Understanding Small Business Loans: Types, Application Process and Alternatives

Understanding Small Business Loans

A small business loan is a financial instrument designed specifically for business owners to meet operational expenses, such as payroll or equipment purchases, or to support the expansion of their business activities. They typically come with shorter terms compared to personal loans or other forms of personal debt, with five-year terms being the maximum offered by many lenders. However, it’s not uncommon to see two-year terms as well. Please note that while there are separate business credit reporting agencies, many top business loan lenders require a personal guarantee and can seize your personal assets in the event of default.

Different Types of Small Business Loans

There are various types of loans offered by the best small business loan lenders, including:

• Term: These are installment loans where you make payments on a set schedule and finish paying off the debt within a set period of time. Maximum loan terms of two years are common for unsecured business loans, although some lenders offer five-year terms for secure business loans such as equipment loans.
• Line of Credit: This offers a revolving credit limit for a finite period. Many small business lenders only offer repayment terms of up to two years. To enjoy revolving credit for a longer period, you might need to get a business credit card.
• SBA Loans: These are installment loans backed by the Small Business Administration (SBA). They typically have longer terms than other term loans offered by online lenders.
• Revenue-Based Financing: This involves financing based on your accounts receivable, credit card sales, or outstanding invoices. Repayment is made via a portion of your daily or weekly business revenue.

Choosing the Right Business Loan for Your Needs

A good business loan should be affordable and help you meet your goals. It’s advisable to compare between three to five of the top small business loan lenders to determine which might be the best fit for your needs. Factors to consider when comparing business loans include the rate, eligibility requirements, repayment terms, funding amount, and whether the lender reports to a business credit bureau.

Applying for and Qualifying for Business Loans

The application process for a business loan is usually similar to other types of loans. Lenders typically require proof of income and will also check your credit history. However, it’s worth noting that many small business lenders also check your personal credit and require a personal guarantee.

Alternative Funding Options to Small Business Loans

If you either can’t qualify for a business loan or are worried about the costs, there are other alternatives you can consider. These include a small business credit card, crowdfunding, borrowing from friends or family, or taking out a personal loan.

Our Methodology

We evaluated 13 online small business lenders, focusing on key areas such as affordability, loan options, underwriting requirements, and customer experience. Learn more about how Buy Side rates the best small business loans.

FAQs on Small Business Loans

Here are some common questions that users have about small business loans:

• What credit score is needed for top lenders? While many lenders have relatively low minimum credit scores, often in the mid-500s to low-600s, you’re likely to qualify for the best rates and terms if you have a higher credit score.
• Are SBA loans always the cheapest? No, sometimes SBA loans have higher rates than other business loans. It’s essential to compare rates before making your decision.
• Can startups qualify for these loans? Startups might not qualify for SBA loans, but they might qualify for loans from online lenders, who often have less stringent time-in-business requirements.