, key factors to consider when selecting a loan, top loan providers, and tips for securing the future of your small business. If you start searching the options below, you can find the best deals for you.
How Do Small Business Loans Work?
Small business loans help companies make large purchases and cover the cost of doing business. Loans generally are issued as a lump sum that can be used to make a specific purchase or manage cash flow and then repaid with interest. However, there are other types of small business loans—like lines of credit, merchant cash advances and invoice financing—that can be used to access cash more quickly and on an as-needed basis.
The best loan for a business depends on a number of factors, including its creditworthiness, how much it needs to borrow, what the funds will be used for and how quickly it needs access to loan proceeds.
Navigating Small Business Loans: A Comprehensive Guide
If you’re new to the world of small business loans, understanding the different types available is crucial. Let’s dive into the first section of our guide, which focuses on exploring the different types of small business loans.
Exploring the Different Types of Small Business Loans
Traditional term loans are one of the most common options for financing a small business. These loans are typically offered by banks and require collateral as security. Moreover, they come with fixed repayment terms and interest rates.
On the other hand, lines of credit allow business owners to borrow funds up to a predetermined limit. This flexibility makes them ideal for managing seasonal expenses or unforeseen emergencies.
Another popular option is equipment financing. As the name suggests, this type of loan allows entrepreneurs to purchase equipment or machinery for their businesses. The equipment itself acts as collateral, making it easier to obtain financing.
Specialized Financing Solutions for Your Small Business Needs
While traditional term loans, lines of credit, and equipment financing are widely available, there are specialized financing solutions tailored to specific industries. Restaurants, for example, can benefit from restaurant loans specifically designed to cover expenses such as buying inventory, kitchen equipment, or renovating the establishment. Similarly, hotels can access hotel financing programs offered by lenders. These loans can be used for renovating guest rooms, updating facilities, or expanding the hotel premises.
Key Factors to Consider When Selecting a Loan
Now that we’ve covered the various types of small business loans, let’s shift our focus to key factors you should consider when selecting a loan.
Assessing Your Small Business Loan Eligibility
Before applying for a loan, it’s essential to assess your eligibility. Lenders generally consider factors such as your credit score, business revenue, time in operation, and collateral before approving a loan.
Additionally, make sure to check if your business meets the specific eligibility criteria set by the lender. Some lenders may require a minimum annual revenue or a certain credit score range.
Understanding Loan Terms and Interest Rates
Loan terms and interest rates greatly impact the overall cost of borrowing. It’s important to carefully analyze the terms and interest rates offered by different lenders to find the most favorable option for your small business.
Ensure that you fully understand the repayment schedule and any associated fees or penalties. Comparison shopping can help you secure a loan with the most competitive interest rates.
Evaluating Repayment Options for Small Business Loans
Repayment options play a crucial role in managing the loan without straining your business finances. Some loans require fixed monthly payments, while others offer flexible repayment schedules based on business cash flow.
Consider the financial stability of your business and choose a repayment option that aligns with your cash flow projections. Flexible repayment terms can provide more breathing room during challenging times.
Review Qualification Requirements
Most small business loans are underwritten based on the business owner’s personal credit score and are personally guaranteed. The minimum credit score required to qualify for a small business loan depends on the lender and the type of loan. So, it’s generally a good idea to check your personal credit score and then research each lender to compare minimum credit score requirements.
Prequalify Where Possible
Some business financing lenders offer a prequalification process. This means prospective borrowers can share details about their financing needs, revenue and other relevant information to find out what loan amounts, rates and repayment terms they may qualify for. This process typically only requires a soft credit inquiry, which has no impact on your credit score.
Determine How You Want To Receive Your Funds
Two of the most common ways you can receive and access your business funds are through a lump-sum payment or on an as-needed basis. If you want to receive your funds up front, choose a traditional working capital or term loan. However, if you want to use funds only as you need them, consider a business line of credit.
Understand Underwriting and Funding Speeds
The amount of time it takes to process an application and receive funds varies widely by lender and loan type. In general, it can take anywhere from a couple of days (in the case of a merchant cash advance) to several months (for an SBA loan) to receive funds after submitting an application. If you need a loan quickly, choose a loan type and lender that can meet those time constraints.
Look Out for Additional Fees
Some lenders offer fee-free business loans that don’t require borrowers to pay origination fees, late payment fees, prepayment penalties or any other common loan costs. However, this is not always the case. Be sure to confirm a lender’s fee structure when shopping for the best terms. Factor in additional fees into your decision-making process.
