Where To Get a Loan for Your Small Business
Get expert insights on how to find the best place for a business loan
When it comes to securing a loan for your small business, your lender selection is a critical decision. The options are numerous, ranging from traditional banks to online lenders, all of which have their own set of qualification criteria and terms. While it may seem convenient to approach your local bank or opt for an online lender promising quick cash, it’s crucial to conduct thorough research to identify the most suitable place for your business loan. This proactive approach saves time and money.
Because every business and situation is different, no single loan option works for every company. However, understanding what different lender types have to offer and the pros and cons of each can empower you to make a more informed decision, giving you a sense of control and confidence.
Who offers business loans: A breakdown of small business lenders
The best place to get a business loan is the one that offers the financing you need at a competitive rate, with terms that work for your company. There’s no one-size-fits-all option, especially since loan programs can vary significantly depending on different factors. In other words, a bank loan that helps you open a new retail location might not be the best program for another business owner who wants to invest in new equipment or real estate, or needs cash to cover payroll.
With this in mind, it’s important to understand the four main types of business lenders.
Bank and credit union loans
Many entrepreneurs make a local bank or credit union their first stop when shopping for a business loan. This can be a good way to go if you have a well-established relationship with the bank. Bank loans often have some of the lowest interest rates and most attractive terms for entrepreneurs and offer a variety of financing products.
Banks and credit unions are typically the best choice for well-established businesses that meet stringent requirements. The strict underwriting process often means it can take a long time between submitting an application and receiving the money. The process may be slightly less cumbersome if you have a good relationship with the bank, i.e., you’ve maintained a business banking account in good standing for several years.
SBA-approved lenders
If getting a loan from your bank proves difficult, you might have an easier time qualifying for a loan backed by the Small Business Administration. The SBA guarantees lenders up to 85% of the loans they issue under the program, reducing the risk for lenders. SBA 7(a) loans are the most common, but you can also secure funding via a microloan (under $50,000), the Working Capital Program, a 504 loan, or an Express Loan.
The application and funding process for an SBA loan can also take a long time, so it may not be ideal if you need a quick influx of cash. However, government backing can help you secure funding from a lender for a startup if you have a limited or less-than-perfect credit history or you’re having trouble getting a loan from other sources.
Community-based lenders
Nonprofit organizations and community development funding institutions (CDFI) may offer business loan programs for qualifying entrepreneurs. Usually found in low-income or historically underserved communities, these programs typically focus on a specific subset of entrepreneurs, like women or minority-owned businesses. Although you may not be able to access higher loan amounts via these programs, they can be a low-interest lifeline for companies that might not be able to access capital otherwise.
Community-based lenders may offer term loans, microloans, or SBA loans.
Alternative options
When you need money quickly or you’ve exhausted all traditional options for business financing, an alternative lender may have a solution. Alternative options can include:
- Online banks
- Peer-to-peer lending
- Lines of credit
- Invoice factoring
- Merchant cash advances
- Equipment loans
These alternative programs are often easier to qualify for than traditional loans, the application processes are simplified, and you’ll have the money you need faster, sometimes the same day or the next. These products are often a good option for business owners with lower credit scores, as some lenders approve loans for applicants with credit scores as low as 550.
However, because of the increased risk inherent in these products, they typically cost more in the long term than a traditional business loan. The interest rates are almost always much higher than what a bank will offer (some as high as 99% or more), and there are often high fees associated with these loans. Loan amounts might be significantly less than what you can get from a traditional lender, and the repayment terms are often much shorter, sometimes as few as 60 days.
Where should you get a loan for your business?
Choosing where to get your business loan begins with an honest assessment of your business, your funding needs, and the specific offerings from different lenders.
Determine your financing needs
Finding the best place to get a business loan starts by determining how much money you need to borrow and how much you can afford to borrow. Lenders may limit how much you can borrow; for example, the SBA 7(a) program allows qualified applicants to borrow up to $5 million, while the Microloan program offers up to $50,000. A CDFI or nonprofit lender might only allow you to borrow up to $250,000. Ultimately, you have to find a lender that can offer the amount you need, or you won’t be able to address all of your needs.
Assess your qualifications
Even when a lender offers loans up to a specific dollar amount, you must meet their qualifications to access any money. This responsibility falls on you, the borrower. Every lender has its own eligibility requirements in terms of credit score, time in business, revenue, and current debt-to-income ratio. If you don’t meet the lender’s criteria, they won’t approve your application, so it’s crucial to carefully review your options before deciding where to apply.
Review the lender experience and application process
The lender might hold a lot of the cards when it comes to deciding whether you get a loan, but remember that you’re entering into a business relationship with them. This means you must do due diligence to ensure you’re partnering with a company that offers the service and experience you deserve.
One of the best ways to find a great lender partner is to ask other small business owners for recommendations and get feedback on their experiences. You can also look at online reviews for specific feedback related to customer experiences. The Better Business Bureau can be a great source of information about prospective lenders; pay close attention to whether there are any government actions or significant complaints against the company.
It’s also worth investigating the company’s application process to be sure you understand how it will affect your credit and the documentation you’ll be expected to provide. For example, some lenders require a soft credit check to determine whether you qualify for the loan. These checks don’t affect your credit score and allow you to compare your options and decide whether to move forward.
Ask questions about the loan
Before settling on a lender, ask important questions to ensure you know how much the loan costs and how the lender will manage your account. These answers can quickly narrow the prospects for the best place to get your loan. Ask the lender about:
- The interest rate, and whether it’s fixed or variable
- The fees they charge, including application, origination, prepayment, and late payments
- Any discounts for making automatic payments
- How long it will take to get the money in your account
- Collateral requirements
- Repayment terms
The answers to these questions will help you determine whether the loan is the right fit. At the end of the day, the lender that makes an offer that most closely fits your budget and financial needs is the best place to get a business loan.
Let Finance Factory help you find the perfect fit
If the array of business financing options has your head spinning and you aren’t sure where to start, reach out to Finance Factory for expert help. Our qualified lending professionals can walk you through the business loan application process and match you with the right lenders for your needs. If you have a credit score of 700 or higher, all you need to do is fill out our quick pre-qualification form, and one of our team members will be in touch to help make the business loan process simple so you can focus on what really matters in your business.
