Business loans are available through traditional banks, credit unions, online lenders and nonprofits. Not all lenders offer the same forms of financing, though, and some have more favorable terms than others. Assessing each lender’s benefits and drawbacks and their loan products can help you decide which option is best for your company.

Traditional banks and credit unions

Traditional banks and credit unions offer term loans, lines of credit, equipment financing, auto loans for commercial vehicles and commercial real estate loans. SBA loans, backed by the U.S. Small Business Administration, are also available through many banks and credit. 

Business loans from traditional banks are ideal if you have good or excellent credit and your company has been established for at least two years. Your business should also be operating profitably. Otherwise, getting approved for a loan can be challenging unless you have a preexisting banking relationship. 

In fact, big banks approved only 14.5 percent of small business loan applications in December of 2022, according to Biz2Credit. Small banks approved 21.2 percent of applications. 

Traditional bank pros

Traditional bank cons

  • Stringent eligibility guidelines
  • Less likely to offer prequalification
  • Extensive documentation requirements 
  • Slower loan approvals and funding times 

Online lenders

Online lenders, including fully online banks and financial technology companies, often feature a more streamlined application process. Online lenders commonly offer faster loan approvals and funding times than traditional banks and credit unions. 

In December 2022, 27.6 percent of business owners who applied with alternative lenders or independent entities not listed as banks or credit unions were approved for funding, Biz2Credit reported.

Most online lenders offer the same forms of financing as traditional banks and credit unions in their lending arsenals. However, they also offer non-traditional loan options to business owners who don’t meet traditional credit score, annual revenue or time in business requirements. These include merchant cash advances, invoice factoring and invoice financing. 

Online lender pros

  • Often, flexible or more lenient lending guidelines 
  • Streamlined virtual application process 
  • Rapid approvals and funding times 
  • Non-traditional lending options 

Online lender cons

  • Typically, less favorable interest rates than bank loans 
  • Customer support limited to phone, email or online chat
  • Steep borrowing costs on non-traditional loan options 
  • May not report payments to credit bureaus

Nonprofits

Many microloan programs are administered through not-for-profit organizations. A popular option is the SBA microloan, which maxes out at $50,000. Funded by the U.S. Small Business Administration, it exists to help underserved business owners, including veterans and women, grow their businesses. 

SBA microloan interest rates typically range from 8 percent to 13 percent. The repayment period is up to six years. The loans cannot be used to pay off debt or purchase real estate, and you’ll likely be required to pledge collateral to get approved. 

If an SBA microloan isn’t right for you, inquire with local nonprofits about other potential funding opportunities for your company. 

Nonprofit pros

  • Accessible by underserved business owners 
  • Lower credit score minimums 

Nonprofit cons

  • May require collateral 
  • Slow approval times 
  • Small maximum loan amounts

What kind of lender is right for me?

When you’re ready to choose a lender, start by assessing your needs and decide on a loan amount. If you need a sizable loan — think $500,000 or more — you may have more luck with a traditional bank or credit union than an online lender or nonprofit. 

Examining your financial health to determine which loans could be a good fit is equally important. Most lenders have a credit score, debt-to-income, annual revenue and time in business requirement. If your business struggles in these areas, you may still qualify for shorter-term, higher-interest options. Also, some lenders specialize in working with startups.

Once you know how you’ll use the funds, the amount you need and what types of loans are best, begin your search for lenders offering these lending options. Compile a list of lenders that could work and dig deeper to determine if they’re reputable or if you should look elsewhere. Look for reviews on Trustpilot and complaints on the Better Business Bureau website.

The next step is to get pre-qualified or pre-approved online with lenders on your shortlist. Some lenders allow you to view potential loan offers, including monthly payments, repayment periods and interest rates, without impacting your credit score. If you have this option, comparing loan offers before applying will help you decide which lender offers the best deal. You’ll also avoid applying with lenders who aren’t a good fit. 

Ultimately, a business loan from a traditional lender or credit union is best for established companies operating profitably. Your credit health is equally important — it must be up to par to qualify for the most competitive terms. 

An online lender or nonprofit could be a better fit if you’re having trouble qualifying for business loans because you are just starting out or have a lower credit score.