Small Business Loans: Best Online Lenders
- September 1, 2017
- Posted by: Dave Rathmanner
- Category: Small Business Loans
They say that death and taxes are the only two things in life that are certain. But if you own your own business, there is one more thing that you can count on - your need of capital.
Whether you’re starting or growing your small business, money is necessary, and small business loans can help you buy equipment, pay the salaries of new employees, or just maintain your cash flow.
Small business loans allow you to grow your business more quickly, purchase equipment to get an edge on or keep pace with your competitors, fulfill big orders, or just bridge the gap between when you have to pay your suppliers and when your clients pay you.
We created this guide to help you find the best small business loan for your needs. We have researched and analyzed small business loans, along with their eligibility requirements, application process, and rates.
Compare the Best Small Business Loans
Instantly view loan options from $2,000 to $1,000,000 using our small business loan comparison tool.
Easily select your desired loan amount, age of your business, annual revenue, and personal credit score to compare small business loan rates from companies that meet your selected criteria.
4 - 8%
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at Balboa Capital's secure website
6 - 24%
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at Currency Capital's secure website
16.5 - 76.5%
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at Fundbox's secure website
17.5 - 60%
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at BlueVine's secure website
Small Business Loan Calculator
One of the best ways to figure out if a small business loan is right for you is to determine what your monthly payment will be and how much the loan will cost you over its life. Use the small business loan calculator below to see your monthly payment, total interest paid, and total loan cost.
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Small Business Loan Company Reviews
OnDeck is an online lender that was founded in 2007. They are based in New York City. OnDeck focusses on providing some of the best small business loans. Their loans amounts range from $5,000 to $500,000 with loan terms from 3 months to 36 months. OnDeck is a great solution for businesses who need cash quickly as they have a quick online or phone application that takes just 10 minutes to complete and you can often get a funding decision and receive the money in your bank account within 24 hours.
Some benefits of using OnDeck is that they offer both term loans, as well as lines of credit and has looser lending qualifications than a traditional lender or bank. In order to borrow money from OnDeck, you must personally guarantee the loan and your credit has to be at least between 500 and 600 - though most OnDeck borrowers have credit scores above 660. While your business needs to have at least $100,000 in annual revenue, OnDeck tends to lend to larger businesses with revenue of around $450,000 per year which have been in business for over seven years.
One of the biggest drawbacks of OnDeck is that they have high interest rates. They offer fixed interest rates that start at 9% and go up to 99% on their term loans and their lines of credit rates start at 14% and go up to 40%. This includes their origination fee, as well as a $20 monthly maintenance fee on lines of credit.
More specifically, there are three different possible origination fees depending on how many loans are taken out with ondeck. The first loans comes with a 2.5 to 4.0 percent origination fee. The second loan comes with a 1.25 to 3.0 percent origination fee. And the third loans may come with an origination fee ranging from 0 to 3.0 percent.
Another key drawback is that OnDeck has a more frequent repayment schedule than with other small business loans. They take money either on a daily or weekly basis from your business bank account - which might not be a good fit for your business if you have problems with cash flow. While OnDeck does not have pre-payment fees, their fee scheme means that there is little benefit to borrowers when they repay their loans early.
Kabbage is an alternative online lender that was founded in 2008 and is based in Atlanta, Georgia. They provide quick access to funding for small businesses. After filling out an easy online application that only takes a few minutes to complete, you can get between $2,000 to $150,000 in funding as soon as the same day. Kabbage offers lines of credit rather than term loans and is best for businesses that prefer a short repayment period since Kabbage only offers repayment periods of between 6 and 12 months.
Kabbage is also a great choice for those who don't have perfect credit. They work with borrowers of all credit profiles, with no minimum FICO requirement, and use alternative underwriting criteria such as the business’ accounting, banking, and e-commerce information in order to make their lending decisions. In order to apply for their small business loans, at minimum you need to connect your business checking account, but you can also add a wide variety of other data sources like a payment platform or bookkeeping software. You can also upload information from accounts like Amazon, Etsy, eBay, QuickBooks, or Square. Kabbage takes into account things like how many years you've been in business and your average monthly revenue.