Evaluate the Lender’s Customer Support Options
If you’ve found a lender that’s prepared to offer the money you need at acceptable terms, consider the lender’s support options before signing the loan agreement. Customer support can make a huge difference down the line if you encounter issues with repayment. Research the lender’s customer service resources and read reviews to make sure it’s a good fit.
Top Small Business Loan Providers: A Comparison
Now that you know what to consider when selecting a loan, it’s time to explore the top small business loan providers. Each provider has its pros and cons, so it’s important to weigh your options.
Traditional Banks vs. Online Lenders: Pros and Cons
Traditional banks, have long been the go-to source for small business loans. They offer stability and established reputations but may have stricter eligibility criteria and longer approval processes.
Alternatively, online lenders like Lendio and Funding Circle provide faster approval times and more flexible eligibility requirements. However, they may have higher interest rates compared to traditional banks.
Alternative Financing Options for Small Businesses
In addition to traditional banks and online lenders, there are alternative financing options available for small businesses. These include crowdfunding, peer-to-peer lending, and merchant cash advances.
Merchant cash advances, offered by companies like XYZ Funding, provide upfront cash in exchange for a percentage of future credit card sales. These options can be suitable for businesses with unique funding needs or limited traditional loan eligibility.
Small Business Administration (SBA) Loans: What You Need to Know
The Small Business Administration (SBA) offers loan programs that can be an excellent option for small business owners. SBA loans have more favorable terms and lower interest rates compared to traditional loans.
However, the SBA loan application process can be lengthy and requires more documentation. Working with an SBA-approved lender or seeking assistance from organizations like SCORE can streamline the application process.
Choosing the Right Lender for Your Small Business
With a multitude of loan providers to choose from, selecting the right one for your small business is crucial. Let’s explore the factors to consider when making this important decision.
Factors to Consider When Selecting a Small Business Loan Provider
Start by evaluating the lender’s reputation, customer reviews, and years of experience in small business lending. Consider how well the lender understands your industry and its commitment to supporting small businesses.
Look for transparency in terms of interest rates, fees, and repayment terms. Responsive customer service and the ability to provide personalized solutions are also important aspects to consider.
Tips for Negotiating Loan Terms and Conditions
Once you’ve narrowed down your options, it’s time to negotiate loan terms and conditions. Gather competing offers and use them as leverage to achieve more favorable terms.
Highlight your business’s strengths, such as a solid track record, positive cash flow, or potential for growth. This can help build confidence with lenders and improve your bargaining power.
Top Small Business Loans:
1. Lender 1: Funding Circle
– Rates: 4.99% – 27.79%
– Amount: $25,000 – $500,000
– Term: 6 months – 5 years
2. Lender 2: BlueVine
– Rates: 4.8% – 24.99%
– Amount: $5,000 – $250,000
– Term: 6 months – 2 years
3. Lender 3: OnDeck
– Rates: 11% – 36%
– Amount: $5,000 – $250,000
– Term: 3 months – 2 years.
Best Place To Get a Business Loan
Small business loans are available from a variety of traditional banks and credit unions as well as online lenders. However, each lender is limited by its own financial products and lending requirements.
1. Banks & Credit Unions
Traditional banks and credit unions typically offer a limited range of small business loans, including those backed by the SBA. While traditional banks often have tighter borrowing standards than online lenders, small business owners may still find it easier to qualify at an institution where they have an existing banking relationship.
Not only will the bank already have the business’ financial statements on file, but it may also be easier to get approved with a local lender who is familiar with your operation.
2. Online Lenders
In general, online lenders may have more flexible borrower qualifications than larger, traditional banks. And, while APRs may be higher through online banks than traditional lenders, approval rates also are higher and borrowers are less likely to need collateral. What’s more, many online lenders provide faster funding speeds than their brick-and-mortar counterparts, making them a good option for businesses that need a fast personal loan.
Common Types of Small Business Loans
In general, small business loans help businesses access the money they need to operate and grow. However, there are several types of small business loans, and it’s important to find the best fit for your needs.
SBA Loans
SBA loans are small business loans that are guaranteed by the Small Business Administration, including the SBA 7(a), 504, CAPLines, Export, Microloan and Disaster loan programs. These loans typically range from $30,000 to $5 million and come with low interest rates and extended repayment terms—up to 25 years. That said, qualification requirements are more demanding than for other loans not backed by the government, and the application process typically takes longer.
