What is the Best Loan for a Small Business?

In this article we address:

• Term loans
• Equipment financing
• SBA loans
• Business lines of credit
• Choosing a business lender
• How to get approved for a loan

Small businesses are at the heart of America’s ever-changing economy. There are more than 32.5 million small businesses in the United States, which means that 99.9 percent of America’s businesses are run by small business owners. Each of those businesses started with an idea and was turned into a viable business plan with hard work and strategic decisions.

How to finance a small business is one of the most common obstacles entrepreneurs must overcome. In this article, we look at different types of financing and how to find the best loan for your small business.

Types of small business loans

There are several types of business loans available to small business owners. Finding the right loan for your company will be based on the amount of money you’re seeking, your business’ credit history, financing timeline, and desired repayment terms. Working with an online lender can give your business access to short-term loans, long-term loans, personal loans, and more.

Term Loan

Business term loans are a traditional financing method where the borrower receives a lump sum of cash up front and pays the loan back with monthly payments of principal, origination fees, and interest. The repayment terms are agreed on by the lender and the borrower before the funds are released. The payment schedule and whether interest rates are fixed or variable will be predetermined, like with real estate loans.

Term loans are used to finance large purchases like buildings, equipment, and vehicles. They are also used for business owners in need of working capital, inventory, payroll funding, or everyday operating expenses. Unsecured term loans are best for small and medium businesses that have established some credit history. Startup business owners may be approved for a secured term loan using personal assets as collateral or a personal guarantee.

Pros of term loans:

• Predetermined payment schedule – The terms of a business loan will allow for predictable payments.
• Early repayment option – Most term loans do not have a penalty for prepayment, which allows the borrower to save money on interest.
• Low-interest rates – Annual percentage rates vary from loan to loan, but term loans generally have lower interest rates than other financing options.

Cons of term loans:

• Strict approval requirements – Eligibility for term loans vary, but some require substantial annual revenue, a downpayment, and a good credit score.

Equipment Financing

An equipment loan gives small businesses the capital they need to purchase equipment. Equipment financing can be secured for 100% of the equipment value and is repaid with regular payments. The loan term is determined by the useful life of the equipment. For example, audiovisual equipment has a useful life of 10 years, so the equipment loan may have a term of up to ten years.

Equipment financing can be used to purchase machinery, computers, software, vehicles, office equipment, and more. Both startups and established small businesses are able to get approved for equipment loans up to $100,000. Established businesses that apply for an equipment loan are reviewed based on their business credit score and business tax returns. New business owners may submit personal tax returns if they do not have business credit.

Pros of equipment financing:

• Fast funding – Equipment loans can be approved and funded in as little as 2-3 business days.
• Predictable payments – The repayment terms are preset there are no surprises when it comes to fees, interest rates, and repayment schedules.
• Improve business credit score – Equipment loans are easier for new and small businesses to get approved for since the equipment acts as collateral. Paying down equipment financing will help small businesses build better business credit.

Cons of equipment financing:

• Loan may outlive equipment – In some cases, equipment does not last the entirety of its estimated useful life, leaving you to make payments on equipment you’re no longer using.

SBA Loan

SBA loans are a great option for many small business owners. The U.S. Small Business Administration (SBA) works with registered SBA lenders to guarantee a portion of the loan amount. The SBA backing makes these loans more obtainable for small businesses that are not eligible for traditional financing. There are many types of SBA loans, which dictate the maximum loan amount, repayment terms, and permitted use of the funds. The most common types of SBA loan programs include the SBA 7(a), Microloans, disaster loans, and SBA Express Loans.

SBA loans can be used for any number of reasons and are approved for up to $5 million. Business owners wishing to fund a startup or finance an established business can find success with an SBA loan. The proceeds can be used for working capital, commercial real estate, franchise financing, inventory costs, renovations, debt refinancing, and more. Borrowers repay SBA loans with regular monthly payments that include a fixed or variable interest rate.

Pros of SBA Loans:

• Low down payments – The down payment requirement for SBA loans can be as low as a 10% equity contribution, which is more attractive than the industry standard of 20%.
• Longer repayment terms – SBA loans offer extended repayment terms of 5 to 25 years which allows small business owners to conserve cash flow.
• Low-interest rates – Since these loans are partially backed by the SBA, they are lower risk to lenders and can qualify for lower interest rates than other financing programs.

Cons of SBA Loans:

• Delayed funding – The application process for an SBA loan is not as fast as other loans, and funding can take up to 4-6 weeks.
• Additional paperwork – In addition to standard loan documents with the lender, the SBA also requires a personal financial statement, borrower information form, and a request for tax transcripts.
• Necessary creditworthiness – SBA loan programs require business credit history and are not a good option for most startups.

