How to Compare Small Business Loan Providers

In this article:

• Do you need a small business loan?
• Types of small business lenders
• Types of loans
• Choosing the right loan provider

Small business financing can help small business owners turn their visions into realities. In this article, we walk through the reasons for getting a business loan, types of financing, and how to choose the right lender.

Do you need a small business loan?

Growing a small business requires an investment of effort, time, and money, but finding a balance between covering operational expenses and having the business funding available to invest in your business’s growth can be tricky—especially when you’re trying to make a profit. A small business loan may be the solution to covering daily costs and funding growth.

Here are the top six reasons small business owners seek financing options:

Inventory

Inventory is a necessary expense for many small businesses. Business models that involve sales as the main source of revenue must have inventory to sell before they can make money. Once a business is up and running, the ideal situation will involve using a percentage of sales revenues to restock inventory. However, there are some situations where inventory may require additional business financing.

Initial inventory

New business owners and startup entrepreneurs need to purchase initial inventory for their businesses. Using business financing to stock the new business’s shelves is often a necessary step towards turning a profit.

Seasonal inventory

Some businesses operate in industries that have natural seasonal fluctuations. Examples include swimwear retailers, holiday decorators, and costume shops. In order to have a profitable year, business owners may use short-term loans to stock up for the busy season.

Bulk inventory

Retailers can save money on inventory when they purchase in bulk and take advantage of time-sensitive opportunities. If a great deal comes along on a large supply of inventory, business financing can make the purchase possible.

Cash Flow

Cash flow is net income generated after all operating expenses, disbursements, financing costs, and taxes are deducted. Cash flow is needed to replenish inventory, pay utility bills, cover payroll, make mortgage payments, and meet other business needs. Business owners sometimes experience cash flow fluctuations due to the age of their business, the season, or other factors. A small business loan can be the solution to unsteady cash flows or can facilitate the growth necessary to increase cash flows.

Equipment

All businesses need equipment in one capacity or another. For some entrepreneurs, equipment includes computers, software, or GPS equipment. Other businesses may require larger equipment, like machinery, commercial ovens, or vehicles. Whether it’s an initial purchase made to get the small business up and running or funds needed to repair or replace existing pieces, equipment can be very expensive. An equipment loan or other financing option can provide the funds needed without causing a disruption in business.

Marketing

Launching a new advertising campaign is a strategy used to grow small businesses. Marketing brings in new customers by building brand awareness for the company. Marketing may mean running ads on social media, promoting special products through email blasts, partnering with influencers, or using a lead magnet to generate new customers. Effective advertising can directly impact sales, but it requires funds. Small business loans can help entrepreneurs launch the advertising campaigns they need to grow.

Expansion

Reasons to consider expansion often stem from good news. The business may be growing faster than expected, new opportunities may arise in different geographical locations, or the business plan may have evolved over time. Using business financing to facilitate expansion can allow business owners to purchase new real estate, complete building renovations, lease new office space, or increase the number of employees.

Refinancing

New business financing options can give small business owners the opportunity to refinance other business debt. Refinancing means paying off old loans with new loans that have better repayment terms. Refinancing other small business loans may lower monthly payments, extend the term of the loan, free up equity, or lower interest rates and loan fees.

Types of small business lenders

If you’ve decided that your small business may benefit from a loan, you may be wondering where the best place to get a small business loan is. There are two main sources of small business financing: online lenders and traditional banks.

Online lenders

Alternative lenders, also called online lenders, offer borrowers multiple small business financing options and personal loans. Online lenders offer borrowers a fast and convenient financing option up to $5 million. Annual percentage rates (APR) that accompany loans through an alternative lender are often higher than the rates offered by traditional lenders, but these lenders also offer more flexible repayment terms and work with clients having a wider range of creditworthiness.

Traditional lenders

Traditional lenders include banks, financial institutions, and credit unions. This type of lender often has a brick-and-mortar location and offers in-person appointments to discuss bank loan options and complete the loan application. Many traditional lenders offer multiple financial services like business bank accounts, certificates of deposits (CDs), business credit cards, and small business loans.

Banks and credit unions appeal to many borrowers because they provide brand name recognition and lower interest rates and origination fees than competitors but getting approved for a small business loan through a traditional lender can be tough. Banks generally require that borrowers have good business credit history and have been operating for a defined period of time. The amount of time for an approved loan to get funded also takes longer when working with traditional lenders.

Types of loans

There are many different types of small business loans, but you don’t have to choose one before reaching out to a lender. Familiarize yourself with the different types of loans available so that you can be sure to work with a lender that can offers the right type of financing, but don’t feel rushed to select one. Your lender can discuss the various funding options with you after you’ve applied for financing.

