Startups and small companies need capital. To find the best rates and low fees, here is our survey of the best small business loan options for 2018.
If you’re a small business owner or are looking to start a business of your own, you may be considering a loan. While these types of loans are notoriously difficult to obtain–compared to their personal counterparts–now is probably the best time to try. Thanks to a stronger economy and a renewed interest in the strength of small businesses, there are more types of lenders than ever. And your odds of approval are higher than they’ve been in years.
Let’s take a look at the types of small business loans available, how much you need, and what you should think about before applying.
What to Consider
You should think about a few things before starting the small business loan process. Without them, your chances of approval drop significantly. So it’s certainly worth being thorough before you begin submitting those applications.
Your Business Plan
Getting approved for a business loan is very different from getting approved for a personal loan. One of the most significant is that business loans almost always require a business plan, particularly if the loan is backed by the U.S. Small Business Association (SBA). Submitting an application for a small business loan without an accompanying business plan or pitch is a sure way to get denied.
You’ll need to take some time to sell yourself to the lender. This includes spelling out your business history and successes, and your plans for the future. You should include financials for support. This might include your revenue growth over the years, why you think this loan will impact your business income, and exactly how you plan to use the funds.
Many lenders will also require financial records, such as bank statements and tax returns. So be sure to have those handy. Showing that your company is on an upwards trajectory, that you’ve been fiscally responsible in the past, and that you have a defined plan for growth will go a long way toward “selling yourself” to lenders in the loan application process.
Your Business’s Age
If your business is brand new, or only a few years old, you’re going to have a harder time obtaining a small business loan than an older, more established company. And, of course, this makes sense. Lenders want to ensure that you have a history of running a successful company before they write you a check.
There’s nothing you can do to fast forward through time. But this is something you should consider before applying. If your business is new or has little history to show, you might want to think about taking out a personal loan before a hard-to-get business loan. These are often smaller in size. But it could be what you need to build up the history, forward progress, and experience required to qualify for a larger business loan.
Who Offers What You Need?
All business loans aren’t created alike, so be sure that you’re applying for one that matches your company’s needs.
Some loans are aimed toward smaller businesses with lower financial needs. If you’re only in need of, say, $25,000 to design and produce a new product line, look for one of these lenders. However, if you’re looking for a larger loan to completely transform your business, build a new location, etc., look for a lender who tends to loan higher amounts to larger companies.
There are also industry-specific lenders. So take a look around and find one that deals with companies in your niche. If you’re an artist with a home studio, you’re unlikely to find success with a lender who primarily offers big loans to larger tech companies.
Your Personal Credit
While your business is its own entity, lenders will strongly consider your personal credit when you apply for a new loan. Be sure your report is clean. And if it’s not, take the time to make improvements before wasting time with the business loan application process.
If you have high levels of revolving debt, you should work to pay down balances first. Holding debt, especially on high-interest accounts like credit cards, shows new lenders you might be a risk. Try to get your debt below a 30% credit utilization (if not lower!) before even thinking about a business loan.
You should also check your credit report for any inaccuracies that could be corrected. If you have negative reports that are scheduled to fall off soon–such as late payments or a number of hard inquiries–it would probably be worth waiting a few months. The better your personal credit, the more you’ll increase your chances of approval for a business loan.
If you’re on the cusp of a higher credit score, hold off on applying until it improves.
How Fast You Need Money
If you’re in a hurry for funds, you may want to explore online lenders. These typically allow for faster approval than brick-and-mortar lenders. You can even have a check in-hand in under a week with many of them.
Searching online also allows you to apply through multiple lenders in a shorter period of time. This means that you can find the loan that suits you best, with the lowest interest rate possible, all from the comfort of home.
Whether You Have Collateral
Some business loans–especially large ones–require you to put up collateral. So this is a big consideration before you begin the small business loan application process.
Some brick-and-mortar banks can require as much as 30% to be put down in collateral, which many small business owners will struggle to provide. Government-backed SBA loans also require collateral. But they won’t typically deny a loan on the lack of collateral alone (if that’s the only reason for denial). Collateral can be in the form of real estate, building assets, or equipment.
Many lenders will instead require a lien on your business assets in addition to a personal guarantee on the note. This can be helpful for small businesses who may not yet have large, established collateral to provide, but still need a loan in order to promote their company’s growth.
Take a look at the assets your business has accumulated, which you could offer as collateral for a small business loan. Then, browse lenders accordingly.
Types of Business Loans
There are two main sources for business loans: direct lenders (such as banks or credit unions) and peer-to-peer lenders. Your industry, business plans, and loan needs will determine which resource is best for you.
Peer-to-peer loans are found through online platforms, which connect borrowers with the right lenders. Lenders are able to “bid” on your loan. This means that your individual situation will dictate both your approval and your interest rate.