One of the downsides of Kabbage is that they have relatively high fee structure – they don’t use traditional ‘interest rates.’ Their fixed fees start from 24% and go to 99% APR. Also, Kabbage’s fee structure is quite complicated. Each month you have to pay back a certain percentage of the principal, as well as a portion of the loan fee. You pay the biggest chunk within the first two months of a six-month loan and within the first six months of a twelve-month loan after taking out your money from the line of credit. While Kabbage doesn’t have pre-payment fees, there is little incentive to repay your loan quickly.
Another downside of Kabbage is that they do not have longer term loans which means that Kabbage funding is not ideal for longer-term purchases.
LendingClub was founded in 2006 and is based in San Francisco. They are a popular peer-to-peer online lender who is better known for their personal loans than their small business loans. They connect people or businesses who are looking for loans with investors who are willing to fund their loans.
LendingClub offers two financing options for small businesses: a term loan or a line of credit. With their term loans, you can borrow anywhere from $5,000 to $300,000 at a fixed interest rate of anywhere from 5.9% to 35%. Their term lengths are anywhere from 1 to 5 years and you can get your funding within as little as two days. The borrowing amount and interest rate range for their line of credit is the same, but when you take money out of the line of credit it must be repaid in up to 25 months.
LendingClub is a better choice than some of the other online lenders because their interest rates are lower than some other options out there, but they still aren’t as low as you might get from a traditional bank if you have good credit. Their requirements are more flexible than traditional banks with a minimum credit score of 600 and a requirement that you provide collateral on loans only if you borrow over $100,000.
When they do require collateral, they put a lien on your business assets instead of your personal assets like some other lenders do. But LendingClub does require that businesses be in operation for 24 months before applying for a loan and that they have at least $75,000 in annual sales.
Additionally, Lending Club charges an origination fee ranging from 1.99 to 6.99 percent. However, there is no pre-payment fee if you repay your loan early.
Some drawbacks of LendingClub is that their rates are relatively high in comparison to banks or SBA loans. They’re also not as fast at funding loans as some other online lenders.
Funding Circle was founded in 2010 and is based in San Francisco. It’s relatively unique among online lenders because it is a peer-to-peer lending platform that focuses on small businesses. They lend money by connecting investors wanting to purchase loans to qualified small businesses.
Funding Circle offers faster funding than you would get from traditional banks and slightly better terms than some other online small business lenders. Their loans take just 10 minutes to apply for online and you can get a decision within 3-5 business days and you usually receive the funding within 10 days. While their fixed interest rates are higher than traditional banks, they are lower than other alternative lenders with an APR range from 4.99% to 26.99%.
While Funding Circle doesn’t have a minimum annual revenue requirement, each lender on the platform will have different cutoffs. The average credit score of borrowers also tends to be around 700, but you need at least a score of 620 in order to qualify. The average Funding Circle borrower has been in business for around 10 years, has around 10 employees and annual revenues of over $2 million.
The average amount that Funding Circle disperses for loans is $120,000 and the average loan is for 36 months. Funding Circle provides loan amounts anywhere from $25,000 to $500,000 with terms of anywhere from 6 months to 5 years.
There are no pre-payment fees, and there is no complicated fee structure that penalizes those who repay sooner. Funding Circle charges an origination fee ranging from 0.99 to 6.99 percent. Late payment fees amount to 10 percent of the missed payment amount.
One of the downsides of Funding Circle is that it is more difficult for some small businesses to qualify for their loans since they look for small businesses that have a long track record, high annual revenues and good credit. They also require both a lien against non-titled business assets and a personal guarantee on the loan.