Common types of SBA loans include:
- SBA 7(a) loans. With maximum loan amounts up to $5 million, the SBA 7(a) loan program is the SBA’s main offering. Loans are commonly used to purchase real estate but may also be used for working capital , debt refinancing and the purchase of business supplies. Current interest rates, as of Oct. 7, for SBA 7(a) loans range from 5.5% to 11.25%.
- SBA 504 loans. Available up to $5 million, SBA 504 loans must be used for major fixed assets, like existing buildings or land, new facilities and long-term machinery and equipment. As such, 504 loans may not be used for working capital, inventory or other common business uses. Rates on SBA 504 loans are lower than those imposed by the 7(a) program, and range from about 2.81% to 4%.
- SBA microloans. SBA microloans extend up to $50,000 and are intended to help small businesses start or grow. This may involve using the funds for working capital, inventory, machinery, equipment and other fixtures and supplies needed to do business. Rates typically range from 8% to 13%, but this varies by lender.
Term Loans
Terms loans are a traditional form of financing that’s repaid over a set period of time. In general, short-term loans range from just three to 18 months, whereas long-term business loans may be extended for up to 10 years. While some term loans are designed for specific uses—like financing equipment or inventory—term loans traditionally can be used to fund most large business-related purchases. Business term loans are typically available up to around $500,000, and annual percentage rates (APRs) start around 9%.
Lines of Credit
Unlike a term loan that’s paid out in a lump sum, a business line of credit is a set amount of money that a business owner can access on a revolving basis. This means the borrower can draw against the line of credit for a set period of time—usually up to five years. If the borrower pays back a portion of the line of credit early, they can access it again until the draw period ends.
Once the draw period is over, the borrower enters the repayment period and can no longer access the revolving funds. Rather than pay interest on the entire amount, as with a term loan, a business owner who accesses a line of credit is only charged interest for what they actually use.
Lines of credit are a good option for businesses that want to access cash on an as-needed basis for things like unexpected expenses and other cash-flow issues. Borrowing limits generally range from $2,000 to $250,000 and come with APRs from 10% to 99%.
Invoice Factoring and Financing
Invoice factoring is the process of selling a business’ outstanding invoices in exchange for a lump sum cash payment. Invoices are sold to a third-party factoring company at a discount, so you won’t get paid for invoices in full. And, once you sell an invoice to a factoring company, the factoring company assumes responsibility for collections.
However, this form of financing can be an effective way to access cash quickly without having to wait the 30 to 90 days customers usually have to pay invoices. For that reason, invoice factoring is a helpful strategy when you need short-term financing or help managing cash flow. In general, invoice financing amounts can extend up to $5 million with APRs between 10% and 79%.
Merchant Cash Advances
Merchant cash advances (MCAs) let business owners access a lump sum of cash by giving the lender—often a merchant services company —a portion of future sales receipts. In contrast to a traditional business loan, a merchant cash advance and related fees are repaid from the business’ individual sales or through automatic clearing house (ACH) payments on a daily or weekly basis.
Under this strategy, a business owner borrows a set amount of cash at a factor rate usually between 1.2 and 1.5. To repay the loan, the business must repay the advance with a set percentage of daily credit card sales over an estimated repayment term. A merchant cash advance may be a good option for businesses that experience a high volume of sales and need to access cash quickly—without qualifying for a traditional business loan.
Equipment Financing
Equipment financing is a form of small business loan that helps businesses purchase the equipment and machinery needed to start and maintain operations. This flexible financing can typically be used for everything from office furniture and electronics to manufacturing equipment.
Equipment loans are collateralized by the items being purchased, so the size of a loan depends on the value of the equipment and the size of the down payment. However, the best equipment financing companies offer terms and limits of up to 25 years and $1 million or more.
Interest rates on equipment financing may be lower than available through other types of financing and typically range from 8% to 30%. As with other small business loans, rates vary by lender and borrower creditworthiness.
Commercial Real Estate Loans
Commercial real estate loans are used to purchase property for business use. These loans differ from residential mortgages since they’re not backed by a government entity and may be more difficult to qualify for—especially for smaller businesses.
Interest rates for commercial real estate loans are generally lower than other forms of financing, ranging from 5% to 15%. Lengthy repayment terms—up to 20 years or more—are often available.
That said, some business owners also opt for shorter-term balloon mortgages, which have lower interest rates but require a lump sum payment at the end of the term. Commercial real estate loans may come with additional costs like appraisal and legal fees.