Business Line of Credit

A line of credit is a type of revolving credit similar to business credit cards, but with more attractive terms. With a business line of credit, borrowers are approved for a set amount of money that they can draw on whenever they need funds. Monthly payments are made to pay the loan back and interest is charged only on the amount of funds currently withdrawn.

Lines of credit can be used for any capital need. Small business owners use lines of credit to supplement cash flow fluctuations, repair damaged or missing equipment, launch a marketing campaign, or hire new staff. Business lines of credit work well for established businesses or new business owners. Applicants can be approved for up to $1 million in as little as 48 hours.

Pros of a line of credit:

• Fast cash – once a line of credit is established, borrowers have fast access to available funds.
• Builds credit history – Making regular payments on a business line of credit can help a new business establish positive credit history and improve its business credit score.
• Only pay withdrawn funds – Having a line of credit provides instant access to funds, and borrowers only pay interest on withdrawn funds.

Cons of a line of credit:

• Document requirements – Some credit lines require updated documents with each draw or annually.
• High fees – Business lines of credit have higher interest rates and loan fees than other business financing options, especially for clients with bad credit.

Choosing a small business lender

Small business loans are available through traditional lenders and alternative lending marketplaces. Traditional lenders include banks and credit unions. Benefits of using a traditional lender include name recognition and lower interest rates. Applying for a loan through a bank or credit union requires making an appointment, preparing documents, and working with the lender to provide additional requests. Getting approved at a traditional bank requires a minimum credit score, two years of tax returns, and proof of business income.

Since approval rates at traditional lenders are low and the application process is cumbersome, many small business owners look to online lenders like Biz2Credit for the best place to get a small business loan.  Online lenders, or alternative lenders, offer a convenient, simple application process that can be done from home. Online marketplaces work with several financial institutions at a time, so they offer competitive rates. The right online lender will find the best small business loans for all circumstances, even businesses that have had trouble qualifying for bank loans.

How to get approved for a loan

Before a business gets funded, the small business owner must apply for and get approved for a loan. A business owner can research and check approval requirements for several different types of loans through the same online lender. Working with a lender like Biz2Credit can help expedite the process because they will walk you through each of the following steps.

Decide how much financing you need

The first step in the loan process is to decide how much money you need to borrow. Decide what you’ll be using the funds for and then estimate the total cost. If you are financing a building or new equipment, the loan amount will be the amount of your purchase. For working capital loans and cash flow financing needs, look at the business’ budget to estimate how much money is needed to meet business needs. Also, consider the future payments of the loan and whether the business can afford monthly payments on a loan.

Gather financial documents

Before applying for a loan, it is a good idea to check your personal credit score and gather some standard financial documents. The statements that you’ll need and the credit score requirement will depend on the loan provider you choose and the type of financing you’re applying for. Some commonly requested documents include:

• Bank Statements
• Tax Returns
• Credit report
• Income Statements
• Business Plan
• Identification documents

If you are concerned about the creditworthiness of your business an online lender may be able to provide details about secured financing options. Many small businesses have success using their unpaid invoices, accounts receivable balances, or future sales to secure funds through invoice factoring, invoice financing, or a merchant cash advance.

Apply for your loan

Applying for a loan is quick and easy when you choose an alternative lender because the entire loan application can be completed from home. Completing the online application takes less than five minutes and involves completing a questionnaire and providing business documents. Statements can be uploaded as attachments or automatically by connecting your business bank account to your online lender portal. At Biz2Credit, you can receive loan options within 24 hours of applying.

Get funded

Once the application is approved, you will receive the funds in your business checking account in as little as 2-3 business days. The specific timing of funding will depend on the lender you choose, the amount of the loan, and the type of financing you are approved for.

Bottom Line

When Bilal Bhatti, the owner of several franchises, including Auntie Anne’s Pretzels, Carvel Ice Cream, and Nestlé Toll House Café, needed business funding he turned to Biz2Credit. Mr. Bhatti was able to secure financing to expand his business and supply his current stores with sufficient working capital. 

There are many funding options available to small businesses, and no single loan is right for everyone. Term loans and SBA loans offer low-interest financing options with flexible repayment terms. Equipment financing is a smart way for small businesses to get the equipment they need without depleting their cash reserve. A business line of credit offers small business owners access to fast cash anytime it’s needed. Whatever your situation, there is a loan right for your business needs.