Fundation is an online lender that was founded in 2011 and is based in New York City. Fundation focusses on providing loans and lines of credit to established small businesses who want flexible terms. Fundation requires that you have been in business for at least one year, have at least $100,000 in revenue, and at least two other employees working for your business other than the business owner.
They also have an alternative underwriting scheme where they take a broad look at both the business and borrower before they decide whether or not to lend you money. They're interested in knowing how you intend to use the money and ask detailed questions about your company on the application in order to get a full picture of your company’s potential.
Fundation provides loans of between $20,000 and $500,000 and lines of credit between $20,000 and $100,000, and charges fixed interest rates of between 7.99% and 29.99%. Their loan terms start at 1 year and can go as high as 4 years and it usually takes them 1 to 3 days to fund your loan if you’re approved. When you borrow money from a line of credit, you have 18 months to repay it.
There are several fees to keep in mind. Term loans come with an origination fee of up to 5.00 percent, and lines of credit are hampered by a $500 closing fee and a 2.00 percent draw fee per withdrawal.
One benefit of Fundation is that after nine months they give you an opportunity to refinance your loan and potentially borrow more. They also offer no pre-payment penalties.
Some of the downsides of Fundation is that they are not a good fit for start-ups without employees or very small businesses. Another downside is that they ask for both a personal guarantee from borrowers and a lien on business collateral. They also require frequent loan repayments. Fundation deducts loan payments from your account twice per month, something which can negatively impact your company if you experience problems with cash flow. Line of credit payments are only deducted once per month.
Wells Fargo is a traditional bank that was started in 1853 as a parcel and delivery service, but which evolved to provide financial services over the years and became a bank. Wells Fargo is one of the top rated Small Business Administration lenders by both volume, as well as dollar amount. For example, in Q1 of 2016 Wells Fargo made 2,379 small business loans and distributed $436,645,500 worth of SBA loans.
Wells Fargo offers a variety of different loan amounts depending on what type of loans you're applying for. They offer business loans between $10,000 and $100,000 and have terms between 2 and 6 years. There are no prepayment fees and small business loans are unsecured. If you want a loan for a vehicle or a piece of equipment these loans can be drawn down like a line of credit rather than dispersed in in a lump sum and the vehicle or the equipment will be used as security for the loan.
Wells Fargo also offers business lines of credit of between $5,000 and $100,000 and depending on your financial situation, they can be unsecured or secured through a Wells Fargo savings or certificate of deposit account. They also offer real estate financing if you are looking to buy a piece of real estate or develop it.
When making lending decisions, Wells Fargo looks at your personal credit history and credit score, as well as your business collateral, cash flow, and resilience. They require that your business be open for at least three years and have a cash flow to expenses ratio that is at minimum $1.50 to $1.00. They also require that you have no bankruptcies tax liens, judgements or suits against your company.
Their interest rates depend on your personal and business financial and credit situations, but they tend to be much lower than many online lenders – especially their SBA loans for which the interest rates are regulated by the Small Business Administration.
Some drawbacks of Wells Fargo are that it can take a long time to get a response and it can be very difficult to qualify for a loan if you don’t have pristine credit or a long company track record.
Bank of America
The Bank of America was originally started as the Bank of Italy in San Francisco in 1904. The bank grew and renamed itself and has become the second largest bank in the United States and one of the top lenders to small businesses.
The Bank of America offers a number of different kinds of financing products for small businesses. They offer business lines of credit which start at $10,000 and go over $100,000. These can be either unsecured or secured via liens on business assets or certificates of deposit depending on your financial situation and credit. Business loans start at a minimum of $25,000, have no stated maximum, and are secured in the same ways. The rates for both types of loans are variable and are connected to the prime rate.
The Bank of America also offers loans for commercial real estate and equipment financing, vehicle loan, and equipment loans. These loans are often secured and start at minimums of $25,000 or $50,000 depending on the type of loan. The maximums also depend on what you’re borrowing for. For example, if you’re borrowing to finance commercial real estate the maximum is $1 million for a line of credit and $2 million for a term loan. The term lengths depend on the type of loan you take out. Commercial real estate loans tend to have longer terms while equipment loans are generally no more than 7 years.
