Best Small Business Lending Options

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Calculators with credit cards and dollar bills - Best Small Business Lending Options
Ruth Albertson
Ruth Albertson
August 6, 2020
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Accounting & Finance

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UPDATED:
August 7, 2020

Whether you are just opening a new business or are looking for ways to grow your small business, you know that regular cash flow is vital for building and expanding. Working capital lets you pay your employees, purchase new equipment or merchandise, pay for marketing, or even hire and train new staff. However, it can be difficult for small business owners to get the funding they need to make the changes they want.

Today, there are plenty of lending options available to small business owners looking for financing options that meet their exact needs and repayment terms. Before choosing the right lender for you, consider the different types of loans and funding options currently available and the qualifications you need to meet.

Key Types of Loans and Funding Options for Small Businesses‍

If you have never looked into lending options before, you may believe that your only hope is your local bank or a business credit card. Thankfully, there are many more options available today, and many can be found conveniently online. By learning more about the differences in types, typical loan terms for each, and pros and cons for business owners, you will be prepared to make the wisest decision to meet your current and long-term business needs.

SBA Loans‍

Small Business Loan Application

SBA loans are among the most well-known loans specifically geared to small businesses. These are guaranteed through the U.S. Small Business Administration but are still processed through individual banks and online lenders. They typically feature lower interest rates than you would find with the usual unsecured loan, and they are perfect for those starting or expanding small businesses. Other positives include better, and longer repayment terms and loan amounts up to $5 million.

There are four types of SBA loans. The SBA 7(a) loan is perfect for those just starting; however, you must provide collateral. SBA 504 loans also require collateral and can be used by those purchasing land or machinery rather than working capital or merchandise. SBA microloans can be used for buying business equipment or furniture but max out at $50,000. Finally, SBA disaster loans that max out at $2 million are available to businesses that need to rebuild or repair following a natural disaster.

Loan Agreement Papers

Business Term Loans‍

With term loans, you are given an amount of money upfront but must pay it back over a specific time. Short-term business loans are usually paid back in 12 months or less, while long-term loans last longer than a year. The benefit of a short-term loan is that you can generally get the money you need in a few days. The downside is that you typically have a higher interest rate than you would get with a long-term loan.

Business Lines of Credit‍

Business lines of credit initially seem similar to credit cards. However, they are far superior because they offer lower interest rates by 5% to 10% or more. With this funding option, you will have a set pool of money. When you need to use the funds for purchasing equipment, hiring employees, or anything else, you will pay interest on the money you have taken out until it has been repaid fully. This is a very flexible lending source that does not give you many rules about how you must use it. However, your lender may set specific qualifications you must meet before taking out your line of credit.

‍Peer-to-Peer Lending‍

Man giving money to someone under a contract

Peer-to-peer lending is an exciting funding option that eliminates the need for banks or other lending institutions. Instead, you will work one-on-one with an individual or business investor who wants to help finance your business in exchange for a return on their investment. Keep in mind, however, that peer-to-peer lending is not allowed by law in all states.

Merchant Cash Advances‍

A merchant cash advance can also give you quick access to some much-needed cash, but you should avoid these except in emergencies or when you know you will be able to pay back the amount quickly. With this funding option, you are borrowing against future income, but interest rates can often range well over 50%. No matter how fast you pay the money back, you will still have to pay this same interest fee.

Secured Loans‍

While most small business loans are unsecured loans that do not require collateral, some business owners choose secured loans, which may allow them to take out more money. You may want to provide your business property, building, or equipment as collateral. However, you must pay back this loan on time or risk losing your valuable business assets.

Closeup of an Invoice with a pen

Invoice Factoring and Invoice Financing‍

Although many businesses do not frequently use these funding sources, they can be smart choices for some who know they will be bringing in a stable future income. The business will sell some or all of its accounts receivable. The company that purchases the accounts is known as the factor. With this option, you will get the money immediately while the factoring company becomes the one to deal with getting money from each customer account. Of course, you are selling your invoices or accounts receivable at a considerable discount as loan terms can include APRs of up to 35%.

Microloans‍

Microloans have become incredibly popular in recent years as small business owners continue looking for options to get ahead without being saddled with astounding debt. Alternative lending sources typically offer these loans rather than traditional banks. While microloans vary in amount and terms, the majority are under $100,000, and some may only be for a few thousand dollars.