Direct lenders can be found online or at brick-and-mortar locations like banks and credit unions. These loans can be backed by the SBA, which makes it easier for smaller or riskier businesses to gain approval.
Best Peer-to-Peer Lenders
There are a number of popular P2P platforms available for your small business loan search, and are a great resource for finding just the right lender. Two of our favorites include Lending Club and Prosper.
Lending Club is the largest peer-to-peer lender in the United States, making it a great place to start your business loan search. While personal loans are their primary bread and butter, they also began offering small business loans a few years ago.
In order to be approved, you must meet a few requirements:
- Your business needs to be at least 12 months old.
- You must own at least 20% of the business.
- You need to have fair or better personal credit.
- You need to have at least $50,000 in annual revenue.
- You cannot have any recent tax liens or bankruptcies.
- You cannot reside in Virginia or Iowa.
Small business loans are available in amounts from $5,000 to $300,000. Lending Club doesn’t require collateral for loans under $100,000. Interest rates range from 5.99% to 29.99% APR. Your business’ financial strength and your personal credit will factor into the final interest rate offered. (Applying online to get an idea of available offers won’t impact your credit.)
Repayment periods are available in one to five year terms. There are no penalties for early repayment, and origination fees are between 1.99 and 6.99 percent.
Prosper doesn’t offer “small business loans,” per se. But they can help you use an unsecured personal loan for your business instead. This makes it a great option for smaller loans or for owners whose businesses don’t have a lengthy, proven track record.
Prosper offers loans in amounts ranging from $2,000 to $35,000, with fixed terms of either three or five years. Interest rates range from 5.99% to 35.99% and origination fees are between 0.50% and 4.95%, depending on creditworthiness. There are also no hidden fees, including penalties for paying off the loan early.
Best Direct Lenders
If you’re looking for a more traditional small business loan, you may want to go with a direct lender. This means getting a loan from a bank or credit union, either online or by going into a brick-and-mortar location to apply.
You may want to at least check with your local bank or credit union, just to see the interest rates offered. Some credit unions are known for offering members great rates, and the fact that you’re already a customer can speed along the approval process for some.
However, an online direct lender can allow you to complete the application process even faster, which means you may have a check in-hand faster than if you walked into a corner bank. Because of the ease and speed of these lenders (and the fact that there are hundreds of banks and credit unions that you could opt for), I’ve included some of our favorite online lenders below.
If you’re desperately looking for a small business loan as soon as possible, Kabbage might be exactly what you need.
The online direct lender offers loans of up to $150,000 with only a few requirements. However, the cost of this speed and convenience is not negligible. You’ll have a repayment term that’s shorter than most (as little as six months, in some instances!) and APRs can be quite high.
You’ll pay interest somewhere between 1% and 13.5% of the loan amount for the first two months. For the next four months, this fee will drop to 1% of the loan amount. However, this can quickly add up, meaning that you could pay an APR as much as 90% when all is said and done.
In order to be considered for approval, you’ll need to have a business checking account or business PayPal account. The lender will also take into consideration certain sales channels and productivity applications that you may utilize, to include Quick Books, eBay, Amazon, Etsy, etc.
Kabbage is a great option if you’re in a bind, as it’s where you’re likely to find the fastest, highest dollar amount loan with the lowest requirements. Unfortunately, you’ll also pay a premium for these conveniences. If you are able to wait longer to seek out alternative lenders, you should do so. That APR could be a serious doozy otherwise.
OnDeck is an online lender that offers two different loan types for small businesses: Term Loans and Lines of Credit. Small businesses can get loans of up to $500,000 in as short as a day, and the application process is shorter than many others.
In order to apply, your business will need to meet a few requirements:
- You’ll need to have been in business for at least a year.
- You’ll need to have at least $100,000 in annual business revenue.
OnDeck’s Term Loans are available in smaller loan amounts, which may be great for newer businesses who aren’t quite as established. (However, they can go as high as $100,000.)
Repayment terms range from three to 36 months with a one-time origination fee of 2.5% to 4% of the loan amount. The company states that its term loans’ APR “starts as low as 9.99%,” but that leaves you open to a potentially high interest rate when all is said and done.
Their Lines of Credit are directed at more established businesses, with a limit of $100,000. The lowest available APR on these “loans” is 13.99% and it’s a flexible revolving line of credit. There is a monthly maintenance fee of $20 on the account, too.
Who to Choose
Deciding where to apply for your small business loan can be confusing. However, the most important part is preparing for the application process, and then shopping around.
Make sure that you have a solid plan in place for your business and know exactly how you’ll use the loan. Draw up a business plan in order to “sell” yourself to potential lenders, in order to improve your odds of approval.
Clean up your personal credit, as it will come into play with almost every small business loan lender. Look into whether a P2P lender will best meet your needs, or if you can get a better deal, longer repayment time, or lower interest rate with a direct lender.
Once you know what you need and have the paperwork to support your request, get to applying!