Bank of America is a Small Business Administration preferred lender which means that they provide a significant amount of SBA guaranteed loans. They primarily offer SBA 7(a) or SBA 504 loans, but they also offer a very limited number of SBA Express loans.
In order to qualify for a Bank of America loan, you have to have been in business for two years and have an active Bank of America account. For non-SBA loans, you’ll usually know within a week whether you've been approved. SBA loans tend to take longer. Some of the benefits of going with a traditional bank is that the interest rates will generally be much lower than some online competitors - especially for SBA loans. In addition, you will be able to borrow more than you might otherwise and you will have more options in regards to term lengths.
The downsides are that it could be far more difficult to qualify, and banks tend to require much higher minimum credit scores and a lot more scrutiny of your business.
Chase Bank is one of America's oldest banks. In 2000, Chase Manhattan merge with J.P. Morgan to become J.P. Morgan Chase and it's now one of the 10 largest banks in the world and one of the biggest small business lenders. Chase is one of the top three SBA lenders and has a number of different financing options. One of the benefits of Chase Bank in comparison to other traditional banks is that they have the capacity to make loans quickly.
Chase Bank offers a number of different types of loans including SBA loans where you can get between $10,000 and $5 million in SBA 7(a) loans. Chase also offers SBA Express loans of up to $350,000 and SBA 504 loan program with no stated maximum.
In addition to their SBA loans, they also offer regular loans which are less competitive and are easier to qualify for. Their terms are generally around seven years for a typical loan, 10 years if you're using the money for an equipment purchase, and 25 years if you're using the cash to buy real estate. These loans have both fixed and variable interest rates for you to choose from. The downside of their non-SBA loans is that they tend to have higher interest rates and require a down payment. These loans can be for any amount from $5,000 to $5 million with terms of between 12 to 84 months.
Chase also offers business lines of credit of anywhere from $10,000 to $500,000. They also have lines of credit of over $500,000 for larger businesses, but the terms are shorter – just 12 to 24 months with a renewal option.
One of the benefits of borrowing from Chase is that you can access large amounts of money and you can do so at a relatively quick turnaround for a traditional bank. You can also get SBA-backed loans which generally take longer to administer (unless you’re borrowing an SBA Express loan), but which have better terms and rates.
The drawbacks of Chase’s non-SBA loans are that it can also take longer to qualify and get a decision than you would with an online lender.
Fundera was started in 2013 and is based in New York City. Rather than lending money themselves, Fundera is a matchmaking service that matches you with funders who are willing to lend you. Fundara does not partner with a large number of lenders, but rather chooses a select few that they believe are good partners. Their lenders provide a range of different products including loans, business cash advances, SBA loans, equipment loans, lines of credit, invoice financing, short-term loans, medium-term loans, and other types of lending products.
To be eligible, all you have to do is set up an account and provide some information about your business and then Fundera will help you compare offers from their funders. There are no specific qualifications in order to apply for a loan with Fundera, but each different lender has their own requirements around how much revenue they expect your business to have, your credit score, how long you've been in business, and other criteria.
Fundera is free to use and the Fundera application is relatively simple and takes a short period of time to complete. As soon as your application is submitted, you will be able to see offers from lenders. These are just pre-approvals so you will have to finish your application in order to see the final terms you’ll qualify for with the lender you choose.
There are some great things about Fundera, including that it is easy to use, and you get a number of different offers all in one place. This saves you time and makes it easier to compare different offers.
Some downsides include the fact that they have relatively few partners compared to other business lending matchmakers and that some of their partners have high interest rates with very large fees.
