Finding the right funding source is key if you plan to start or grow a business. According to the 2022 Small Business Credit Survey, over the past five years, 51 percent of business owners have secured financing through financial institutions or lenders.

Among the many financing options offered by traditional banks, credit unions, online lenders and nonprofits, a business loan stands out as a reliable choice. But since not all lenders are alike, choosing the best business loan requires you to assess the benefits and drawbacks of available loan options.

Key takeaways

  • Business loans are available from a variety of lenders, including banks, credit unions and online lenders.
  • Banks and credit unions are ideal for established businesses with good to excellent credit.
  • Compared to traditional lenders, online lenders and nonprofits are more willing to work with businesses with poor or bad credit.
  • Before applying for a loan, assess the financial health of your business and lenders' requirements.

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 pre-existing banking relationship. 

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Bankrate insight
The 2022 Small Business Credit Survey found 44 percent of low credit risk businesses — those with good to excellent credit — opted for a loan, line of credit or cash advance from a large bank. Another 34 percent went with a loan from a small bank, while only 8 percent went with a credit union.

Pros

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. 

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 scores, annual revenue or time in business requirements. These include merchant cash advances, invoice factoring and invoice financing. 

Pros

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

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

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Bankrate insight
According to the 2022 Small Business Credit Survey, 22 percent of all businesses looking for a loan, line of credit or cash advance applied for financing with online lenders. When looking at medium to high credit risk applicants — those with fair to poor credit — the number jumps to 37 percent.

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 grow their businesses, including veterans and women. 

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. 

Pros

  • Accessible by underserved business owners 
  • Lower credit score minimums 

Cons

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

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Bankrate insight
Nonprofits also provide financial support to small businesses in the form of grants. Many organizations target underserved communities like women, minorities and veterans since they tend to face barriers to accessing capital.

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. 

  1. Examine your financial health and review lender requirements. This can help you determine which loans could be a good fit. 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 short-term loans or alternative lending options. Also, some lenders specialize in working with startups.
  2. Search and compare lenders. 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.
  3. Get prequalified or preapproved. Some lenders allow you to view potential loan offers without impacting your credit score, including monthly payments, repayment periods and interest rates. 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. 

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Bankrate insight
Funding from traditional lenders like banks or credit unions may be out of the question for those with bad credit. As an alternative, subprime borrowers should consider online lenders. These often have flexible lending criteria and offer several types of bad credit business loans, including term loans, equipment loans and lines of credit.

The bottom line

Making informed decisions is part of being a successful business owner. When it comes to your business loan, your ideal choice will align with your unique business needs. So when selecting the right lender and business loan, it’s best to carefully evaluate multiple factors before applying for funding.

Frequently asked questions

  • Yes, if you qualify, you can secure a business loan through your bank. Before applying, confirm the lending criteria and get prequalified or preapproved to view potential rates, terms and monthly payments.
  • Securing a small business loan can be challenging since approval is based on several factors, such as credit score, annual revenue and time in business. However, exploring different lenders and loan types can improve the chances of obtaining a loan as you can review lending criteria and determine the types of loans you qualify for and with which lenders.
  • To find the right business loan, examine your financial health and review lending requirements to narrow down which lenders and loan types are viable options and align with your business needs.