Crowdfunding‍

Crowdfunding - many people giving money to an idea

Crowdfunding has also become incredibly popular in recent years as small businesses have started looking for new ways to fund their endeavors. Rather than working with one lender or one or two individual investors, crowdfunding lets many smaller investors or individuals buy into the idea. Of course, each of these investors will receive a piece of the pie once the business succeeds. However, repayment rates are usually far lower than they are with traditional loans.

Personal Loans‍

Some small business owners instead choose to take out a personal loan, drawing on their credit score to get a better interest rate if they have not yet built up credit as a business. This may be the best choice for small companies that are just starting. However, you may have a hard time getting business credit in the future if you choose this option now.

How to Qualify for Small Business Loans‍

Woman looking at her credit report

Now that you know about the different types of lending options available to you, you may be wondering whether you qualify for any of them. One of the most important considerations you will have to make is your credit score. Your credit score is typically what determines much of the repayment terms, including the annual percentage rate. Certain loans may also require repayment guarantees, known as collateral.

In addition to providing your business or personal credit score or both, you will also need to tell your lender essential facts about your business and your business’s income and assets. You may need to provide annual business revenue and expected yearly profit data. This may include documentation of your personal or your business’s banking account and business tax returns from previous years. You should also have a business plan, proof of business licensing, a current balance sheet, and any other relevant business paperwork at hand.

Despite all of this paperwork gathered, you may still need to make a pitch to the lender as to why you need the money. You should have a concrete plan for how you will use the money once you receive it and plan to pay it back. However, this is more common with traditional lenders.

Understanding Credit Scores‍

Credit report with a credit score of 520 with a rejected seal

Because a credit score is one of the most critical measures of loan terms and qualifications, you should understand what a good credit score is and how to raise your credit score before filling out loan applications quickly. Most traditional lenders require a credit score of at least 620 before approving any type of loan or funding. Certain types of SBA loans require a minimum of 680. However, if you do not have that high of a score, you still have hope as many alternative lenders will consider those with limited or lower credit for certain types of funding. However, loan terms are usually less favorable; the lower your score is.

To improve a low credit score, consider establishing new credit with new companies. Make all of your payments on time, and lower the amount of debt you have before applying for new debt. If you need a loan quickly, and do not have time to increase your credit score, consider ways to improve your revenue or sales numbers.

What to Look for When Shopping for Business Loans‍

Bank giving money to shops as a loan

A quick look into small business lending options will quickly show you that there are dozens of options from which you can choose. Knowing which option is the best for you can require time, close consideration, and an acknowledgment of what your goals and desires for your business are. While this is going to end up being a personal decision, you should look for things before taking out any loan or beginning any new funding process.

1. Type of loan‍

Consider the type of loan that will best meet your needs. If you do not have any time to waste before getting your money, specific options, such as crowdfunding or peer-to-peer lending, may not be the way to go.

2. Loan requirements‍

Determine if you meet the requirements for loan application. This will include the amount of money you are applying, the size of your business, your personal or business credit score, the documentation you will need to provide, and how you plan to use the money.

3. Interest rate and fees‍

Affordability is vital for any type of loan, and you must ensure that you have the resources necessary to pay back the loan on time. If you qualify, you will want to apply for lending options with the lowest interest rates, such as traditional SBA bank loans or alternative online loans.

4. Repayment term‍

You should also be aware of how soon you will have to repay the loan. Be sure to give yourself enough time to make back the money that you have spent with interest. Ask about monthly payment amounts to get a better idea of whether the rate and terms are feasible.

5. Investment value‍

ROI with a growth graphic

Although any lending option will cost you more than you would pay if you were funding a new venture with cash, you must also consider what the return on your investment is going to be. Make sure that what you plan on pouring money into with your loan funds will pay off in the end for your business. This may require you to determine how to calculate customer impact from increased hiring or learn how to measure ROI on marketing.

In addition to these five tips, look for an easy application process and fast funding for your loan to get the money you need as soon as possible.

Choosing from the Best Small Business Lending Options‍

Now that you know what to look for in any type of loan or funding option you are considering, you will want to learn more about the best lenders and loan types available today. Consider each product and service below carefully to determine the best fit for your small business.

Best Loans from Traditional Lenders‍

If you want to go the traditional route, plenty of banks still offer small business loans, many of which are backed by the U.S. Small Business Administration.

1. Wells Fargo‍

Outside a Wells Fargo Bank

With a track record of being the biggest small business lender in the United States, Wells Fargo has plenty of experience providing all types of business loans and has a balance of well over $500 billion in commercial loans. Its unsecured business loans have rates starting at 7% with repayment terms lasting up to five years. Wells Fargo’s unsecured business line of credit is another excellent option with up to $100,000 in a revolving credit line.