Bluevine is an online lender that provides lines of credits and invoice factoring for small businesses. They were started in 2013 and are based in Redwood City, California. They offer lines of credit of up to as much as $150,000 with repayments expected over 6 to 12 months. They also offer something known as invoice factoring. Essentially, BlueVine will give you an immediate advance on your invoices so you don’t have to wait for your customers to pay you. They offer invoice factoring credit lines of up to $2.5 million and focus on invoices which are due in 90 days or less.
One benefits of their lines of credit and invoice factoring is that they don’t charge maintenance fees, unused credit fees, or pre-payment fees. Their lines of credit charge as low as 4.8% and you can access the funds at the click of a button online.
You can get funding within 24 hours and then draw on those funds whenever you need them. As you repay your line of credit, the available credit replenishes -- allowing you to use it again.
One of the benefits of their invoice factoring process is that it syncs with your own accounting software, making borrowing seamless. The money is also available immediately unlike other invoice factoring services that distribute cash once a month. The fee for invoice factoring is generally 15% to 10% of the invoice and a $15 wire fee. You also don’t need to fill out a lot of paper work in order to get started and they make a decision within 24 hours.
For invoice factoring, they look for a credit score above 530 and for their lines of credit, they look for credit scores above 600.
While invoice factoring might seem like a great solution to access fast money, it charges a very high interest rate since they take 10% to 15% of your invoice when you borrow that money for only 90 days. Over a year, that would add up to a 40% to 60% APR. You are much better off getting a line of credit from BlueVine or another lender than using their invoice factoring. The one benefit of invoice factoring is that it does allow you to access more money than a loan.
Fundbox is an online small business lender that was founded in 2012 and is headquartered in San Francisco, California. They use alternative underwriting criteria in order to decide whether to lend to your business. Rather than requiring that you use your personal credit, they look at your business health and set your interest rate and decide how much to lend to you based on that. They offer a line of credit with a unique repayment arrangement.
Rather than pay an interest rate, you pay a weekly fee on the money that you borrow. They allow you to borrow for term lengths of between 12 weeks and 24 weeks. They charge as low as 4.66% over 12 week terms and 8.99% over 24 week terms. Once you repay part of your line of credit, that money can be borrowed again.
Fundbox’s online application is quick and easy. If you’re approved, they can transfer you funds as soon as the next business day. Fundbox also connects with your accounting software in order to more quickly approve you for a loan, making the application process much easier and allowing them to easily judge the health of your company in order to make a funding decision.
Fundbox does not charge origination, maintenance, or inactivity fees. You only pay fees on as much as you borrow. One of the benefits for Fundbox is that, unlike other lenders with unique repayment terms, they don’t frontload their fees so that repaying your loan early doesn’t make sense. Instead, they divide the fees evenly across your term length which means you can save if you pay off the money you borrowed early.
While Fundbox has some benefits like the fact that they don’t frontload their repayment fees, and the fact that they have few fees, they could be more expensive than other types of business financing you might qualify for. While their rates sound low, you have to remember that those rates are over just 12 weeks or 24 weeks, whereas the APR of other lenders is averaged over a whole year. So, that 4.66% fee is actually 18.64% over a year and that 8.99% fee is actually 19.47% over a year. Still, Fundbox might be a cheaper solution for a business owner with bad credit but a thriving business.
Credibility Capital is an online small business lender that was founded in 2013 and is based in New York City. Credibility Capital aims to work with high quality small businesses and lends in all states except Nevada, North Dakota, South Dakota, and Vermont.
They offer small business loans in the amounts of $10,000 to $350,000 and offer term lengths of 1, 2, and 3 years. Their rates start as low as 7.99% and go as high as 20%. They have no prepayment fees, but they do charge a 3% to 5% origination fee bringing the loan’s APR to between 10% and 25%.
They require that the businesses that they lend to have been in business for at least 18 months. They also require that the business owner has strong personal credit and hasn’t had a commercial or personal bankruptcy in the last 5 years. They prefer your credit score to be over 640 and require that you provide a personal guarantee and a lien in order to get a loan.
