Small business owners often need an infusion of working capital, especially to upgrade equipment or pay for expensive repairs.
There are many options available for small business loans, but there can also be many hoops to jump through, especially with traditional financing options. Loans from the U.S. Small Business Administration can take 30-90 days to finalize and fund if you qualify. Business owners who need cash quickly have many different financing options, and some loans can be completed and funded in under 24 hours.
We’ll show you how to get the working capital you need to keep your small business running smoothly.
How to Choose the Right Business Loan
Choosing the best business loan will look different from one business to the next. You first need to determine how you plan to use the funds. The requirements for obtaining a short-term cash infusion aren’t the same as for a multi-million acquisition or purchasing a new building for business expansion.
Once you determine your business’s most pressing needs for cash, you can pursue a range of different financing options:
SBA Loan
There are three main types of loans available from the U.S. Small Business Administration.
Pros & Cons of SBA Loans
Pros
- SBA funding is common for bigger small businesses with proven longevity and revenues.
- Terms and fees are often more competitive than alternative funding options, and repayment/prepayment terms are more flexible.
Cons
- Businesses must be under a certain threshold in annual revenues or employees to qualify for a SBA loan.
- Loan requirements vary. For instance, a retail bakery must have fewer than 500 employees, while a flooring installation contractor must have less than $19 million in annual revenues.
- These loans also can have a lengthy approval process, which may not help small business owners who need cash quickly.
Microlending and Peer-to-Peer Financing
Business owners who don’t qualify for traditional financing options often turn to microlenders for an infusion of business capital.
Microlending is often offered by private investors seeking higher returns. These lenders typically operate through peer-to-peer lending sites.
Pros & Cons of Microlending and Peer-to-Peer Loans
Pros
- Loans are available for entrepreneurs and startups that can’t obtain traditional bank financing.
- Loan amounts can be much smaller than other financing options, and they usually don’t have to be guaranteed with personal collateral.
Cons
- Microloans tend to have higher interest rates than other sources of financing.
- Loan repayment terms are usually compressed, which increases payments.
- Loan limits are usually less than $50,000.
Business Line of Credit
Think of a business line of credit like a credit card for your business. It’s less of a loan and more of a line of credit you can draw upon for any short-term funding needs, such as covering payroll or purchasing new supplies and inventory.
Pros
- An unsecured business line of credit has a variable interest rate, usually lower than credit card rates.
- Credit limits may range from $10,000 to $250,000.
- Business owners can use only as much of their line of credit as they need, regardless of credit limits.
Cons
- Some business owners may be required to complete a blanket lien to secure their line of credit, which puts their assets at extreme risk in the event of a default.
- With high credit limits, business owners can easily overspend and be unable to meet repayment demands. The approval process can be burdensome and lengthy.
Personal Loans for Small Business
Of all the forms of business financing mentioned here, personal loans occupy a unique space.
Business owners won’t need to show detailed financial statements or take a deep dive into their business’ revenue and cash position. Instead, the main factor that’s usually necessary to obtain a personal loan is an excellent personal credit score.
Qualified borrowers with exceptional FICO scores of 800 or above will qualify for the most money at the lowest interest rates. Those with very good scores – 740-799 – will also receive favorable loan terms.
Pros
- Personal loans usually don’t require collateral.
- Borrowers can receive same-day funding or within 24 hours from certain lenders.
- Qualification standards are much easier and simpler than those for traditional avenues of business financing.
Cons
- Less-qualified borrowers with lower credit scores will typically receive offers with lower loan limits and higher interest rates.
- Borrowers risk damaging their personal credit scores if they cannot meet loan remittance requirements.
- Loan limits may not be enough to meet your business needs.
What Can You Use a Business Loan For?
There are many ways to use a small business loan, but your use depends on the type of loan you receive.
With a personal loan, you can use the funds as you see fit – there is no oversight or regulation once your loan is funded. SBA loans, on the other hand, are limited to specific uses.
Here are some of the many ways you can use a small business loan:
Purchasing new equipment, inventory, or supplies (personal loan, business line of credit, SBA 7(a) and SBA microloan)
- Purchasing a new facility to house your business (SBA 504)
- Cover payroll and operating expenses (personal loan and others)
- Marketing and advertising expenses (personal loan and SBA)
- Tenant improvements (SBA 504 and others)
- Acquisitions, expansions, and startup costs
Find the Best Rates for Your Personal Loan Business Solution
The rate you receive depends on many factors, including your credit score and income. The smartest way to know if you’re getting the best loan rate is to compare offers from competing lenders.
Where to Find Business Loans
Perhaps the “best” place to get a business loan is the financial institution where you can meet qualification requirements and your business needs.
That scenario will look much differently from one business owner to the next.
SBA Loan
Stable businesses with a long history, formidable management, and strong balance sheets may qualify for Small Business Administration loans. In fiscal year 2023, the SBA dispersed over $27.5 billion in 7(a) funds, $6.4 billion in 504 loans, and $87 million in microlending to small business owners.
With an SBA loan, you’ll work with a traditional lender, such as a regional or national bank, to complete loan paperwork and receive funding if your business qualifies.
Personal Loan for Business
There are many different avenues to obtain a personal loan, including traditional banks and credit unions, credit card companies, and online financial institutions. The latter may offer better terms due to lower overhead costs, but that depends on the borrower’s credit score.
Personal loan business solutions include Prosper, Best Egg, SoFi, and Avant.
Business Line of Credit
Banks and credit unions are common avenues for obtaining a business line of credit. Online lenders, meanwhile, may be more willing to work with borrowers with less-than-stellar credit.
Microlending
Microlending platforms include Upstart, LiftFund, LendingTree, Ascendus, and Kiva, to name just a few.
How to Qualify for a Business Loan
Qualification standards vary depending on which funding option you pursue.
With a personal loan, you’ll only need a strong credit history, though some lenders may also examine your income and debt-to-income ratio.
For SBA financing, expect to put your business under a microscope. Some of the key business metrics a lender will look closely at include:
- Number of employees
- Annual revenues
- Cash flow, balance sheets, and profit and loss statements
- Years in operation
- Length remaining on commercial lease
- Potential collateral
- Sector you operate in
- Business plan
Lenders will scrutinize every minute detail of those categories, which are just the business side of qualification requirements. You’ll also need to consider your credit score, tax returns, and years of relevant business experience.
5 Steps for Getting a Business Loan
Follow these five steps, and you’ll be on your way to obtaining the financing your business requires.
1. Decide How the Funds Will Be Used
The many different funding options mentioned above have different qualification requirements. Figuring out how you plan to use the funds is the first step in determining what type of funding source is your best option.
2. Determine Your Eligibility
Aside from a personal loan for business, you’ll likely have to provide your business’s financial statements, credit score, and time in operation, and you may have to pledge collateral to back the loan.
3. Shop for the Best Offer
Traditional SBA funding is lengthy and time-consuming, so you may want to work with your business’s current banking partner. You’ll want to compare interest rates, loan or line of credit limits, and qualification standards for other funding avenues.
4. Get Your Paperwork in Order
Lenders will examine your business thoroughly. You’ll want to have important documents such as profit and loss statements, financial statements, tax returns, articles of incorporation, business plans, lease documents, and your business plan at the ready.
5. Apply for Your Loan
Personal loans usually can be completed online (and funding will be delivered directly to your checking account). Other types of business loans require you to complete a lengthy application through a preferred lender.
Lack of funds and working capital is the primary reason most small businesses fail. A business loan can give your company the cash it needs to cover necessary expenses and keep the doors open.
