When you have big dreams for your small business, the biggest obstacle is often capital. There are dozens of financing options out there, which can make research a headache, so we've put together a comprehensive loan guide for small businesses, answering some of the most common questions.
If you run a healthy business, you may wonder why you'd need to take on debt. Some of the most popular reasons for borrowing include:
Most lenders will want to know exactly how you intend to spend the money, so draw up a business plan before you apply. Some may place conditions on lending, such as the type of investment you are allowed to make, so be clear and accurate with your intentions.
If all you need is enough working capital to meet today's business needs, that's fine. But you need to be able to show (to yourself, and to lenders) that there will eventually be some kind of return for that capital.
There is no normal loan amount for small business owners. But there is a rule of thumb. Ideally, the profits the loan brings in should cover your repayments, and then some.
Here's how to work that out:
Step one: Figure out what your monthly costs will be (include everything from taxes to payroll to loan payments). Don't forget to include the Annual Percentage Rate (APR) of the loan when considering the repayments.
Step two: Make an educated guess as to what your monthly revenue will be, with the help of the loan. Start with your current monthly revenue, and add in a conservative estimate of how much revenue the loan will add, if any.
Step three: Subtract your future monthly revenue from your future monthly costs. Ideally, the result is a monthly profit.
Maybe as you do the monthly math, you lose money for the first 6 months, and more than make up for it in the last 6 months. That's fine. Just make sure you have enough money to cover your costs, make your loan payments, and in the end, make the loan worth your time.
Different lenders look for different things in an applicant. But the basics qualifiers for business financing include:
What's a "good" credit score? Here's a rough ballpark, depending on the loan type:
In addition to a stellar credit score, lenders will ask for evidence to support your application—like income statements, cash flow statements and balance sheets. They might also ask for legal documents, bank statements, tax returns, and a list of any assets the company owns.
Check the loan application requirements before you get started to make sure you have everything you need. If you don't have financial statements, you can always work with an online bookkeeping service like Accracy to do some catch-up bookkeeping and get the historical financial statements you'll need.
The loan application process usually works like this:
Further reading: How to Get a Small Business Loan
We've outlined the main types of loans for business owners, to help you narrow down your choice. Heads up, some of these aren't technically loans, but accomplish the same thing.
The SBA loan program is a long-term loan, guaranteed by the Small Business Administration. With some of the most attractive interest rates and loan terms, they're arguably the best loan you can get. But they're tricky to get your hands on without good finances and a solid credit history.
Best for: businesses that have operated for at least 2 years, with proven financial track record and a credit score of at least 640.
A traditional loan, usually provided by a bank, with a set repayment schedule and fixed interest.
Lenders earn money on the loan interest you pay. So if you try to pay your loan off early, you might be charged a penalty fee (since the lender is making less money from you than they originally thought).
Best for: predictable businesses with steady cash flow and a credit score of 680 or more, looking to finance something big.
Further reading: How to Calculate Your "Cost of Debt"
Establish a credit limit, but only repay what you use—plus interest.
Lines of credit are best for: less established businesses, or owners looking to build a credit score.
Otherwise known as an equipment loan. Borrow to buy equipment, using the purchase as loan collateral. For example, a farmer might use equipment financing to purchase a tractor. If they do not pay back the loan, the tractor can be taken by the lender—a little bit like a mortgage.
Best for: businesses looking to purchase equipment quickly, or who cannot qualify for an SBA loan to cover an equipment purchase.
Not technically a loan, but an advance on sales. Repaid as a cut of your credit card sales. Instead of interest, MCAs charge a "factor fee", which is a multiple of the amount advanced. For example, an MCA with a factor fee of 1.1 means for every dollar borrowed, $1.10 must be paid back.
Best for: businesses that make a large proportion of income through credit card sales, such as restaurants. Useful when looking for short-term financing to resolve cash flow gaps or cover unexpected expenses.
If your business gets paid through client invoices, you can always explore invoice factoring. A factoring company will pay you 80% of the value of a client invoice today, and the final 20% once the client actually pays you. The catch is, you pay the company 0.5-5% of the total of the invoice. The upside is, the factoring company takes responsibility for the whole process, including making sure the client pays the invoice.
"Invoice financing" is similar but slightly different. That's where you show a lender an invoice and get a loan against that amount (but in every other way, it's a regular loan, and you maintain responsibility for the invoice payment).
Finance short-term goals, with loan repayment averaging 3"“18 months.