Applying for a Credibility Capital loan is fairly straightforward and simple. You provide them with some basic information about yourself and your business and one of their loan specialists will contact you to complete your application. You can generally get your funding in as little as a week.
While Credibility Capital offers access to more capital than many other small business lenders, it comes at a price. While their rates are reasonable, Credibility Capital charges a one-time origination fee ranging from 3 to 5 percent depending on loan size. However, there is no prepayment penalty.
If you have great credit and a strong business, you might be able to get a loan for less with another online lender. Also, if your business is newer or you don’t a have great personal credit, then you’re less likely to qualify for a loan with Credibility Capital. The fact that they do a soft credit check to pre-qualify you, however, means that you can’t lose anything by applying for a quick online quote.
Small Business Loans FAQs
What Are Typical Qualification Requirements for Small Business Loans?
The qualification requirements necessary to get a small business loan depend on the type of lender. When it comes to traditional banks and credit unions, expect your loan application to take longer to fill out than with online small business lenders and for it to be more difficult to get a loan. One of the benefits of using a traditional bank or credit union is that you’re more likely to have access to Small Business Administration (SBA) loans, but they have higher approval criteria on both their SBA and non-SBA loans.
Ask the Expert: Zachary Lezberg, Founder of Small Business Expo
What are some typical qualification requirements for small business
In my experience with exhibitors and sponsors that provide typical business loans, there is a wide range of loans you can receive with differing requirements. Some lenders require a personal guarantee. This means that you personally are on the hook to pay back that loan in full. Others simply require bank references, financial statements (two to three years), and other documents.
Usually, lenders prefer to see businesses that have a track record of growth - preferably being in business for at least two years with financials to support. Further, business revenue will typically come into play depending on the size of the loan they are requesting, while the number of employees is typically just part of their operating costs, which is illustrated in the financials.
Do you have any other small business tips to keep in mind?
Be honest! Don't fudge your numbers. Lenders are smart and see right through it. Be fiscally responsible. Apply for lending when you don't need it. It's always great to have in your back pocket if you ever need the funds for growth - the best time to apply for a loan is when you are doing well and don't need the money!
Most bank and credit unions will expect you to have excellent credit and will only lend to you if your credit is above 600 or 700. Online small business lenders are far more likely to lend to people who have personal credit scores that are below 600. Even online, most lenders expect you to have a credit score of at least 500.
Many lenders have requirements around how long you have been in business with the lowest cutoff often being 2 years. That excludes many brand-new businesses and start-ups as lenders are wary of lending to companies without a track record.
Other small business lenders have requirements about how much revenue your company earns annually that can be as low as $100,000 per year or as high as $2 million or more. Traditional banks are more likely to require a full business plan, but many online lenders also require a business plan to get your loan funded.
Almost all small business lenders require that the business owner personally guarantees a loan unless you have a very strong business credit history, but some will require a lien against your business instead or in addition to your personal guarantee. With SBA loans, everyone who owns at least 20% of your company has to provide a personal guarantee.
Number of Employees
Some small business lenders prefer to lend to companies that have a certain minimum number of employees. While this can be as few as two additional employees, it depends on the lender.
How Do Small Business Loan Applications Work?
To apply for a small business loan, you need to have your personal information and your business information on hand. You might need to provide access to your accounting software if you're applying with an online lender like Kabbage.
You may also need to provide a copy of your business license, personal and business bank statements, balance and income statements, personal and business tax returns, a resume of your business experience, financial projections for your company, your drivers license, your business license, and your business plan.
Often with traditional banks you have to fill out a written application, although some allow you to apply online. For some traditional banks and credit unions you’ll also have to go in person and meet with a loan officer.
When you apply with an online small business lender, the application is often shorter and easier to complete and they require less information, fewer documents, and it takes less time in order to approve your small business loan. Any documents can be scanned and uploaded. You can often be approved and get the money within a few days rather than the weeks it can take to get approved with a traditional lender.
How to Improve Your Chances of Approval?