Bank Loans
Borrowers can acquire bank loans through traditional banks, credit unions and online lenders. Bank loan amounts vary depending on the lender but can range from thousands to millions of dollars. They can be used for various business purposes, including working capital, equipment purchases and real estate acquisitions.
Bank loans are typically repaid in fixed monthly payments over a set period and may include origination fees and prepayment penalties. This type of financing usually comes with lower interest rates than other alternatives—usually between 5% and 13%—but may also come with stricter eligibility requirements and longer application processes.
Alternatives to Small Business Loans
If a small business loan doesn’t seem right for your specific needs, consider other options to get the financing your business needs.
Business Line of Credit
While a business loan disburses funds as a lump sum, you have access to a predetermined credit line with a business line of credit. You can draw on this credit line during the draw period, and you only owe interest on the amount you borrow, not the full credit line. Once the draw period ends, you enter the repayment period, when you’re required to repay your outstanding balance plus interest and any fees.
Business lines of credit are more flexible than business loans and are handy as a rainy day fund.
Business Credit Card
Business credit cards work similarly to consumer credit cards, except you use the card to pay only for business-related expenses. In some cases, business credit card rates may be higher than business loan rates; however, they tend to have more flexible qualification requirements.
A business card may be better than a business loan if you don’t need to borrow a large sum. Plus, some cards offer cash back or points-based rewards programs. You may even be able to find a card with no-interest financing for a certain period of time, which can be equivalent to an interest-free loan if you repay your balance during the introductory period.
Crowdfunding
Crowdfunding can help you reach your funding goals without taking out a loan. You can use popular sites like Kickstarter and Indiegogo to raise money for your business or product. On these sites, you’ll set a funding goal and typically create reward tiers for people who pledge funds. However, if you don’t reach your goal, you usually get nothing.
¹The required FICO score may be higher based on your relationship with American Express, credit history, and other factors.
Personal Loans for Business
Some lenders allow you to take out a personal loan to fund your business. This loan is tied to your personal credit, not the business credit score, which means you’ll be personally liable to repay the loan.
A personal loan can be a good option to fund your business if you don’t have sufficient revenue or time in business to qualify for a business loan. The funds from a personal loan can be used however you need to fund your business, but the amounts may be lower than what’s offered on many business loans.
Small Business Grants
Unlike loans, grants don’t need to be repaid. Small business grants can provide financial aid for specific projects or purposes that align with the grant’s criteria. However, securing a grant can be highly competitive and requires extensive research and preparation.
You will need to demonstrate how your project or business aligns with the mission of the grant provider and show a solid financial plan for using the funds.
Pro Tip
If feasible, consider asking a friend or family member with good credit to co-sign the loan. A co-signer’s good credit can positively impact your loan terms and increase the likelihood of approval.
Frequently Asked Questions (FAQs)
What can you do if you’re denied a small business loan?
There are a number of steps you can take if you’re denied a small business loan. First, try to find out why your application was denied. If your SBA loan application is denied, you’re entitled to a notice of denial that details the reasons; you may receive this directly from the SBA or from your lender.
If, instead, you are denied a small business loan through an online lender or other financial institution, contact them to find out why you were not approved. They may be able to provide insight into how to improve your future approval odds.
Once you know why your loan application was rejected, take steps to rectify the underlying issues. For example, you may need to improve your credit score, establish more consistent sales or reassess the amount you need to borrow.
How hard is it to get a small business loan?
Getting a small business loan may prove more challenging than other financing options like business credit cards. Although qualification requirements vary by lender, most lenders typically look at the business owner’s personal credit score and the business’ annual revenue. Many lenders require a minimum personal credit score of 600 to 660 and annual revenue between $100,000 and $250,000.
We recommend confirming the qualification requirements with your preferred lender before applying.
What is the easiest way to get a small business loan?
The easiest way to get a small business loan may be through online lenders instead of traditional banks because borrower requirements may be more flexible. With an online lender, you may be able to quickly prequalify and get funding as soon as the same business day as long as you meet eligibility requirements.
How much income do you need to get a business loan?
Typically, lenders require businesses to have an annual revenue of between $100,000 and $250,000. If your business makes less than that, there are business loans for low-revenue companies that may offer funding options for your business.
Conclusion:
Find the best small business loan for your needs with our comprehensive review. Compare rates, terms, and requirements to make an informed decision.