Term loan

Business term loans are a traditional source of small business financing where the borrower is approved for a maximum loan amount and then receives a lump sum payment upfront. Term loans can be unsecured, where the lender is not requiring any collateral or personal guarantee to secure the loan, or secured, which requires that the borrower provide an asset, like real estate or equipment, to secure the loan. Term loans are repaid over the length of the loan with monthly payments of interest and principal according to the schedule listed in the repayment terms.

Term loans work well for borrowers that need to make a large purchase or supplement working capital. Advantages of term loans include predictable repayment terms and low-interest rates. The interest on term loans can be fixed where it remains the same over the life of the loan, or a variable interest rate where it is determined by the market rate.  Another benefit of term loans is that most allow borrowers to pay the balance of the debt off early without prepayment penalties.

SBA loan

SBA loans are issued by traditional or online lenders and are partially guaranteed by the U.S. Small Business Administration. Since they are backed by a government program, SBA loans are lower risk for lenders and offer lower down payments and interest rates than other financing options. There are many SBA loan programs, each of which has a different maximum loan amount, eligibility requirements, and specified purpose of the funds. Some common types of SBA loan programs include:

Lines of credit provide revolving credit to small business owners. Business lines of credit work like a business credit card, in that a borrower is approved for a maximum credit limit which they can draw on whenever funds are needed. Monthly payments are determined by the amount of funds currently withdrawn, and when the funds are repaid, the borrower can withdraw from the credit line again. A business line of credit can be used to cover cash flow fluctuations, make large purchases, or accommodate unexpected expenses. This type of financing is a great tool for new business owners to build a business credit history, which can help them secure larger financing in the future.

Other loans

Term loans, SBA loans, and lines of credit cover a large percentage of borrowers’ needs, but there are more options when it comes to small business loans, including:

If you are unsure of which type of loan fits best into your business plan, consider an online lender, like Biz2Credit, who was selected by Business News Daily as the best lender for marketplace loans.

Choosing the right small business loan provider

Choosing the right business lending option begins with choosing what type of lender you’d like to work with and what type of loan will fit your business needs the best, but there are more factors to consider when deciding which lender to call. 

Loan amount

Consider how much money you need to borrow. If you are looking for financing to make a large purchase, consider getting an appraisal of the real estate or equipment. If the purpose of your small business loan is cash flow fluctuations or to increase working capital, consider calculating the business’ working capital ratio. The total amount of a loan will impact the amount of monthly payments, the down payment required, interest rates, the length of the loan, and other repayment terms. 

Both alternative lenders and traditional banks work to finance loans of all amounts. Once you’ve determined the amount you need to borrow, make sure to apply for a loan type that fits that need.

Customer service

Finding a lender with great customer service can make the process of securing business financing go much smoother. Lenders can give good customer service by offering convenient appointment times, answering questions quickly, providing thorough application instructions, and offering flexible financing options. To find a lender who has a high customer service rating, you can check the company’s rating with the Better Business Bureau (BBB) and sites like Trustpilot.

Application process

Borrowers must complete an application before receiving funding. Application processes vary depending on the type of loan and the lender you have chosen. Traditional lenders offer the ability to apply for financing in person, but generally take longer to deliver a decision. Online lenders, like Biz2Credit, will allow the borrower to complete an online application can issue an approval decision as fast as 2-3 business days and may even offer same day funding.

Approval requirements

Most approval decisions for small business loans are issued based primarily on the creditworthiness of the borrower, but the requirements for approval, like minimum credit score, will vary depending on the lender and type of loan. Often lenders will list the approval and credit score requirements in the FAQs section of their website and may recommend some documents you can prepare ahead of time like, a credit report, business checking account statements, and copy of your business plan.

Traditional lenders are best for small businesses that:

• Have at least two years of business financial statements and income tax returns
• Have good credit and an established credit history
• Have personal assets or commercial real estate that can be used as collateral
• Have two years of bank statements on hand

Online lenders are best for borrowers that:

• Have increasing annual revenue
• Are new businesses or in the first two years of operations
• Have bad credit or a complicated credit history
• Do not want to use personal assets for collateral

Bottom Line

Every type of business can benefit from a small business loan at one time or another. The best small business loans are ones that fit the specific needs of your business. Qualifying for a small business loan can be a simple process when you work with the right lender. For Ajay Kumar, a CPA from New Jersey,  Biz2Credit proved to be the right lender when they helped make his business expansion dreams a reality.