There are a lot of things that you can do in order to improve your chances of getting approved for small business loans. The most important thing is to improve your personal credit score since many lenders use it to decide whether or not to lend to you and they also set your interest rate based on your score.
Ask the Expert: Deborah Sweeney, CEO of MyCorporation
Do you have any advice for small business owners that are looking to improve their chances of getting approved for a small business loan?
A clear business plan certainly increases chances for approval. Lenders are not looking for certainty, but a well-thought out strategy is critical. Be real and drive home the current and future value of your business without seeming like you are naively presenting only the positive aspects of your business model.
Also, having taken out credit and paid that loan back is important. Having no debt is not necessarily the answer. Rather, having debt and showing a good ability to make those payments is critical to success as a small business owner and also to demonstrate creditworthiness to those looking to give a loan. It's important to keep in mind that lenders WANT to lend money. They want to be involved with business growth, if not for the long-term relationship, but also for the interest and revenue from multiple accounts, etc.
Any other tips on how to build and preserve a business?
Listen. As you grow in business, it is more important to listen to customer feedback and the market than to simply invest more in marketing to push what you think the customers want.
Also, work hard and show that to your team. When leadership is committed and hardworking, it makes all the difference. Finally, focus on ROI. Decide what is working and what is not, and the best way to do that is to have a good sense of your ROI on expenditures.
Building your business credit is another way to improve your chances of approval. You can do this by taking out credit in your business’ name right after you start your business. While you’ll have to co-sign for a business credit card, having one will start the process of establishing your business credit history. You should also start by taking out small loans and building a track record of paying them back.
Create a Clear Business Plan
Another way to improve your chances of qualifying for small business loans is to have a clear business plan and all of your historic and projected financial information available to share with a potential lender. This makes you look professional and allows the lender to better understand your business’ needs and potential.
A good business plan will include things like a description of your company, biographies of the management team, an analysis of your industry, a description of the service or product that you provide, a plan for your operations, your promotional and marketing strategy, and a SWOT analysis of your company’s strengths, weaknesses, opportunities, and threats.
Another way to improve your chances of getting approved is to shop around for different small business loans. Just because a traditional bank or credit union might turn you down for a loan doesn't mean there are no lenders willing to lend you. While online small business lenders are great options, remember that you’ll have to pay a premium in the form of higher interest rates if you have bad credit or if your company is smaller, newer, or for any other reason considered a larger risk.
Are Small Business Administration Loans a Good Option?
Small businesses often need money to finance their growth, but the high rates of business failure makes lending to small businesses a risky proposition for banks and other lenders. That often translates into high interest rates and fewer small business loans. To help make lending easier and more affordable, the Small Business Administration (SBA) started backing loans.
SBA loans are business loans that are partially backed by the SBA in order to help reduce lending costs to businesses. That means that the SBA insures between 50% and 85% of the total loan amount on behalf of lenders that give them out. For that reason, there is less risk to banks and so they're able to provide funds to small businesses at lower interest-rates and with better terms.
Ask the Expert: Steven Cohen, President of the Excelsior Growth Fund
What are your thoughts on small business administration loans?
SBA loans are a great way for businesses that are starting or expanding to access affordable loans. SBA microloans up to $50,000 can provide support for almost any business purpose. Larger SBA loans up to $5.5 million are also available and come with the support of a government guarantee, which makes them perfect for small businesses that might have difficulty getting more traditional financing.
The SBA has a great tool called Lender Match that makes it easy to find a SBA lender in your area.
Do you have any other small business tips to remember?
At Excelsior Growth Fund, we always encourage small business owners to understand the true cost of financing and what the APR, or annual percentage rate, will be on a loan before borrowing. Today's small business owner has access to hundreds of loan options that range from local banks to online lenders. Always read the fine print and ensure that you can handle the monthly (or daily) payment terms and that the APR is not predatory.
