4 small-business loan options

Businesswoman smiles after learning how to get a small-business loan Image: Businesswoman smiles after learning how to get a small-business loan

In a Nutshell

If you’re a small-business owner searching for financing to grow your business, we’ve rounded up four small-business loan options to consider. Learn about bank and credit union loans, online loans, SBA loans and U.S. Department of Agriculture loans.

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If you own a small business, you may eventually need a small-business loan to help you expand or cover operating costs.

A small-business loan also may help you buy property, equipment or inventory.

If you’re in the market for a small-business loan, you’ll find there are a several types you can apply for, including a bank or credit union loan, a loan from an online lender, an SBA loan or a U.S. Department of Agriculture loan.

Let’s dive deeper into these small-business loan options and explore how you can prepare to apply for a small-business loan.


Small-business loans: Know your options

Before you apply for a small-business loan, consider the different types of loans and which one best fits your needs and qualifications.

1. Loans from banks and credit unions

Banks and credit unions can offer a number of different small-business loans.

  • Commercial real estate loan: With a commercial real estate loan, you can buy land or property for your business. You also may be able to use this type of loan to expand or remodel your current business property.
  • Business term loan: If you need to buy large assets for your business (like equipment or machinery) and don’t have all the cash to do so upfront, a business term loan may be useful.
  • Vehicle loan: A vehicle loan may help you pay for or refinance any cars, trucks or vans you need for your business.
  • SBA loan: Some banks and credit unions partner with the Small Business Administration to offer government-guaranteed SBA loans. Two common types of SBA loans are the SBA 7(a) and SBA 504 loans. We’ll go into more detail about SBA loans below.

2. Loans from online lenders

There are also online lenders that offer small-business loan options. If you don’t want to go into a bank branch, finding a small-business lender online might sound appealing. Online lenders that offer small-business loans include Kabbage, Lendio and PayPal, among others.

If you’re approved for a loan, you may be able to get access to your loan funds quickly — sometimes as soon as 24 hours or the next business day.

Online lenders offer many of the same small-business financing options you see at banks or credit unions like business lines of credit and SBA loans. Some offer merchant cash advances, which can provide you with cash upfront that you’ll repay via the credit card sales you make in the future.

To make it easier for you to make your loan payments on time, some of these lenders offer automatic payments as well.

3. SBA loan

The Small Business Administration, or SBA, is a government agency that supports small-business owners. Instead of lending money to small-business owners directly, it partners with banks and other lenders to help small businesses secure funding.

Since SBA loans are backed by a government agency, lenders consider them less risky. SBA loans offer competitive terms, lower down payment requirements and resources that can help you run your small business.

SBA loans range from $500 to $5.5 million, and you can use your funds for a variety of business purposes. (Some lenders may set restrictions on loan uses.)

The specific requirements for an SBA loan vary from lender for lender, but generally they include that …

  • The business is for-profit and is registered and operating legally.
  • The business is located and operating in the U.S.
  • You’ve invested your own time and/or money in the business.
  • You haven’t been able to get a loan through other lenders.

4. U.S. Department of Agriculture loans for rural businesses

If your small business is in a rural community, a business loan from the U.S. Department of Agriculture may be a good choice. USDA loans are similar to SBA loans because they’re also guaranteed by a government agency and made by lenders like banks and credit unions. The goal of USDA loans is to promote job growth and improve the economy in rural areas.

There are a couple of things you’ll need to be eligible for a USDA loan.

  • Your business needs to be located in a rural area outside of a town or city with a population of fewer than 50,000.
  • You need to put up collateral like equipment, machinery or real estate that is worth at least as much as the value of the loan.

Tips to apply for a small-business loan

At first, applying for a small-business loan can seem overwhelming. But the application process is more manageable if you plan ahead. Here are some things to do before applying for a small-business loan.

Solidify your business plan

Before you apply for a loan, make sure you actually need the money you want to borrow. Creating a business plan can help give you a good idea of where your business is headed and whether a small-business loan could help you take it there.

Evaluate the current financial health of your business

Before your application can be approved, the lender needs to know you have the capacity to repay the loan. Lenders may evaluate this capacity in several ways.

  • Credit history: Lenders may review both your credit history and that of your business. Before you apply for a loan, request your personal credit reports and try to clean up any errors. If your credit could use some work, you might want to wait to apply for a business loan until you’ve improved it.
  • Cash flow: If you’re applying for a loan for your existing business, lenders will want to see that you have sufficient cash flow to be able to repay the loan. But if it’s a new business, lenders may instead consider your experience: Have you run a profitable business before?
  • Collateral: You may need assets to secure your business loan. Your assets serve as collateral that the lender could confiscate if you don’t repay the loan. If your assets aren’t enough to back the loan you want, you may be able to ask a co-signer to put up collateral for you.
  • Job history: If you don’t have a ton of experience in your industry yet, lenders may review your job history and experience to help them assess whether you can effectively manage your company. A well-managed business is more likely to be successful, which means you’ll likely be more able to repay a loan.

Prepare your paperwork

Pulling together a loan application can be time consuming. If you’re applying for an SBA or USDA loan, you may need to fill out paperwork for both the lender and the U.S. government.

Applications vary, but typically you’ll need to supply a business plan, cash flow projections and current and projected financial statements.

Provide as much detail as you can. The more lenders know about you and your business, the better they can assess your situation and determine whether you qualify for the loan you want.

If you’re in a rut with your loan application, a SCORE small-business mentor may be able to help. SCORE is a nonprofit association supported by the SBA that’s a network of volunteer business mentors.

Alternatives to small-business loans

If you’re not sure a small-business loan is right for you, consider these business financing alternatives.

  • Business line of credit: A business line of credit is similar to a credit card because it can give you the chance to borrow up to a certain credit limit and pay interest only on the portion of money you actually borrow.
  • Business credit card: They work like personal credit cards, but they’re meant to be used only for business-related expenses. Depending on what you’re looking for, some business credit cards offer rewards programs that can save you money or intro 0% APR offers that allow you to make purchases interest-free for a certain period of time.
  • Personal loan: With a personal loan, you apply to borrow money from a lender and pay it back with interest through installment payments. You may be able to use a personal loan for small-business funding.
  • Investment from family and friends: If a family member or friend believes in your business and wants to help you start or grow it, they may be willing to lend you money. Don’t go this route if you don’t feel confident that you’ll be able to pay them back since it could damage your relationship.

What’s next?

Your small business is unique, so consider your financing options carefully. Explore all of the options available to you and weigh the pros and cons of each.

Here are a few questions to ask yourself.

  • Is a small-business loan my best option?
  • What loan amount do I need?
  • Which loan program makes the most sense?
  • What are my short-term goals? What about long-term goals?
  • What monthly payments can I afford?