Compare Types of Small Business Loans Financing Options
|Type of Small Business Loan||Good For||Estimated APR||Required Credit Score|
|SBA Loans||Low-interest working capital||Varies depending on type of SBA Loan||140 FICO SBSS|
*some lenders may require higher
|Traditional Bank Loans||Versatile loans for a variety of purposes||4-13%||680 FICO|
|Merchant Cash Advance||Quick access to capital if you don’t have great credit||10-350%||500 FICO|
*sometimes no score is required
|Business Lines of Credit||Access to funds when you need them||10-90%||500 FICO|
|Microloans||Businesses with thin credit profiles looking for small loan amounts||12-18%||Varies|
|Cash Flow Loans||Quick access to cash without great credit||11.0-90%||600 FICO|
|Alternative Online Loans||Fast turnaround time with less required documentation||7-30%||600 FICO|
|Business Credit Cards||Earning rewards to use on travel or cash back||15-25%||700 FICO|
|Equity Crowdfunding||Capital without having to repay; experienced investors can act as mentors||n/a; investors get equity||n/a|
|Reward Crowdfunding||Testing out your idea; capital you don’t have to repay||Crowdfunding platform: 0-5%|
Payment processing: 3%+$.30 per transaction
|Equipment Financing||Capital to buy equipment that doesn’t require asset (other than equipment)||2-20%||650|
|Invoice Financing||Leveraging future accounts receivable||15-35%||n/a|
|Trade Credit||Building credit||5-15%||May or may not be applicable|
What is a Small Business Loan?
A small business loan provides much-needed working capital that business owners can use for a variety of functions, including expanding the business, hiring staff, purchasing equipment, or keeping cash flowing. Sometimes lenders require collateral to guarantee small business loans. Typically, the borrower pays back the loan in installments over a designated period of time.
COVID-19’s Impact on Small Business Loans PPP & EIDL
With so many businesses closed because of COVID-19 stay-at-home orders, many small business owners are struggling with cash flow. They aren’t looking for business financing to grow or expand; they need funds to stay afloat.
The SBA currently has two loan programs to assist businesses negatively impacted by COVID-19: the Paycheck Protection Program and Economic Injury Disaster Loan. Online lenders and traditional banks are accepting loan applications for PPP, and the SBA is processing loans for EIDL.
Both these loans have low interest rates, and some or all of the PPP loans may be forgiven if you meet certain criteria.
How to Qualify for a Small Business Loan
The qualifications for these different types of small business financing will vary. With a bank, you may be asked to provide financial statements with your small business loan application. For a merchant cash advance, you’ll likely need to provide proof of your annual revenue.
One thing to pay attention to is any required credit score. Even one business credit card to the next may have different requirements, so read through that lender’s site to see if you qualify. If you don’t know your personal or business credit score, download your credit report to find it. (get your free business credit scores.)
Some lenders will also require collateral, such as upfront cash or other assets, so know whether you have assets valuable enough to qualify for those loans. And some lenders want you to have been in business for a certain amount of time, so make sure you meet those requirements.
How to Choose the Best Business Loan for Your Small Business
There are several factors that will guide you to choosing the right small business loan:
- Your qualifications (credit score, time in business, revenues, etc.)
- How fast you need the money
- How much you need the money
- The amount of interest you are willing to pay
The further out you plan for your financing needs, the better the deal you can get because you won’t be desperate to get the funds immediately. If you can wait a few months, you may qualify for an SBA loan at a great rate. On the other hand, if you need cash today, you may have to pay for the privilege of getting an alternative online loan with a higher interest rate.
Don’t just look at one type of loan; weigh your financing options with different lending products from different lenders before making a decision.
Frequently Asked Questions
Can I get a small business loan with bad credit?
Absolutely. Because there’s such a wide variety of business financing products, there’s one for every business and personal credit score, even if you’ve got poor credit or no credit history. Start by pulling your credit report to know where you stand. If you have time to build your credit, it may be worth it to wait to apply for financing. Otherwise, look at merchant cash advances and cash flow loans.
How do you get a small business loan?
Start by knowing what you want to use it for and then looking at what you qualify for. Spend time analyzing your cash flow and annual revenue, as well as your credit scores to understand the kinds of rates and repayment term you might qualify for. Then go through this article to match with the right option.
What is a good credit score for a small business?
As I said before: there’s a small business financing tool for every credit score, so the answer really varies. In general, you’ll qualify for better rates the better your score is. A FICO score of 600-700 is a good place to start.
Are small business loans a good idea?
Any kind of financing can be a risk. You need to be sure you will be able to repay the funds you receive in a timely manner. Falling behind on your payment can negatively impact your credit, which may make it more difficult to secure financing in the future. However, small business loans can free up cash flow and help you build your credit if used responsibly.
Nav’s Verdict: Small Business Loans
Today’s business owners have more financing options than ever before, with online lenders competing with traditional loans to get your business. Take the decision-making process seriously: having working capital can help your business, but only if you use the funds wisely and have a plan for paying back the loan.