Best for: businesses with strong cash flow, looking for a shorter repayment commitment.
For a loan that doesn't take your business revenue into account, try a personal loan.
Best for: new business owners with a strong personal credit score, who don't mind muddying the waters between their corporate and personal finances.
Further reading: Should I Fund My Business With a Business Loan, or a Personal Loan?
Credit unions work a bit differently than a traditional bank, since they're membership-based non-profits (yes, a non-profit bank!). If you need a loan and you're already a member of a credit union, you should start your loan search there. Their loan rates are some of the lowest you'll find. And if you have a spotty credit history, but a solid relationship with your credit union, you're much more likely to get approved for a loan there compared to a traditional bank.
Getting a credit card for your business obviously isn't a loan. But if the above loan options don't for you, a business credit card can give you some flexibility with your working capital. For example, if you sign up for the US Bank Business Platinum card, they'll offer you 0% APR and no fees for the first 12 months. Assuming you can pay your credit card balance in full in that time, it's effectively a free loan. Credit cards can also give you short-term flexibility when you need to make a purchase today, but your client won't pay their invoice until next week.
Further reading: The Best Small Business Credit Cards [2023]
You don't need to go to a bank to get a loan anymore. Online lenders (such as Biz2Credit, LendingClub, Kabbage, and many others) can help you get approved for a loan much faster than a bank, and sometimes at more competitive rates. Since all they do is lending, and they don't have the overhead of big banks, they can get you better loan terms.
Just do your due diligence before you start the loan application process online. The above online lenders are reputable. But be sure to read real customer reviews on third-party sites, and watch out for sky-high interest rates and shaky approval processes (like skipping a credit check).
The best loan is the one with the most competitive rates and the easiest application requirements.
To calculate the best loan for you, we recommend using NerdWallet's Loan Comparison tool. You'll always find the most competitive loan on the market there.
The more stable and reliable your business, the better your interest rate (since you're less of a risk to the lender). Less stable businesses will face steeper rates.
Your credit score is a major factor in what interest rate you will be charged—low scores indicate high risk for lenders, so the higher your credit score, the lower your interest rate is likely to be. Interest rates are also dependent on the type of loan, and the lender's own business model, so it's worth shopping around for the best deal.
Loan comparison sites such as NerdWallet can save some legwork, or you can go it the old-fashioned way and ask for a quote.
Heads up: when lenders do a credit score check, this can sometimes affect your credit score a little bit. But if you do all your comparisons within a 30 day window, the credit score companies sometimes will recognize you're looking for a quote and won't ding you. To be safe, wait until you're ready to apply before getting quotes.
Fees to be aware of
Most lenders will charge you an origination fee (or processing fee) for getting your loan set up. According to Investopedia, the origination fee is usually between 0.5-1.0% of the total loan amount.
Many lenders will also charge you a "repayment" fee for paying your loan off early. Why would they punish you for paying them faster? Because you're depriving them of the interest income they planned on earning over the full term of the loan.
Choosing a lender is a personal decision, based on a number of factors. When looking for a lender, consider:
If you're unsure about a lender, check out Google Reviews or TrustPilot and search for the lender's name. Real reviews from customers will give you an idea of a lender's strengths and weaknesses. Your loan will likely have a multi-year repayment term, so look out for any history of poor customer service, or reports of costly errors from grumpy consumers.
There are many different kinds of business loans. To that end, we've outlined nine of the very best small business loans in 2023 here.
As a quick summary:
If you're going to the bank today to apply for a loan, you should expect to wait at least one week (or even up to one month) to get the money deposited into your bank account. The application process takes time, then the bank has to decide whether they want to approve your loan application or not, and then it will take a few business days for the money to end up in your account.
Unfortunately, predatory lenders do exist, so you should watch out for red flags. Signs you should look elsewhere include:
When in doubt, consult a financial professional. A reputable lender will not pressure you to sign straight away, and will respect your decision to do due diligence before signing on the dotted line.
Can't afford a loan? You might qualify for a grant. Check out our complete dictionary to U.S. small business grants.
We are offering free 1 Month Basic Bookkeeping to all new customers so you can experience Accracy's seemless and professional services.
Incorporating a business in Delaware comes with certain advantages. Here's how to pay your Delaware franchise tax and submit the annual report and filing fee.
Select businesses are eligible to apply for a second PPP loan. We've got the info you need to make applying a breeze.
Follow the journey of one of history's most influential figures in accounting, Luca Pacioli, the father of accounting.