2. Bank of America‍

With over $300 billion in commercial loans in the United States, Bank of America is another top contender. Its Business Advantage Unsecured Term Loan is an excellent option with incredibly low rates starting at 5.5%. If you already have accounts at Bank of America, you may be able to score even better loan terms thanks to the brand’s relationship rewards program.

‍Best Loans from Alternative Lenders

Lendio, Kiva and Smartbiz logos in a tablet

1. Lendio‍

Lendio is one of the top online business loan contenders with interest rates as low as 6%, loans as high as $5 million, and incredibly fast application time. You will find out what loans you qualify for in fewer than three business days. Lendio works with over 75 financial institutions to help you find the perfect loan to meet your needs.

2. Kiva‍

If you are looking for a microloan, Kiva is the lender for you. Offering only this type of small business loan, Kiva sweetens the deal with 0% interest rates. However, you will have to work at funding your loan yourself with the help of family and friends before Kiva helps you crowdfund the rest.

3. SmartBiz‍

SmartBiz offers plenty of SBA loans through its lending marketplace. When you use this option, you will be presented with a wide array of options for which you qualify and choose the one that best meets your needs while giving you the lowest rates. Plus, you can get your loan approved in far less time than you would at a traditional bank.

Best Peer-to-Peer Small Business Loans‍

If you want to cut out the middleman, consider a peer-to-peer loan that typically comes with less stringent requirements for loan application.

LendingClub app

1. LendingClub‍

This is the top peer-to-peer lender in the United States, and it has been in business since 2014. Although LendingClub also offers unsecured personal loans, its strong suit is in providing peer-to-peer loans for businesses totaling at least $50,000 in sales annually. However, you will need to have a credit score of at least 640 to be approved, and you must pay an origination fee of at least 3.49%.

2. Funding Circle‍

Funding Circle offers both SBA loans as well as peer-to-peer loans. With interest rates starting as low as 2.75%, this is an excellent option for saving money. Plus, you will enjoy personalized assistance and will be connected with a specialist in under an hour after filling out your application.

3. Prosper‍

Prosper offers similar services to Lending Club but boasts lower origination fees in most instances. This is a good option if you only need a smaller loan of up to $40,000.

‍Best Options for Business Lines of Credit

1. Kabbage‍

Kabbage software interface on the phone and computer

Lines of credit are the only lending solutions that Kabbage offers, meaning that they are the best at what they do. You will not face any credit score requirements, and you will not even have to show your recent tax documents. Plus, once you are approved for credit, you can access your money through PayPal or your business’s bank account. You can even request the money on a physical card.

2. Bluevine‍

Bluevine is an excellent choice for a line of credit and an excellent option for those with lower credit scores. This lender provides between $5,000 and $250,000 as a line of credit, and term limits last up to 12 months. Depending on your credit score, your interest rate could range from 4.8% to over 50%. The automated application and easy approval process mean that you could have the money you need in less than one business day.

Best Small Business Lending Options for Poor Credit‍

Although Bluevine is an excellent option if you have a credit score as low as 530, there are still other options.

1. OnDeck‍

Closeup of OnDeck Website

OnDeck offers term loans starting at 9% interest rates. With this company, you only need a credit score of at least 600 and $100,000 in revenue. While you can get your cash fast through this lender, you will not save money by paying off your loan early. You are required to make weekly payments on your loan. However, OnDeck is a smart option if you plan on being a repeat customer. On future loans, you should be able to see lower interest rates and fees.

‍2. FundBox‍

FundBox is another business line of credit lender that makes application and approval incredibly simple. It can automatically connect to your bank account and accounting software to determine if you are a reasonable credit risk. However, because good credit is not needed, you will most likely see higher interest rates and worse loan terms.

Other Notable Mentions‍

There are plenty of other traditional and alternative lenders specializing in small business loans these days. While it is impossible to list all of them, you can find a couple of different customer favorites.

1. Accion‍

Although the application process with Accion is longer than many others, you are given a unique chance to prove how your business is special and how the loan money will help your business succeed. Accion specializes in smaller loans but does offer loans up to $1 million. This is an excellent option if you are a startup.

2. StreetShares‍

If you are a newer business with lower annual sales, StreetShares may be the best bet for you. It does not require a high credit score for approval, and it offers moderate interest rates and loan amounts.

Hand with a magnifier showing the word Loan

Finding the right small business loan does not have to be a complicated process. While each loan type and lending institution differs, there are so many options available today that you should have no trouble finding one that meets your qualifications.

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