Types of SBA Loans
There are three types of SBA loans. If you’re borrowing for working capital, you will likely apply for a SBA 7(a) loan and if you’re borrowing to finance the purchase of a fixed asset like real estate or machinery, you will likely apply for an SBA 504 loan. There also an option for a faster SBA loan which is called SBA Express. This loan was designed to help businesses who need money fast. Lenders try to respond to SBA Express loan applications within 36 hours. The maximum that you can borrow is $350,000 and the SBA will only guarantee 50% of that amount so lenders are more rigorous with approving these loans.
Qualifying for SBA Loans
The one challenge small businesses often have with these loans is that they can be very difficult to qualify for since they have higher qualification standards than other small business loans and they can take longer to get approved for. Despite this, SBA loans are one of the best ways to fund your company's growth since they will offer you quite low rates in comparison to other options.
SBA Loan Details
While the lenders decide on the final interest rate on an SBA loan, they have to stick to the SBA formula which allows banks to charge the prime rate plus an additional markup. If your loan is more than $50,000 with a term of less than seven years, the rate is based on the prime rate with a maximum additional 2.25% markup. If you're borrowing more than $50,000 and your term is seven years or more, the maximum you’ll be charged in addition to the prime rate is 2.75%. This APR has to include all loan fees in addition to the interest rate.
When you are borrowing money to use as working capital, you get up to seven years to pay it back, if you buy new equipment with the funds, you have up to 10 years to repay them, and if you buy real estate you have up to 25 years for your repayment. SBA loans require personal guarantees from every person who is an owner in the business that has a 20% stake or more.
Where Should You Look for an SBA Loan?
SBA loans tend to be offered by larger institutions like traditional banks as they can afford to lend money at lower interest rates. They also are more likely to have the infrastructure necessary to facilitate the more onerous SBA loan application and approval process.
Credit unions are also a great place to go when looking for a SBA loan. One of the benefits of borrowing from a credit union is that they are non-profit organizations. The purpose of credit unions is to provide financial services to their members. For that reason, they are not motivated by making the highest return on investment possible like banks are, so they are more likely to offer lower interest rates on SBA loans, more personalized customer service, and more flexible criteria for approving loans. Another benefit of credit unions is that they also tend to provide a lot of business education programs for small businesses.
There are a few online lenders who also offer SBA loans, but they don’t make the majority of SBA loans and many online lenders don’t have SBA loan options. One popular online option for finding an SBA lender is SmartBiz, but they don’t offer the loans themselves. Instead, they connect applicants with a marketplace of banks who provide SBA loans. The benefit of using their service is that they match you with an SBA lender who is the most likely to approve your SBA loan application.
SBA Loan Application Process
The application is quite exhaustive and asks questions about your experience operating a business. You also have to explain in detail what the money will be used for and you require a detailed business plan. You will be required to submit past tax returns and your credit information. You will likely have to put some kind of collateral down for the loan in order to get a better interest rate such as your home or business assets.
Additional Opportunities for Small Business Loans
Opportunities for Veterans
There are special programs to help veterans get small business financing. These programs offer online portals, help accessing SBA programs, and specific SBA loan programs as well. You can view these options on our Small Business Loans for Veterans page.
Opportunities for Women
Women small business owners also have access to special programs for funding. The SBA is working to help promote its loan program to women entrepreneurs, while helping them qualify for a large number of loans. To view their program, as well as additional options, check out our Small Business Loans for Women page.
Opportunities for Start-Ups
Unfortunately, many start-ups have a difficult time accessing traditional small business loans. One of the key reasons is that they don’t have a track record of earning revenue, and often have little cash flow. That makes lending to them a risk in the eyes of lenders. For that reason, most lenders require a business to have been operating for a specific amount of time or to be bringing in a minimum amount of revenue before they’re willing to fund a loan for the business. These rules exclude most start-ups.
Online lenders and credit unions are better sources for start-ups than traditional banks since they’re more likely to have flexible qualifications and offer smaller loan amounts.