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Ways to get a small-business loan

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Small business loans are easier than ever to access. You can get funding from a traditional bank or online lender, and there are several options to choose from.

However, navigating the loan process from start to finish can be challenging as you’ll have to find the best lender and loan product for your business. You’ll also need to know what to do to get the application process started.

This guide explores small business loan options, the application process, the benefits and drawbacks of each and alternative funding sources if you can’t get approved for a small business loan.

Different options for small-business loans

All business loans work in the same general way: They let small-business owners and entrepreneurs borrow money and pay it back over time. However, different kinds of lenders can work better for different types of businesses.

Bank loans

Bank loans are offered by major players within the banking industry. They may come in the form of a fixed-rate loan or a business line of credit. Funds can be used to open the doors to your company, cover a cash flow gap, make equipment purchases or expand operations.

Regardless of which form of financing you choose, you should compare lenders and their business loan offerings, along with the rates, terms and qualification criteria. Many will look at your personal and business credit scores, cash flow, collateral and time you’ve been in business.

If you’re ready to apply for a bank loan, follow these steps to simplify the process:

  1. Narrow down your list of lenders. Contact each lender on your shortlist to learn more about the eligibility criteria for the loan products you’re considering.
  2. Select the best lender for your company.
  3. Gather the required documentation to save a ton of time when you apply.
  4. Complete the application and submit any documentation the lender needs to expedite the review process.

Who it’s best for: Bank loans are best for small business owners who have bank accounts at brick-and-mortar banks that they enjoy doing business with. But if you have minimal business experience, limited reserves or less than perfect credit, an SBA loan or loan from an online lending marketplace could be a better fit.

SBA loans

The U.S. Small Business Administration (SBA) works directly with over 800 lenders in all 50 states and U.S. territories to offer small business loans. Its loan products feature competitive rates and terms, and unique benefits like lower down payments and flexible overhead requirements. Many SBA loans are also offered without any collateral required, and SBA loan limits can be as high as $5 million with select programs.

SBA-backed loan options include:

  • 7(a) loans: offers up to $5 million for business real estate purchases, working capital, business debt refinancing, and furniture, supply and fixture purchases
  • 504 loans: offers up to $5 million in fixed-rate financing for major fixed assets
  • Microloans: offers up to $50,000 to foster business expansion

You can use the SBA’s Lender Match Tool to connect with lenders offering SBA loans. Here’s how it works:

  1. Complete the online questionnaire. It only takes five or so minutes of your time.
  2. Get matched with a potential lender. You’ll get an email with contact information for lenders who are interested in doing business with you, typically within two business days.
  3. Connect with the lender. During the initial call or meeting, the lender will review the terms and conditions of the loan.
  4. Apply for funding. You’ll submit a formal application and any required documentation directly to the lender.

Who it’s best for: SBA loans are most suitable for small business owners who operate in the U.S. or its territories, have exhausted all other options and can’t secure a loan elsewhere. However, if you have access to other small business financing opportunities, an SBA loan may not be a good fit.

Online opportunities

The internet is also a treasure trove when it comes to finding the best small-business loans, and it’s common for online lenders to offer better rates and terms than you can find elsewhere. Websites like Funding Circle can help you shop around and compare multiple business loans in one place, and you might even be able to get prequalified online before you apply. Generally, you’ll need to fill out a brief questionnaire to get matched with lenders in its network that can get you funding for your business.

Some online business lenders offer unique borrowing opportunities other than traditional small-business loans. For example, you can find small-business lenders that offer loans that cater to credit-challenged borrowers or let you borrow against unpaid invoices using a process called invoice factoring.

How to calculate your business loan payment

To calculate your small-business loan payment, you can use a loan and amortization calculator. To figure out how much you may need to pay each month, you’ll need to know how much you plan to borrow, the length of your loan repayment terms and the interest rate you can qualify for.

A loan calculator can also be helpful if you’re trying to compare business loan options from different lenders. When you use a calculator to compare loans, you may find that one option is significantly less expensive than another due to a lower interest rate or a shorter repayment timeline.

Less traditional ways to get money for a small business

If you’re having trouble qualifying for a small business loan, there are viable alternatives.

Personal loans

Personal loans can be easier to access than business loans. The downside is the rates are usually higher, particularly if you have bad credit. It’s also highly likely that you’ll get approved for a small amount that’s payable in a short span of time, which means the monthly loan payments could stretch your budget too thin. Another significant drawback is recordkeeping as these loans make it difficult to keep business and personal financial affairs separate.

Home equity loans 

Home equity loans should only be used as a last resort to fund your small business. These loans let you convert a percentage of the equity you’ve built up in your home, or the property’s value minus the outstanding balance on the mortgage, to cash.

Depending on how much equity you have, you could get a sizable amount of cash. Plus, the interest rate is fixed and you’ll typically get an extended period to repay what you borrow in equal monthly installments.

But here’s the catch: your home is used as collateral to secure the loan. So, if you fall behind on payments, the lender could foreclose on your home.

The bottom line

The best way to get a small-business loan is to compare all of your options to find one that suits your needs. Your business could qualify for a loan with a brick-and-mortar bank in your area, but it’s possible that an online lender could offer a lower interest rate or more flexible repayment terms. Try to only borrow what you need, and go with the loan product that offers the lowest rate and lending fees you can find.

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Written by
Holly D. Johnson
Author, Award-Winning Writer
Holly Johnson writes expert content on personal finance, credit cards, loyalty and insurance topics. In addition to writing for Bankrate and CreditCards.com, Johnson does ongoing work for clients that include CNN, Forbes Advisor, LendingTree, Time Magazine and more.
Edited by
Loans Editor